Unexplained expenditure under section 69C of Income-tax Act, 1961 : Ratio Decidendi of recent Tribunal decisions on bogus purchases
Background
Section 69C of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] deals with unexplained expenditure. It says that where an assessee has incurred any expenditure and either:
- he offers no explanation about the source of such expenditure or part thereof or;
- if the explanation offered by him is, in the opinion of the Assessing Officer, not satisfactory
then the amount covered by such expenditure or part thereof may be deemed to be income of the assessee.
The disallowance of bogus purchases as unexplained expenditure under section 69C of the Act has been a burning issue in assessment as well as appellate proceedings under the Act.
When the assessee provides no explanation about the source of purchases or fails to provide satisfactory explanation about the source of purchases then the Assessing Officer disallow the entire amount of the alleged bogus purchases.
Crucial Documentary Evidences to prove genuineness of purchases
When the Assessing Officer disallows purchases of the assessee on the ground of being bogus then the documentary evidences which could act as aid for the assessee in order to prove the genuineness of the purchases in dispute are as follows:
1. Purchase orders and invoices;
2. Transport receipts, Lorry receipts, Delivery confirmations, Toll payment receipts, E-way bills, Weighbridge Slips;
The said documents are proof evidencing transportation and movement of goods.
Delhi Bench of ITAT in M/s LS Contractors Pvt. Ltd. [ITA Nos. 2207 & 2208/DEL/2025] held that “If the Assessee had made purchases on E-way Bill the movement of goods cannot be doubted and thus the purchases to that extent cannot be treated as non-genuine. Wherever the assessee had procured the materials by way of E-way bill such materials cannot be treated as non-genuine and the materials procured other than E-way bill can be considered as unproved purchases.”
3. Bank statements reflecting payment made to suppliers in respect of purchases in dispute
Delhi Bench of ITAT in Vinod Kumar Goyal vs. NFAC [ITA No. 2354/DEL/2025] held that for the purpose of invoking Section 69C, the revenue should first bring on record that there is an expenditure which has been genuinely incurred by the assessee and assessee was not able to prove the source of such expenditure. In the instant case, the assessee had furnished bank statement before the revenue wherein the sufficient balance to make payment to its suppliers stood established. Hence, the source of incurrence of such expenditure on account of purchase is not doubted at all by the Revenue. Hence, the provision of Section 69C per se cannot be applied and addition made by the lower authorities deserves to be deleted on this limited count itself.
1. GST Registration details and GSTR filings of the supplier
2. Inward Register, Stock Register and Goods Receipt Notes (GRN)/Material Receipt Notes (MRN)
3. Ledger Confirmations from suppliers
Grounds on the basis of which purchases are treated as bogus/non-genuine
Various criteria/grounds on the basis of which Revenue treat purchases as bogus are as follows:
I. Non-traceability of suppliers or non-receipt of reply from suppliers in response to notice under section 133(6) issued to them
In most of the cases it has been observed that in order to verify the genuineness of purchases, Assessing Officer issues notice under section 133(6) to the suppliers in question or undertake physical verification of said suppliers. Due to non-compliance to the said notice by the suppliers or due to their non-traceability, purchases made by the assessee from them are held as doubtful.
However, non-compliance to notice under section 133(6) or non-traceability of the suppliers does not falsify the claim of genuine purchases if the assessee has produced sufficient documents evidencing
1. movement, delivery and receipt of goods;
2. payment to suppliers;
3. ledger confirmations from suppliers etc.
Ahmedabad bench of ITAT in M/s. Anam Pesticides Pvt. Ltd. vs. Income Tax Officer [I.T.A. No. 1444/Ahd/2024]held that “Further, we also note that it is a well-settled law that just because the parties from whom purchases have been made are unverifiable does not mean that the purchases itself are bogus, specifically when the figure of sale/turnover have not been disputed by the Tax Authorities.
II. Non-filing of return of income by suppliers in dispute
In certain cases, non-filing of return of income by the suppliers is one of the reasons to further investigate purchases from said suppliers. In other words, purchases are disallowed and added to total income of the assessee just because the suppliers have not been regular in filing the return of income.
However, this reason is not sufficient to disallow the purchases and treat the same as bogus when the assessee had put on record ample documentary evidences to not only support purchases from the said suppliers but also to justify their transportation and delivery.
