Case Law Details
Kuppaswamy Murthy Vs ITO (ITAT Bangalore)
In the case of Kuppaswamy Murthy, the Bangalore ITAT deleted the addition of ₹20.16 lakh made on account of alleged bogus purchases from a supplier flagged by the Commercial Tax Department.
The AO had treated purchases as bogus solely because the supplier (M/s Royal Enterprises) was identified as a bill trading/entry provider, despite the assessee furnishing:
- Purchase invoices,
- Bank payment proof,
- Sales and books of account.
However, ITAT found critical flaws in the assessment (pages 12–14):
- No independent enquiry was conducted by the AO,
- No verification of stock, transport, or actual movement of goods,
- Addition was based purely on third-party information (“borrowed satisfaction”),
- Even more glaring—only part of purchases was disallowed (₹20.16L out of ₹30.99L) without identifying specific bogus invoices → purely ad hoc.
Key observations:
- Information from another department is only a starting point, not conclusive evidence,
- Sales were accepted, hence purchases cannot be disallowed in isolation without disproving actual business activity,
- No cross-examination or material provided- violation of natural justice,
- Suspicion cannot replace evidence, even applying “human probability” test.
Outcome:
- Entire addition deleted,
- ITAT held disallowance was based on presumption, not proof,
- Appeal allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal has been instituted by the assessee against the order of the NFAC, Delhi dated 19.12.2025 for AY 2018-19. The assessee has raised multiple grounds of appeal.
2. First, we proceed to deal with the interconnected issue raised through Ground Nos. 4 to 8 of the appeal. The issue raised by the assessee is that the learned CIT(A) erred in confirming the addition made on the basis of alleged bogus purchases.
3. The facts in brief are that the assessee, an individual, is engaged in business manufacturing and supplying wooden and packing cases. During the year under consideration, the assessee has shown sales and purchases at Rs. 2.62 crores and 2.36 crores respectively along with opening and closing stock of Rs. 33.14 lakh and 51.59 lakh. The financial result of the assessee for the year shows GP margin of 6.7% and NP margin of 5.89%.
4. Based on investigation carried out by the Commercial Tax Department, Government of Karnataka it was found that the assessee has shown purchases of Rs. 20,16,630/- from an entry provider namely M/s Royal Enterprises. The said party was found to be involved in GST bill trading without actual supply of goods or services. As such, there were 60 bogus parties identified by the commercial tax department which included M/s Royal Enterprises. Out of 60 identified fictious or bogus bill providers, 9 persons were arrested and criminally persecuted. Accordingly, a show cause notice was issued proposing to disallow the alleged bogus purchases of Rs. 20,16,630/- from M/s Royal Enterprises.
4.1 In response, the assessee furnished copy of invoice, bank statement showing payment made through banking channel and contended the purchase made from the impugned party is genuine and duly recorded and disclosed in books of account.
4.2 However, the AO rejected the assessee’s contention and held that the impugned party was found entry provider engaged in providing bogus bills for GST input credit to beneficiaries. Detailed investigation along with field inquiry was made in this regard. Therefore, merely on the basis that payment was made to the said party through banking channel, the impugned purchases cannot be held as genuine purchases. The AO further held that the bogus bills purchases are to reduce the tax liability on the profit. In this case the assessee has availed the benefit of bogus and fictious bills in order to reduce the tax liability. Hence, the AO disallowed the purchases of Rs. 20,16,630/- and added back to the total income of the assessee.
5. The aggrieved assessee preferred an appeal before the learned CIT(A) and submitted that the purchases of Rs. 20,16,630/- from M/s Royal Enterprises is genuine and supported by tax invoice, e-way bill, ledger account and payment made through banking channel. Without bringing any independent materials, the impugned genuine purchases cannot be held fictious by merely placing reliance on alleged investigative findings of the commercial tax department. The assessee further submitted that he has no control over the internal affairs of the supplier and beyond his control verifying the same. Therefore, no adverse inference can be drawn on the basis of third party(supplier) information. Further, the opportunity of cross examination has not been provided which is in violation of principle of natural justice. Without prejudice, it was submitted that if purchases are disallowed then corresponding sales and closing stock ought to be reduced.
6. However, the learned CIT(A) rejected the assessee’s contention and confirmed the addition made by the AO. The relevant findings of the learned CIT(A) are extracted as under:
The submissions of the appellant have been carefully considered in the light of the material available on record, the findings recorded in the assessment order, and the settled legal position governing allowability of purchase expenditure.
It is noted that the disallowance in the present case is not based on mere suspicion or conjecture, but on specific and concrete information received from a statutory investigative mechanism,
namely the Commercial Tax Department, identifying M/s Royal Enterprises as an accommodation entry provider engaged in issuing invoices without actual movement of goods. The assessment order records detailed findings regarding the modus operandi of such entities, including generation of fictitious invoices and routing of funds through banking channels, which has been brought on record through inter-departmental intelligence inputs.
The law is well settled that mere production of invoices and proof of payment through banking channels does not, by itself, establish the genuineness of a transaction, particularly where the surrounding circumstances and investigative material demonstrate that the supplier lacks actual business activity or capacity to effect real supplies. In this regard, reliance is placed on the judgment of the Hon’ble Supreme Court in CIT v. N.K. Protein Ltd., wherein it has been held that where purchases are found to be bogus, the entire amount can be disallowed notwithstanding the fact that payments were made through banking channels.
