ITAT Visakhapatnam Examines Reversed Bogus Purchases and Upholds 50% Disallowance of Labour Charges

Background of the Dispute

The decision in Globe Infraconstructions Pvt Ltd Vs DCIT (ITAT Visakhapatnam) concerns two primary issues:

  1. A massive addition of ₹11.14 crore towards alleged bogus purchases.
  2. An ad-hoc disallowance of 50% of labour charges amounting to ₹16.76 lakh.

The assessee, a company engaged in infrastructure and commercial construction, filed its return of income for AY 2021-22 declaring a total income of ₹2.04 crore. The case was picked up for scrutiny, primarily to investigate substantial purchases reflected against multiple suppliers who were either:

  • Non-filers of income tax returns,
  • Showing only non-business income in their returns, or
  • Reporting very low turnover vis-à-vis the transactions appearing in the assessee’s data.

The scrutiny assessment culminated in additions/disallowances which were substantially confirmed by the CIT(A). The assessee carried the matter to the Tribunal.

Facts Relating to Alleged Bogus Purchases

Purchases as per GST and Departmental Data

During assessment, the Assessing Officer (AO) examined GSTR‑1 and other departmental data and noted that the assessee had shown purchases from 17 parties aggregating to ₹11,81,99,483.80. Many of these suppliers had either:

  • Not filed their returns for the relevant year,
  • Not filed returns for several preceding years, or
  • Had very low or no reported business income.

To verify these purchases, the AO issued notices under Section 133(6) to the concerned parties through the Verification Unit.

Outcome of Supplier Verification

The verification yielded mixed results:

  • M/s. Harsha Infra Projects Pvt Ltd responded to the Section 133(6) notice, confirmed the transactions of ₹67,74,688 and was found to be filing returns.
  • In respect of most of the remaining parties, the position was adverse:
    • Parties were not traceable at the given addresses,
    • Some denied having any dealings with the assessee, or
    • Some had their GST registrations cancelled and had not filed returns for several years.

Based on this, the AO concluded that purchases from the remaining suppliers, aggregating to ₹11,14,24,795, were bogus and added the entire amount to the assessee’s income.

Assessee’s Explanation Before AO

The assessee explained that:

  • It was a new venture promoted by a young, foreign-educated Managing Director, Mr. Kosuru Lakshman Kumar.
  • It had obtained a subcontract from M/s Ultra Dimension Pvt Ltd (UDPL) for civil, mechanical and electrical works linked to Ministry of Defence and other commercial construction contracts.
  • Since it operated with thin margins as a sub-contractor, it attempted to reduce costs by sourcing materials through certain middlemen at discounted rates (20%–26% below local market prices).
  • These middlemen linked the assessee to suppliers located in Delhi and assured supply of materials over six months.
  • Invoices were issued, and based on such invoices, purchases were initially recorded and corresponding GST input credit was claimed.

According to the assessee:

  • No material was actually delivered against these invoices.
  • The assessee realised it had been defrauded by unscrupulous intermediaries.
  • The purchase entries were later reversed in the books.
  • Input GST credit initially taken on such invoices was also reversed and repaid to the GST authorities.
  • Consequently, purchases allegedly amounting to ₹11,07,65,220.75 were neither included in the cost of materials consumed nor otherwise debited to the Profit & Loss Account in the final accounts used for computing taxable income.

The assessee further stated that, out of the total figure in the AO’s table, certain purchases were genuine, namely:

  • M/s LNBMC – ₹2,85,000/-
  • M/s Sai Ram Krishna Cars Private Limited – ₹3,54,580.65
  • M/s IGE Info Systems Private Limited – ₹7,470/-

In essence, the assessee maintained that:

  • Only a small portion relating to a few parties was genuine and remained in the accounts.
  • The rest, aggregating roughly ₹11.07 crore, was fully reversed and not claimed as deduction.

AO’s Treatment

The AO:

  • Accepted the genuineness of purchases from M/s Harsha Infra Projects Pvt Ltd (₹67,74,688), as the party had responded and confirmed the transactions.
  • Treated purchases from the remaining parties, aggregating to ₹11,14,24,795, as bogus.
  • Added ₹11,14,24,795 to the returned income on the ground that the assessee failed to substantiate the genuineness of these transactions with independent evidence such as delivery challans, transport documents or confirmations.

The AO did not accept the assessee’s plea that the entries were reversed and that no deduction was claimed, and proceeded to tax the full amount as bogus purchases.

Disallowance of Labour Charges