The expenses debited in the profit and loss account are routine business expenses such as purchases and such expenses satisfy the conditions laid down in section 37(1) of the Act. The onus on the assessee is limited and does not extend to ensure that the suppliers, from whom assessee had made the purchases, are tax compliant.
Mumbai bench of ITAT in ACIT vs. M/s. Everest Food Products Pvt. Ltd. [ITA No.3988/Mum/2025] held that the purchases cannot be disallowed merely on the ground that the suppliers have not filed their return of income when the purported bogus purchases are said to have been backed by bills and vouchers which are duly reported in the books of accounts and the Revenue has neither given any finding on the veracity of the documentary evidences furnished by the assessee nor has established that the suppliers from whom the assessee has made purchases are accommodation entry providers.
III. Status of the suppliers shown as inactive on the GST Portal and have not filed GST Returns
It may sometimes happen that purchases are disallowed on the context that the GST registration status of the suppliers, from whom purchases were made, is inactive on GST Portal and they have not filed their GST Returns i.e. Form GSTR-1 and GSTR-3B.
To this, the assessee has to establish the fact that GST registration of the impugned suppliers was active and they have filed their GST returns during the period when purchases were made from them. The said fact can be established by furnishing the screen shot of GST Portal showing active GST registration status as well as evidence of GST returns filed by the suppliers during the period when purchases were made from them.
Also, submission of copies of E-way bills would further corroborate the fact of active GST registration of suppliers as on the date when purchases were made because E-way bill could be generated only when the suppliers had valid GST number as on the date of transaction. Further, the assessee should furnish copies of their GSTR-2A in order to show that the invoices raised by suppliers in respect of purported bogus purchases are auto-populated in their GSTR-2A which consequently proves that the suppliers have filed their GSTR-1 for the period when purchases were made from them.
If the assessee is able to prove the said fact by filing aforesaid evidences, then the disallowance of purchases on the ground of being ingenuine can be challenged.
Delhi Bench of ITAT in Mahavir Transmission Ltd. vs. DCIT [ITA No. 2632 to 2635/DEL/2022] observed that the suppliers in dispute were registered with the GST during the period when they made supplies to the appellant company which gets confirmed from the fact that they were registered on the GST portal. Each of the suppliers have filed the GST return, copies of which have been submitted by the appellant company after downloading the same from GST Portal. The input tax credit in respect of each supply has been allowed to the appellant company and no dispute has been raised in respect of these supplies under the GST. Thus, the observation of the AO that the status of suppliers is inactive is not relevant because these suppliers may have ceased to carry on the business later on but were active on GST when these supplies were made to the assessee. The status of GST registration was inactive much after the year in which purchases have been made from these suppliers.
Contentions assessee can put forward to prove genuineness of purchases in dispute
The contentions which assessee can put forward in order to prove genuineness of purchases in dispute are as follows:
I. Sales not doubted by Revenue
It is a settled position of law that the Revenue would necessarily have to ignore the corresponding sales recorded against the purchases before disallowing said purchases on the ground of being bogus. When the assessee had undertook sales out of the purchases claimed and the sales has not been disputed and profit earned on the sales has been offered to tax and the profit has been accepted then the said purchases cannot be held as ingenuine.
It is not correct to accept the manufacture and corresponding sale of the finished product but doubt the input raw material. Therefore, purchases cannot be disallowed as bogus when corresponding sales remain undisputed.
Chandigarh Bench of ITAT in Gaurav Singhi vs. ITO [ITA No. 889/CHD/2024] held that “Since the sales have not been doubted no addition could be made on account of bogus purchases.”
II. Rates of purchases from impugned suppliers are at par with the rates of purchases from other suppliers
In order to prove genuineness of purchases, the assessee should contend that purchases purported to be bogus are made at rates which are at par or lower than the rates at which purchases were made from other suppliers not in dispute. The said fact can be established by furnishing copies of sample invoices issued by other suppliers of the assessee not in dispute along with invoices issued by the impugned suppliers
Chandigarh Bench of ITAT in M/s Prime Steel Industries Pvt. Ltd. vs. DCIT [ITA No. 275/CHD/2024] held that no addition could be made either on ground of bogus purchases or on ground of profit element embedded in such purchases because the alleged purchases were either at par to the rate of other purchases or at lower rate than other purchases.
Author Bio
