ITAT Delhi Rejects Sweeping Purchase Disallowance Where Sales, Stock Records, and Books of Account Remain Undisputed

Case Overview

Case: ITO Vs Dhawan Creative Prints Pvt. Ltd.
Forum: Income Tax Appellate Tribunal, Delhi
Assessment Year: 2017-18
Order Date: 22/04/2026

The Delhi Bench of the Income Tax Appellate Tribunal rendered a significant ruling in the matter of ITO Vs Dhawan Creative Prints Pvt. Ltd., dismissing the Revenue's appeal in its entirety. The decision reinforces a well-established principle — that a sweeping, percentage-based disallowance of purchases cannot be sustained merely on account of unserved notices or third-party non-responses, when the assessee's sales figures, stock records, and books of account stand fully accepted and uncontroverted.

Background and Facts of the Case

Dhawan Creative Prints Pvt. Ltd. is a company engaged in the trading of fabric and cloth. For Assessment Year 2017-18, the assessee filed its return of income declaring total income of ₹8,04,920/-. The return was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) mechanism, and assessment was completed under Section 143(3) of the Income Tax Act, 1961.

During the course of assessment proceedings, the Assessing Officer (AO) examined the financial statements and observed that the assessee had reported:

  • Revenue from operations: ₹41,15,00,000/-
  • Purchases of stock-in-trade: ₹39,95,09,435/-

The scale of purchases relative to declared income drew the AO's attention. Based on what was characterised as incomplete confirmations from suppliers and an adverse response received from one specific supplier, the AO issued a show-cause notice proposing disallowance of 20% of total purchases, amounting to ₹7,99,01,884/-. The assessee responded by furnishing supporting documentation — including books of account, ledger copies of supplier accounts, bank statements evidencing payments, and stock registers — and contended that non-response by third parties to departmental notices cannot be laid at the assessee's door.

The AO, however, remained unconvinced and proceeded to disallow ₹7,99,01,884/- by treating 20% of the total purchases as bogus. In addition, the AO made a further addition of ₹8,30,083/- under Section 69A of the Income Tax Act, 1961, treating cash deposits of ₹9,50,000/- made during the demonetisation period as unexplained.

Proceedings Before the Commissioner of Income Tax (Appeals)

The assessee challenged both additions before the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (CIT(A)/NFAC), Delhi. The CIT(A) passed an order dated 20.06.2025 partly allowing the appeal.

Purchase Disallowance — CIT(A)'s Analysis

The CIT(A) undertook a detailed examination of the factual matrix. Key observations included:

  • Out of 9 notices issued under Section 133(6), replies were received from 4 parties.
  • 3 of those 4 parties confirmed purchase transactions with the assessee, and their purchases could not, therefore, be treated as bogus.
  • 5 notices remained unserved at the given addresses.
  • In one case, Shri Nitin Srivastava, the proprietor of N.S. Trading, categorically denied having any business dealings with the assessee.

Crucially, the CIT(A) noted that the AO himself had: