ITAT Mumbai on Bogus Purchases: Only Margin Taxable When Sales Stand Accepted

Background and Case Overview

The Mumbai Bench of the Income Tax Appellate Tribunal, in the case of ACIT Vs Utkarsha Vivek Parkar, examined whether the entire amount of purchases treated as bogus could be added under Section 69C when corresponding sales were not questioned by the department.

The assessee, an individual engaged in the business of supplying printing plates under the proprietorship Neoimage CTP, had reported business income for A.Y. 2011-12. The key dispute arose from alleged bogus purchases aggregating to Rs. 28,28,113/- from two entities identified as hawala dealers by the Sales Tax Department, Government of Maharashtra.

The Assessing Officer (AO) made a 100% addition of these purchases under Section 69C, whereas the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to 12.5%, treating this as the profit element embedded in such purchases. The Revenue carried the matter in appeal before the ITAT, challenging this relief.

Facts Leading to Reassessment

Original Return and Processing

  • The assessee filed the return of income for A.Y. 2011-12 on 28.09.2011, declaring total income of Rs. 27,38,943/-.
  • The return was processed under Section 143(1) on 17.08.2012.

Information on Hawala Purchases

Subsequently, the AO received specific information from the office of the DGIT (Investigation), Mumbai, based on data from the Sales Tax Department, Maharashtra. The information suggested that the assessee had obtained accommodation purchase bills from hawala dealers:

  • Crystal Corporation – Rs. 5,06,785/-
  • Shruti Traders – Rs. 23,21,328/-

Total alleged non-genuine purchases: Rs. 28,28,113/-

These entities were listed as providing accommodation entries without actual movement of goods.

Initiation of Reassessment under Section 147

On the basis of this material, the AO recorded reasons to believe that income chargeable to tax had escaped assessment within the meaning of Section 147. Notice under Section 148 was issued on 21.03.2018.

  • The assessee, through authorised representative, requested vide letter dated 05.04.2018 that the original return filed on 28.09.2011 be treated as the return in response to Section 148.
  • Subsequently, an electronic return was again filed on 14.08.2018, declaring income of Rs. 27,38,940/-.

Assessment Proceedings and AO’s Findings

Enquiries on Disputed Purchases

During reassessment, notices under Section 143(2) and Section 142(1) were issued. The AO sought:

  • Ledger accounts of the two suppliers
  • Copies of purchase invoices
  • Other supporting documents relating to movement and receipt of goods

The assessee produced:

  • Ledger accounts of Crystal Corporation and Shruti Traders
  • Purchase details and correlation with sales and consumption

However, the AO highlighted that:

  • Both suppliers had been categorized by the Sales Tax Department as hawala operators.
  • The assessee did not produce crucial evidences of actual movement of goods, such as:
    • Delivery challans
    • Transport or lorry receipts
    • Weighment slips
    • Octroi receipts
    • Stock register entries tracking inward movement

Notices to Suppliers and Non-Compliance

To independently verify the genuineness of the transactions, the AO issued notices under Section 133(6) to the two parties.

  • Notices were returned unserved with postal remarks such as “Left” and “Not Known”.
  • On physical enquiry, the Inspector could not trace the parties at the given addresses.

The AO concluded that:

  • The suppliers were not traceable;
  • The assessee failed to produce them or provide further corroboration;
  • The purchases were merely accommodation entries used to inflate expenses and reduce taxable income.

Addition under Section 69C

Holding that the assessee had not established the genuineness of the purchases, the AO: