The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that no separate addition can be made on account of alleged non-genuine purchases where the assessee has already disclosed substantial gross profit from accepted turnover and there is no evidence of cash flow-back or suppression of sales. The Tribunal further deleted the addition made under Section 68 in respect of sundry creditors and restricted the disallowance under Section 14A to exempt income earned during the year. A Bench comprising Judicial Member Amit Shukla and Accountant Member Makarand Vasant Mahadeokar allowed the appeal of the assessee and dismissed the Revenue’s appeal.

The dispute arose in the case of Rajesh Manuprasad Trivedi, engaged in civil construction and contract execution work for Government and semi-government authorities. The Assessing Officer had made substantial additions for Assessment Years 2015-16 and 2016-17, primarily on account of purchases treated as non-genuine based on information received from the Investigation Wing and statements of Shri Naresh A. Hirani, who was alleged to be engaged in issuing accommodation bills through various concerns. Purchases from multiple entities were treated as bogus on the ground that suppliers were either non-existent or did not respond to summons under Section 131.

During assessment proceedings, the assessee submitted complete documentary evidence, including purchase invoices, confirmations, PAN details, bank statements, ledger accounts and income-tax return acknowledgements of suppliers. It was also contended that payments were made through banking channels and the materials were duly consumed in the execution of civil contract works awarded by government bodies. However, the Assessing Officer rejected the explanation, relying heavily on third-party statements and field enquiries, and treated the entire purchases as non-genuine.

Before the Tribunal, the key issue was whether the entire purchases could be disallowed merely on the basis of suspicion and third-party statements when sales/contract receipts and execution of work were not disputed. “Once turnover and execution of contract work stand accepted, entire purchases cannot be treated as income merely on the basis of suspicion.”

On the issue of the Section 68 addition towards sundry creditors, the Tribunal found that the Assessing Officer had failed to identify specific creditors in the assessment order and had made the addition without proper examination. It noted that during remand proceedings, most creditors had either directly responded to notices under Section 133(6) or the assessee had furnished supporting documents such as confirmations, ledger accounts and bank statements.

“Trade creditors arising from business purchases cannot be treated as unexplained cash credits merely because they remain outstanding at year end.” Accordingly, the Tribunal upheld the deletion of the addition under Section 68, holding that outstanding trade liabilities cannot be equated with unexplained cash credits in the absence of any adverse material.

On Section 14A disallowance, the Tribunal held that the assessee had earned only minimal exempt dividend income and therefore disallowance computed under Rule 8D could not exceed such exempt income. It accordingly restricted the disallowance to the amount of exempt income earned during the year.

In conclusion, the Tribunal dismissed the Revenue’s appeal, allowed the assessee’s appeal, deleted the addition on account of alleged bogus purchases, upheld the deletion of the Section 68 addition, and restricted the Section 14A disallowance to exempt income.