Supreme Court Upholds 100% Disallowance on Bogus Purchases: Company Fails to Prove Genuineness of Transactions

Kanak Impex (India) Ltd., a trader in iron and steel, faced reassessment for AY 2009-10 after the Sales Tax Department and DGIT (Investigation) flagged purchases of Rs. 20.06 crore from alleged hawala operators. Though the original assessment under Section 143(3) had accepted the accounts, the reopening under Section 147 proceeded after repeated notices went unanswered. The Assessing Officer treated the entire purchase as bogus and added the full amount under Section 69C.

The CIT(A) on appeal accepted the AO’s view but reduced the addition to 12.5%. The Tribunal followed the Mohammad Haji Adam decision and restricted additions to the GP element. The High Court admitted the Revenue’s appeal on substantial questions regarding Section 69C and estimation of profit in bogus purchase cases, ultimately reversing the appellate relief. Kanak Impex approached the Supreme Court by way of SLP, which was dismissed at the threshold.

Issue Raised: Whether the assessee, having failed to prove the genuineness and source of purchases flagged as accommodation entries, could be granted only a profit-rate addition instead of full disallowance under Section 69C.

HC Held: The Hon’ble High Court held that once the assessee failed to substantiate the purchases or explain the source of expenditure, Section 69C applied, mandating full disallowance. It emphasized that Kanak Impex did not appear during reassessment proceedings despite valid service, did not furnish supplier confirmations, and offered no explanation for the funding of purchases amounting to Rs. 20.06 crore. While the CIT(A) had explicitly found the assessee involved in bogus billing, its decision to restrict the addition to 12.5% was held legally untenable. The Tribunal too was found to have misdirected itself by treating the issue as one of estimating gross profit, ignoring that the statutory burden to prove genuine purchases remained unmet. Relying upon N.K. Industries and Premlata Tekriwal, the Court reaffirmed that estimating profit on bogus purchases effectively grants a deduction for unexplained expenditure which Section 69C expressly prohibits.

The High Court restored the Assessing Officer’s full addition of Rs. 20,06,80,150, holding that partial disallowance would endorse illegality and defeat the purpose of Section 69C. It rejected the assessee’s arguments based on high resultant profits, lack of supplier details during the original assessment, and reliance on precedents where taxpayers had participated and discharged the initial onus. The Court concluded that before all three authorities, the assessee had failed to prove genuineness or source, and therefore, full disallowance was mandatory. The Supreme Court, upon hearing counsel and reviewing the record, found no reason to interfere and dismissed the SLP.

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