ITAT Delhi Ruling: Bogus Purchases Attract Higher Tax Rate under Section 69C, Not Normal Disallowance under Section 37(1)
The treatment of bogus purchases has long been a contentious issue between revenue authorities and assessees. A critical question often arises regarding the appropriate statutory provision for taxing such transactions: should they be disallowed as non-genuine business expenditure under Section 37(1) of the Income Tax Act 1961, or treated as unexplained expenditure under Section 69C, thereby attracting the punitive tax rates prescribed under Section 115BBE?
In the recent judgment of Harish Narang Vs PCIT (ITA No.3637/Del/2025), the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) delivered a significant verdict. The Tribunal upheld the revisionary order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263, establishing that where goods are never received, the transaction constitutes unexplained expenditure under Section 69C, not merely a business disallowance.
Factual Matrix of the Case
The dispute for the Assessment Year 2018-19 arose when the assessee filed a return declaring an income of Rs. 6,64,740. Subsequent intelligence received from the GST Department indicated that the assessee was involved in procuring bogus purchase bills amounting to Rs. 1,04,27,400 from two specific entities:
- Shri Balaji Wooltex (Rs. 82,74,900)
- Shri Rameshwaram International (Rs. 21,52,500)
Investigations revealed that these entities were paper concerns managed by one Shri Rajesh Mittal. Before the GST authorities, Shri Mittal admitted to operating nineteen such firms solely for providing accommodation entries. The modus operandi involved issuing fake invoices without the actual delivery of goods. Payments received through banking channels were returned to the beneficiaries in cash after deducting a commission.