ITAT Chennai Narrows Bogus Purchase Addition to Gross Profit Component

Background and Context

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) in ACIT vs EI Instrumentation Pvt. Ltd. (AY 2018-19) examined whether the entire value of alleged bogus purchases could be added under Section 69C when:

  • The assessee had recorded the purchases in regular books,
  • Payments were routed through banking channels,
  • Corresponding sales were fully accepted by the Assessing Officer (AO), and
  • Adverse material from Investigation Wing was never supplied to the assessee.

The Tribunal ultimately upheld the order of the Ld.CIT(A), which had restricted the addition to the gross profit (GP) element embedded in the disputed purchases at 8.87%, and dismissed the Revenue’s appeal.

Procedural History

Appeal and Delay

  • The Revenue challenged the order dated 21.01.2025 passed by the Ld.CIT(A)/NFAC, Delhi, relating to AY 2018-19.
  • The appeal was filed with a delay of 29 days.
  • An affidavit explaining the reasons for delay was placed on record by DCIT.
  • The assessee’s counsel did not seriously object to condonation.
  • The Tribunal condoned the delay of 29 days and proceeded to decide the matter on merits.

Core Issue in Dispute

The only substantive grievance of the Revenue was against the Ld.CIT(A)’s action in:

  • Rejecting the AO’s complete disallowance of purchases from M/s Barbrik Consultancy Pvt. Ltd. (M/s Barbrik) of ₹1,20,99,998/- under Section 69C, and
  • Restricting the addition to 8.87% of such purchases, representing the profit element, amounting to ₹10,73,269/-.

Facts of the Case

Business Profile and Return Filing

  • The assessee, EI Instrumentation Pvt. Ltd., is a Private Limited Company.
  • It is engaged in the business of trading in electrical parts, instrumentation items and related equipment.
  • For AY 2018-19, the assessee filed its Return of Income under Section 139 declaring total income of ₹46,01,420/-.

Reopening of Assessment

The original return was reopened under Section 147 based on information from the Income Tax Investigation Directorate, Kolkata. The Investigation Wing reported that:

  • M/s Barbrik was allegedly issuing accommodation bills of substantial amounts to various concerns.
  • Such bogus invoices were allegedly intended to help beneficiary entities inflate purchases and thereby depress taxable profits.

The AO noted that:

  • The assessee had booked purchases of ₹1,20,99,998/- from M/s Barbrik during the relevant previous year.
  • According to the AO, this suggested that the assessee was a beneficiary of the accommodation entry operation of M/s Barbrik.

Accordingly, notice under Section 148 was issued to reopen the assessment.

Assessee’s Response During Reassessment

In response to the show cause notice, the assessee submitted detailed explanations and supporting documents, including:

  1. Purchase Register showing entries of purchases from M/s Barbrik.
  2. Ledger accounts with invoice-wise details for M/s Barbrik.
  3. Bank statements, evidencing that payments were made through normal banking channels.
  4. Sales records demonstrating onward sales of goods.
  5. GST returns, aligning with the purchase and sales figures.

The assessee consistently maintained that:

  • All transactions with M/s Barbrik were genuine,
  • Goods were actually purchased and subsequently sold,
  • There was no unexplained expenditure, and
  • All transactions were duly documented and tax compliant.

AO’s Adverse Findings and Addition

Despite the above material, the AO: