ITAT Restricts Bogus Purchase Addition to Profit Element Only.

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that an addition on account of alleged bogus purchases cannot be sustained merely on the basis of information received from the Maharashtra Sales Tax Department when the assessee has furnished supporting documentary evidence and the sales recorded by it remain undisputed. The Tribunal directed the Assessing Officer to restrict the addition, if any, only to the profit element embedded in the disputed purchases. The Bench comprising Judicial Member Pawan Singh and Accountant Member Girish Agrawal partly allowed the appeal filed by Marvell Nutex Pvt. Ltd.

The assessee, engaged in the business of manufacturing and trading yarn and grey fabric, was subjected to reassessment proceedings based on information received from the Investigation Wing that it had allegedly obtained accommodation purchase bills from three entities identified as hawala dealers by the Maharashtra Sales Tax Department. The Assessing Officer treated purchases aggregating to Rs 44.40 lakh as non-genuine and disallowed the entire amount.

During the assessment proceedings, the assessee furnished purchase invoices, ledger accounts, bank statements, stock registers, delivery challans, quantitative details and sales records to substantiate the purchases. It was also explained that the materials purchased had been consumed in manufacturing activities, and the resultant sales were duly recorded in the books of account.

However, the Assessing Officer disallowed the purchases primarily on the ground that notices issued to the suppliers under Section 133(6) remained unserved, and the assessee failed to produce the parties for verification. The Commissioner (Appeals) also upheld the addition.

Before the Tribunal, the assessee contended that all documentary evidence supporting the purchases had been furnished and no discrepancy had been pointed out by the Revenue. It further argued that the sales arising from the consumption of the purchased materials had not been doubted by the Department.

“To wholly reject these documents merely on a general information received from the Sales Tax Department would not be a proper approach on the part of the Assessing Officer in the absence of strong documentary evidence.”

The Tribunal distinguished the judicial precedents relied upon by the Revenue, noting that those cases involved non-cooperation by assessees or failure to furnish supporting evidence, whereas in the present case, the assessee had actively participated in the proceedings and provided all relevant records.

“In the absence of such a cohesive and coordinated approach of the Assessing Officer with the Sales Tax Authorities, it would be difficult to come to a concrete conclusion with regard to such purchases being bogus merely on the basis of general information.”

At the same time, following the Bombay High Court ruling in Mohammad Haji Adam & Co., the Tribunal held that where purchases are not fully verifiable, but corresponding sales are accepted, the addition should be restricted only to the profit element embedded in such purchases and not the entire purchase value.

Therefore, the Tribunal directed the Assessing Officer to compute the difference, if any, between the gross profit rate on genuine purchases and the disputed purchases and make additions only to that extent. The appeal of the assessee was therefore partly allowed.

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