ITAT Rejects PCIT Action Seeking 100% Bogus Purchase Disallowance

The assessee, an individual, filed his return for AY 2021–22 declaring income of Rs. 14.38 lakh. The case was selected for scrutiny due to purchases made from certain parties flagged as non-filers of income tax returns. During assessment, the Assessing Officer (AO) issued notices under Section 133(6) to eight such parties, out of which three responded, while five did not comply.

Based on this, the AO treated purchases from five parties amounting to Rs. 10.47 crore as non-genuine and made an addition of 12.5% (Rs. 1.30 crore) under Section 69C, following judicial precedents. Subsequently, the Principal Commissioner of Income Tax (PCIT) invoked Section 263, holding that the AO should have disallowed the entire purchases instead of restricting it to 12.5%, and enhanced the income by Rs. 9.16 crore.

Main Issue: Whether the PCIT was justified in invoking Section 263 to revise the assessment on the ground that the AO should have disallowed 100% of alleged bogus purchases instead of estimating profit at 12.5%.

Tribunal’s Decision: The ITAT Delhi held that the revision under Section 263 was not sustainable as the AO had already taken a plausible and legally supported view while making the addition. The Tribunal observed that the assessee had furnished relevant documents such as purchase invoices, bank statements, e-way bills, and transport receipts, which were not found defective by the PCIT. Relying on judicial precedents including Malabar Industrial Co. Ltd. v. CIT, the Tribunal reiterated that an order can be revised only if it is both erroneous and prejudicial to the interests of the Revenue. A mere difference of opinion or preference for a higher addition does not justify revision.

The Tribunal also noted that the AO had followed the principle laid down in CIT v. Simit P. Sheth, where only profit element embedded in alleged bogus purchases was taxed. Further, GST authorities had accepted the purchases and dropped proceedings, strengthening the assessee’s case. Accordingly, the ITAT quashed the order passed under Section 263, holding that the PCIT had wrongly assumed revisionary jurisdiction.

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