ITAT Delhi Allows Only 5% Addition on Disputed Purchases Where Sales and Stock Are Not Questioned

Background and Context

The Delhi Bench of the Income Tax Appellate Tribunal in ITO Vs Silk Factory has reaffirmed a settled income tax principle: where the assessee’s sales and stock records are accepted, it is generally unjustified to disallow the entire amount of disputed purchases as bogus. Instead, only a reasonable profit element embedded in such purchases can be brought to tax.

In this case for Assessment Year 2022-23, the Assessing Officer (AO) treated purchases aggregating to ₹21.83 crore as entirely non-genuine and invoked Section 69C to make a 100% addition. The Commissioner of Income Tax (Appeals) [CIT(A)]—acting through the National Faceless Appeal Centre (NFAC)—held that the purchases were not satisfactorily established but restricted the disallowance to 5% of the impugned purchases. The Revenue challenged this relief before the ITAT.

The Tribunal ultimately upheld the CIT(A)’s approach and dismissed the Revenue’s appeal.

Brief Facts of the Case

Nature of Business and Scrutiny Trigger

  • The assessee is a partnership firm engaged in the business of trading in fabrics.
  • The case was picked up for scrutiny under CASS.
  • The key reason for selection was that the assessee had shown substantial purchases from certain parties who were non-filers of Income Tax Returns when compared with the turnover reflected in their GST returns.

AO’s Findings on Purchases

The AO examined purchases from 9–10 suppliers totaling ₹21.83 crore and drew adverse inferences based on multiple GST and compliance-related red flags:

  • Most of the suppliers (except two individuals) were non-filers of income tax returns.

  • One supplier, Sri Narendra Kumar, declared only salary income; another, Sri Kundan Kumar, disclosed a small income of ₹5.71 lakh and did not respond to notice issued under Section 133(6) of the Income Tax Act 1961.

  • For several suppliers:

    • GST registrations were either suspended, suo motu cancelled by the department, or cancelled on the request of the supplier.
    • Multiple GSTINs existed in the same name.
    • They appeared to be “transient entities” – obtaining GST registration, showing large turnover within a very short span (even a few days), and then seeking cancellation of GST registration soon thereafter.
    • The GST database indicated that most of them were not engaged in trading of fabrics, although the assessee had claimed to have purchased fabrics from them.

  • Notices under Section 133(6) were issued to these parties. None responded, except Sri Manish Khurana of Tirupathi Sales, who asserted that his PAN and Aadhaar had been misused without his knowledge and that he had filed a complaint in this regard.

Based on these factors, the AO concluded that the purchases from the said suppliers were entirely bogus and invoked Section 69C to treat the full purchase value of ₹21.83 crore as unexplained expenditure. Additionally, the AO also made an addition of ₹12 lakh for capital introduced by a partner.

Assessee’s Evidence Before AO

Despite the above findings, the assessee had produced a comprehensive set of documents during assessment proceedings, which the AO himself recorded in the assessment order. These included:

  • Audited financial statements;
  • Computation of income;
  • Bank account details;
  • Copies of TDS returns;
  • Month-wise details of purchases and sales;
  • Opening and closing stock details in both quantity and monetary value;
  • Ledger accounts of purchase and sales parties;
  • Form 26AS.

Beyond this, the AO further recorded that the assessee furnished:

  • Purchase invoices;
  • Ledger accounts of the concerned suppliers in the assessee’s books;
  • E-way bills;
  • Transport consignment notes;
  • Bank statements reflecting payments;
  • Tax audit report and computation of income.

Thus, on record, the assessee had produced primary documentation typically relied upon to substantiate purchases and stock movements.

Order of the CIT(A)/NFAC

The CIT(A) broadly agreed with the AO that the supplier profile and GST-related anomalies indicated that the purchase parties were problematic and that the purchases appeared to be not fully verifiable in the manner claimed. However, the CIT(A) adopted a different approach to quantifying the addition.

Key Reasoning by CIT(A)

  1. Sales Not Disputed:
    • The AO had not questioned the sales or turnover declared by the assessee.
    • The trading results and sales figures were accepted without rejection of books of account.