ITAT Raipur Upholds Section 263 Revision for Inadequate Enquiry into Bogus Purchases

1. Background of the Dispute

The Raipur Bench of the Income Tax Appellate Tribunal decided an appeal in the case of Maa Kudargarhi Steels Private Limited Vs PCIT (ITAT Raipur) concerning the scope of revisionary jurisdiction under Section 263 of the Income Tax Act 1961 in the context of alleged bogus purchases.

The assessee, engaged in steel manufacturing, had filed its original return of income for Assessment Year 2018-19 on 08.08.2018 declaring income of Rs.4,13,35,460. The case was initially selected for limited scrutiny, and an assessment under Section 143(3) was completed on 24.06.2021 accepting the returned income without variation.

Subsequently, based on specific information that the assessee had allegedly taken accommodation entries by booking bogus purchases, the assessment was reopened. The Assessing Officer (AO) invoked Section 148 after following the procedure laid down under Section 148A. In response, on 21.11.2022 the assessee filed a return declaring the same income as originally declared.

The reassessment proceedings eventually led to an addition of only 2% of certain questioned purchases, which later triggered Section 263 proceedings. The Principal Commissioner of Income Tax (PCIT) ultimately set aside the reassessment order on the ground that the AO failed to carry out the level of enquiry mandated by law, particularly in light of Explanation 2(a) to Section 263(1).

2. Controversy Around Disputed Purchases

(i) Purchases from Four Suppliers

During the reassessment, the AO focused on purchases aggregating Rs.3,47,42,785 claimed from the following four entities:

• Jai Guru Steels – Rs.85,92,317
• Sunil Enterprises – Rs.1,29,17,733
• Ganapati Trading – Rs.79,55,035
• Basanta Traders – Rs.55,77,700

Information obtained from the GST Department suggested that these entities were non-genuine and engaged in issuing bogus invoices. Acting on this input, the AO treated these parties as “fictitious” and initiated verification.

(ii) Statutory Notices and Non-Compliance

The AO issued notices under Section 133(6) to each of the four suppliers. None of them responded. Simultaneously, the assessee was issued detailed show-cause queries requiring it to substantiate the genuineness of purchases from these parties. The AO specifically called for:

• Copies of purchase invoices along with photographs of the goods purchased
• Inward register details maintained at the factory, including supplier particulars, GST details, way bridge receipts, vehicle numbers, transport signatures and timing of inward movement
• Supplier confirmations, along with their income tax returns and statements of income
• Bank statements clearly reflecting payments to the suppliers
• Despatch documents such as Bilty/Lorry receipts of transporters
• FASTag-based evidence showing actual movement of vehicles from the suppliers’ locations to the assessee’s premises
• Stock register entries showing quantity of material purchased and its subsequent consumption or sale
• Details or proof of any steps taken by suppliers for restoration of GST registration, where cancelled or suspended
• Documentary evidence of payments made to transporters for movement of these goods

(iii) Partial Compliance by the Assessee

In response, the assessee produced only limited material. As recorded in the reassessment order, the assessee furnished:

“copy of ledger account of purchase parties, transport bill, tax invoice raised by the sellers and on some occasion weighment slip. Assessee failed to provide any confirmation from seller, supporting documents corroborating actual movement of vehicle and payment detail of transporter.”

Thus, while some internal documents and invoices were placed on record, the crucial third-party confirmations and evidence of actual movement of goods and freight payment details were not provided. The suppliers, despite being issued notices, also did not respond.

3. Reassessment Outcome: 2% Addition on Purchases

The AO noted these deficiencies and recorded that the assessee had not produced confirmations from the suppliers nor evidence of taxes paid by them on corresponding outward supplies. The suppliers themselves had not cooperated by filing any documentation.

Despite this, instead of disallowing the entire amount of purchases or examining the applicability of Section 69C and Section 115BBE, the AO chose to estimate the “profit element” embedded in such alleged bogus purchases. The AO concluded as under:

“However, considering the reply of the assessee and various other aspect of the case relevant to determine the purchase as bogus, profit element of 2% as prevailing in the similar business is determined to the income of assessee from above transactions of Rs.3,47,42,785/- (85,92,317 + 1,29,17,733 + 79,55,035 + 52,77,700). Accordingly, an amount of Rs.6,94,856/- is added to the business income of assessee of A.Y.2018-19. Penalty u/s 270A of the Act is initiated separately for under reporting of income.”

Thus, the AO accepted that the purchases were not satisfactorily proved, yet restricted the addition to 2% of the purchase value and did not test the issue under Section 69C read with Section 115BBE. The AO also did not examine whether penalty under Section 271AAC(1) was attracted.

4. Initiation of Section 263 Proceedings

(i) PCIT’s Concerns

On examination of the assessment records, the PCIT formed a prima facie view that the order passed under Section 147 on 24.03.2024 was erroneous and prejudicial to the interests of the Revenue. A show-cause notice under Section 263 was issued to the assessee. The core allegation was that the AO: