ITAT Delhi on Limits of Section 263 in Bogus Purchase Disallowance: Axis Infoline P. Ltd. Vs PCIT
Background and Context
The Delhi Bench of the Income Tax Appellate Tribunal, in Axis Infoline P. Ltd. Vs PCIT (ITAT Delhi), examined whether the Principal Commissioner of Income Tax (PCIT) could invoke revisionary powers under Section 263 of the Income Tax Act 1961 merely because he preferred a higher disallowance on bogus purchases than what the Assessing Officer (AO) had already made after due enquiry.
The dispute arose from an assessment for Assessment Year 2021-22 where the AO had identified purchases from M/s Diwakar Enterprises as bogus and made a 25% disallowance under Section 69C. The PCIT, however, was of the view that 100% of such purchases should have been disallowed and, on that basis, revised the assessment under Section 263.
The ITAT Delhi ultimately held that such revision was not legally tenable, as the AO had adopted one of the possible legally sustainable views on a debatable issue.
Facts of the Case
Assessment Proceedings
- The assessee, Axis Infoline P. Ltd., had shown purchases aggregating to
Rs.1,49,86,000/-from M/s Diwakar Enterprises. - During scrutiny proceedings, the AO conducted enquiries and concluded that purchases from this concern were bogus.
- The assessee offered to surrender 12.50% of these purchases to buy peace.
- The AO did not accept the assessee’s surrender at 12.50%. Instead:
- He examined relevant judicial precedents.
- He consciously decided to disallow 25% of the impugned purchases.
- A disallowance of
Rs.37,46,500/-(i.e. 25% ofRs.1,49,86,000/-) was made underSection 69C.
The AO’s order thus rested on a considered estimation, supported by cited case law, that only a part of the bogus purchases should be brought to tax as unexplained expenditure, and not the full figure.
Revision by PCIT under Section 263
The PCIT-1, Delhi examined the assessment order and formed the view that it was both:
- Erroneous, and
- Prejudicial to the interests of the Revenue,
within the meaning of Section 263.
Key aspects of the PCIT’s reasoning:
- The PCIT proceeded on the premise that once purchases are held to be bogus, the entire amount must be disallowed.
- Heavy reliance was placed on:
- N.K. Proteins — decision of the Hon’ble Gujarat High Court, where the SLP was dismissed by the Hon’ble Supreme Court [
84 taxmann.com 195 (SC)], and - Kanak Impex —
474 ITR 175 (Bom.), where the SLP before the Supreme Court was also dismissed.
- N.K. Proteins — decision of the Hon’ble Gujarat High Court, where the SLP was dismissed by the Hon’ble Supreme Court [
- Based on these authorities, the PCIT concluded that:
- 100% of the bogus purchases of
Rs.1,49,86,000/-were liable to disallowance. - The AO’s approach of disallowing only 25% (
Rs.37,46,500/-) was, in his opinion, inadequate and erroneous.
- 100% of the bogus purchases of
- Consequently, the PCIT passed an order dated
26.03.2025underSection 263, setting aside the assessment and directing disallowance of the full amount of purchases from M/s Diwakar Enterprises.
The assessee challenged this order before the ITAT Delhi.
Grounds Raised by the Assessee
The assessee assailed the Section 263 order broadly on the following lines: