High Court Dismisses Revenue Appeal; Upholds 15% Restriction on Bogus Purchase Addition

The assessee, engaged in the business of power transmission and distribution, filed its return of income for A.Y. 2009-10 declaring a total income of Rs. 7.65 crore. The assessment was reopened under Section 147 of the Income Tax Act on the basis of information received from the Directorate of Investigation regarding alleged “hawala” purchases amounting to Rs. 2,05,74,750/-. The AO, relying solely on that information, treated the entire amount as bogus purchases and added it back to the total income in the reassessment order dated 19/03/2015. He also initiated penalty proceedings under Section 271(1)(c) for concealment of income.

In the course of reassessment proceedings, the assessee provided purchase bills, ledger accounts, evidence of bank payments, as well as a certificate from its VAT auditor explaining that the amount of purchases made by M/s Entech Enterprises had been erroneously stated due to a typing mistake, actual purchases being Rs. 11,63,175/- instead of Rs. 1,16,53,175/-. It also emphasised that the VAT assessment for the said period was outstanding, and all transactions were effected through banking channels. The AO did not accept these reasons and upheld the entire addition of Rs. 2,05,74,750/-.

Issue Raised: Whether the ITAT was justified in restricting the addition on account of alleged bogus purchases to 15% (resulting in an addition of Rs. 15,12,713/-) and in accepting the corrected figure of Rs. 11,63,175/- for purchases from M/s Entech Enterprises, when the Assessing Officer relied on Sales Tax Department information, treating the suppliers as non-genuine.

HC’s Decision: The CIT(A), upon examining the record and relying on judicial precedents such as Simit P. Seth, held that the AO was not justified in disallowing 100% of the purchases and that only the profit element embedded in such purchases could be added. The CIT(A) thus limited the addition to Rs. 15,12,713/-, i.e., 15% of the adjusted bogus purchase amount. The ITAT, on appeal, affirmed this reasoning, noting that the Assessing Officer had failed to provide the assessee with copies of the Sales Tax Department’s material or an opportunity to cross-examine the alleged “hawala” suppliers, amounting to a breach of natural justice.

Before the High Court, the Revenue argued that once the suppliers were held non-existent, the entire purchases should have been treated as bogus. The Court, however, found that both the CIT(A) and the ITAT had recorded concurrent factual findings supported by documentary evidence, including invoices, bank payments, and the VAT auditor’s certificate. Relying on its earlier ruling in PCIT v. SVD Resins and Plastics Pvt. Ltd., the Court ruled that additions cannot be maintained on general information without independent confirmation or an opportunity to the assessee.

Thus, the appeal was dismissed.

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