ITAT Mumbai Restricts Section 69C Addition to 8% of Alleged Bogus Purchases Where Sales Stand Accepted and Assessee Has Expired

Case Overview

Case Name: Sheetal Parag Dusane Vs ITO (ITAT Mumbai)
Assessment Year: 2011-12
Order Date: 22.05.2026
Forum: Income Tax Appellate Tribunal, Mumbai
Appeal arose from: Order dated 21.11.2025 passed by the Addl./JCIT(A), Office of Commissioner of Income Tax (Appeals), Panaji under section 250 of the Income Tax Act, 1961, emanating from the assessment order dated 20.02.2015 passed by the Income Tax Officer, Ward-3(2), Kalyan under section 143(3) r.w.s. 147 of the Act.

Background and Factual Matrix

The assessee, an individual proprietor operating under the trade name "Aircon Pneumatics," was engaged in the manufacturing of engineering goods. For Assessment Year 2011-12, the assessee filed a return of income on 29.09.2011 declaring total income of Rs. 7,67,900/-. The return was processed under section 143(1) of the Income Tax Act, 1961 on 12.11.2011.

Subsequently, a letter dated 06.02.2013 was received from the DGIT (Investigation), Pune, conveying information from the Maharashtra Sales Tax Department regarding an alleged network of hawala operators issuing fictitious purchase bills without any actual supply of goods. The assessee was identified as one of the alleged beneficiaries of such accommodation entries.

Disputed Purchases

The Assessing Officer identified purchases amounting to Rs. 10,73,994/- recorded in the books of the assessee from two suppliers:

  • Nimesh Steels Private Limited — Rs. 4,32,935/-
  • Naina Multitrade Private Limited — Rs. 6,41,059/-

Both entities had been flagged by the Maharashtra Sales Tax Department as bogus dealers issuing accommodation bills without corresponding movement of goods.

Reassessment Proceedings

A notice under section 148 of the Income Tax Act, 1961 was issued on 07.05.2013 to reopen the assessment. Notices under sections 148 and 142(1) largely went uncomplied with. Fresh notices under sections 143(2) and 142(1) were issued on 05.12.2014 following transfer of jurisdiction.

In view of inadequate compliance, an intimation dated 23.01.2015 was issued proposing ex parte assessment under section 144 of the Act. However, a Chartered Accountant, Shri Mahesh Bhiwandikar, attended the proceedings and placed the return on record. The Assessing Officer noted that:

  • The assessee had maintained regular books of account
  • Audit reports in Form Nos. 3CB and 3CD were duly filed
  • Sales of Rs. 1,28,72,548/- were disclosed
  • Total purchases stood at Rs. 77,81,359/-
  • Net profit rate was disclosed at 7.74%

Assessing Officer's Findings

The Assessing Officer called for transportation receipts, octroi documents, delivery challans, and confirmation from suppliers in respect of the disputed purchases. The assessee submitted copies of purchase invoices and bank statements demonstrating payments through banking channels, contending that all purchases were duly recorded and settled through account payee cheques.

The Assessing Officer was not persuaded. His findings were as follows:

  • The Sales Tax Department had conclusively identified the suppliers as hawala operators
  • Submission of bills and bank statements alone was insufficient to establish genuineness
  • Absence of lorry receipts, octroi receipts, delivery challans, supplier ledger extracts, and evidence of actual physical movement of goods rendered the purchases unverifiable
  • The assessee's reversal of VAT credit before the Maharashtra Sales Tax Department was treated as an implicit acknowledgment of the non-genuine nature of such purchases

Accordingly, the Assessing Officer:

  1. Rejected the books of account under section 145(3) of the Act
  2. Treated Rs. 10,73,994/- as unexplained expenditure under section 69C of the Act
  3. Made an additional ad hoc disallowance of Rs. 30,000/- out of expenses under various heads including travelling, conveyance, repairs, vehicle expenses, and miscellaneous expenditure
  4. Determined total income at Rs. 18,71,890/- against the declared income of Rs. 7,67,900/-
  5. Initiated penalty proceedings under section 271(1)(c) of the Act

First Appellate Proceedings Before CIT(A)

The assessee, through legal heir Mrs. Sheetal Parag Dusane, preferred an appeal challenging the assessment order. Key arguments advanced before the Ld. CIT(A) included: