When sales are not doubted 100% disallowance for bogus purchase cannot be done: ITAT

The assessment, in this case, was reopened by the Income Tax Department upon receipt of information from the Sales Tax Department that assessee has made bogus purchase. The assessee submitted the purchase vouchers and the payments were made through the banking channel. However, the suppliers were not produced before the Assessing Officer. No other materials in support of purchases were produced. But sales in this case were not doubted.

The Income Tax Officer in this case has made 100% addition on account of bogus purchase. Upon assessee’s appeal ld. CIT(A) confirmed the same. Thus an Appeal was made to Income Tax Appellate Tribunal (“ITAT”).

ITAT Order

6. Up on careful consideration I find that assessee has provided the documentary evidence for the purchase. Adverse inference have been drawn due to the inability of the assessee to produce the suppliers and also lack of other supporting evidence purchases. I find that in this case the sales have not been doubted. It is settled law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported form Hon’ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises (in Writ Petition No. 2860, order dated 18.06.2014). In this case the Hon’ble High Court has upheld 100% disallowance for the purchases said to be bogus when sales are not doubted. However in that case all the supplies were to government agency.

7. In the present case the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expenses of the exchequer. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee, I find that 12.5% disallowance should serve the end of justice. I direct accordingly.