Kanak Impex (India) Ltd Vs PCIT (Supreme Court of India)
The dispute arose from reassessment proceedings for Assessment Year 2009–10 concerning the assessee’s alleged bogus purchases amounting to ₹20,06,80,150/-. The assessee was engaged in trading iron and steel and originally declared income of ₹2,84,700/-, which was assessed at ₹3,86,250/- under Section 143(3). Later, based on information from the DGIT (Inv.)/Sales Tax Department indicating purchases from hawala bill providers, the Assessing Officer reopened the case under Sections 147/148. Repeated notices issued through post, email, and affixture drew no response; the assessee did not appear in reassessment. As a result, an order under Section 144 read with Section 147 treated the entire purchases as bogus and added the full amount of ₹20.06 crore.
Read HC Judgment: 100% Disallowance of Bogus Purchases Mandated when source not explained: Bombay HC
Before the CIT(A), the assessee challenged the validity of the reassessment, alleging non-service of notice. The CIT(A) rejected this, observing that the address used in assessment and appeal forms was identical, suggesting deliberate non-acceptance of notices. Email notices did not bounce, and affixture was unrebutted. Hence, reassessment was held valid. Regarding the merits, the CIT(A) held that the assessee had failed to prove genuineness and source of purchases, that the names of suppliers provided by the Sales Tax Department matched those in the assessee’s books, and that the assessee was involved in accommodation entries. However, despite these findings, the CIT(A) restricted the addition to 12.5% of the bogus purchases by following the Gujarat High Court’s decision in Simit P. Sheth.
Both parties appealed. The Tribunal relied solely on Mohammad Haji Adam & Co., holding that only profit embedded in bogus purchases could be taxed. It directed the AO to determine the GP rate comparable to genuine purchases and dismissed the revenue’s appeal seeking 100% disallowance.
Before the High Court, the revenue argued that the Appellate Authorities entirely ignored Section 69C, which mandates that unexplained expenditure must be treated as income and no deduction allowed. The assessee defended the partial addition on the basis of earlier submissions made in the original assessment, contending high profits would result if the entire purchases were disallowed. The assessee did not challenge the Tribunal’s order before the High Court.
The High Court examined the nature of accommodation entries by explaining a typical scenario: unaccounted cash is used to make real purchases, while paper invoices are obtained from entry providers to bring the expenditure into the books. In such cases, the key issue is proving the source of the real expenditure. Section 69C becomes relevant when the assessee provides no satisfactory explanation for the source of expenses, and such unexplained expenditure must be deemed income with no deduction permitted.
The Court emphasized that the primary onus to prove the genuineness of purchases—including the source of funds—rests on the assessee. In the present case, the assessee did not appear or provide details during reassessment and failed to discharge this burden. The CIT(A)’s finding that the assessee was involved in bogus billing remained unchallenged. The Court also determined that the CIT(A)’s reliance on estimated profit percentage had no basis because the issue was not low profitability but whether the purchases were proved.
The High Court held that both the CIT(A) and the Tribunal misdirected themselves by estimating profit rather than addressing whether the purchases were genuine. Estimation effectively granted the assessee a deduction for unexplained expenditure, contrary to Section 69C. The Court elaborated that partial disallowance (e.g., 12.5% of purchases) effectively allows the balance as deduction even when the purchases were not proved, making Section 69C redundant.
Relying on precedents including N.K. Industries, Premlata Tekriwal, Shanti Jain, and Shoreline Hotel, the Court reaffirmed that where purchases are unproved and the assessee fails to discharge the burden of explanation, the entire amount must be disallowed. Distinguishing cases cited by the assessee, the Court noted those involved participation in assessment and discharge of initial onus, unlike here.
Since the assessee offered no explanation for the source of expenditure of ₹20.06 crore, Section 69C was fully attracted, and the AO was justified in making 100% additions. The Appellate Authorities’ approach was found erroneous in law.
The High Court allowed the revenue’s appeal, restored the AO’s addition of the entire ₹20,06,80,150/-, and reversed the CIT(A) and Tribunal orders. It clarified that the total addition cannot exceed the disputed ₹20.06 crore.
The Supreme Court, after hearing the petitioner and reviewing the record, found no reason to interfere with the High Court’s judgment and dismissed the Special Leave Petition.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