Further, the Hon’ble Supreme Court in Sumati Dayal v. CIT has held that the test of human probabilities must be applied while examining the genuineness of transactions and that apparent documentation cannot override the real nature of the transaction when surrounding circumstances indicate otherwise. Applying this principle, the explanation offered by the appellant, based solely on documentary evidence generated by the very party found to be non-genuine, cannot be accepted at face value.
As regards the contention relating to non-grant of cross-examination, it is noted that the addition is not founded upon any statement recorded behind the back of the appellant, but on documented investigative findings and third-party verification conducted by a statutory authority, which form part of governmental records. In such circumstances, absence of cross-examination does not vitiate the assessment when the appellant has failed to independently establish actual receipt of goods through corroborative evidence such as transportation records, stock movement registers, or quantitative reconciliation beyond self-serving documents.
The argument that the appellant cannot be expected to verify the affairs of the supplier also cannot be accepted in entirety. The burden to prove the genuineness of expenditure squarely rests on the assessee, and this burden does not stand discharged merely by pleading lack of control over third-party conduct, especially when serious infirmities have been noticed in the supplier’s existence and operations.
With regard to the alternate plea that corresponding sales or closing stock ought to have been reduced, it is observed that such a plea is contingent upon the assessee first establishing the genuineness of purchases. Once the purchases themselves are held to be non-genuine, no corresponding adjustment is warranted merely to neutralise the tax effect of an otherwise unsustainable claim.
In view of the foregoing discussion, it is held that the Assessing Officer was justified in treating the purchases from M/s Royal Enterprises as non-genuine and in disallowing the expenditure of Rs 20,16,630. The action of the Assessing Officer is supported by material on record and fortified by binding judicial precedents of Hon’ble Supreme Court.
7. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
8. The Learned AR before us filed paper book running from pages 1 to 57 and submitted that the authorities below were not justified in sustaining the addition made on account of purchases from M/s Royal Enterprises merely based on the information having been received from the Commercial Tax Department. It is argued that the entire addition has been made by treating the purchases as bogus without furnishing to the assessee the actual materials, report, statement, verification note, or any other adverse information allegedly collected from the Regional Economic Intelligence Committee (REIC) or the Commercial Tax Department. When an addition is founded on third-party information, the assessee must be put in possession of such material so that an effective rebuttal can be made. In the present case, the information was used behind the back of the assessee and, therefore, the very foundation of the addition is contrary to the principles of natural justice.
8.1 The Ld. AR further contended that the Ld. AO did not provide any opportunity to cross-examine the concerned third party, or the person whose statement or information was allegedly relied upon. He submitted that where an adverse inference is drawn on the basis of third-party material, denial of cross-examination causes serious prejudice to the assessee. In support of this proposition, reliance was placed on the judgment of the Hon’ble Supreme Court in the case of Andaman Timber Industries v. Commissioner of Central Excise, Kolkata-II in Civil Appeal No. 4228 of 2006. Referring to the said decision, the Ld. AR argued that failure to allow cross-examination, though specifically requested, renders the action of the revenue authorities unsustainable in law since the assessee was denied a fair opportunity to confront the material used against him.
8.2 Coming to the facts of the assessment, the Ld. AR submitted that the assessee had furnished the details called for and the AO himself recorded that the assessee submitted purchase details, bank account details, details of unsecured loans, sample sales invoices and sales details.
8.3 The Ld. AR submitted that the AO proceeded only on the assumption that M/s Royal Enterprises was an entry provider identified by the Department of Commercial Taxes, Karnataka, and from this general allegation the AO straightaway concluded that the purchases made by the assessee from that concern were non-genuine. He argued that no independent enquiry was carried out by the AO to establish that the specific goods purchased by the assessee were never delivered, that the invoices were fabricated, or that the payments had come back to the assessee in any form. According to the Ld. AR, the assessment order does not contain any finding based on direct verification of the assessee’s business records, stock position, sales pattern, consumption pattern, or movement of goods. Thus, the conclusion of bogus purchases was drawn only by borrowing an outside allegation and not by conducting a proper enquiry in the case of the assessee.
8.4 The Ld. AR then referred to para 3.3 of the assessment order wherein the AO stated that the Commercial Tax Department had inspected various fictitious persons and bogus bill providers and that one such alleged entry provider was M/s Royal Enterprises. He submitted that even if there was some general investigation against the said concern, the same by itself could not justify disallowance in the hands of the assessee unless the AO is demonstrated, with cogent material, that the assessee’s own purchase transactions were sham. He argued that mere allegation against the supplier cannot automatically lead to disallowance in the purchaser’s case unless the transactions of the purchaser are separately shown to be false. The AO was required to establish that the goods were not received, that the entries in the books were false, or that the purchases were only accommodation entries. No such exercise was undertaken.
8.5 The Ld. AR also pointed out that the assessee had furnished before the AO as well as before the Ld. CIT(A) copies of 25 invoices pertaining to purchases from M/s Royal Enterprises during the year under dispute. These invoices aggregated to Rs. 30,99,407/-. He submitted that out of these invoices, the AO has treated purchases only to the extent of Rs. 20,16,630/- as bogus. But neither in the assessment order nor in the appellate order, any attempt has been made to identify which particular invoices, out of the 25 invoices produced, were allegedly bogus. He argued that when the assessee has produced invoice-wise details containing invoice number, date, name of seller, vehicle number, amount, and annexure reference, the revenue authorities were duty bound to examine the same and identify the defective invoices, if any. In the absence of such exercise, the disallowance made by the AO becomes wholly ad hoc and based on guesswork.
8.6 Developing this argument further, the Ld. AR submitted that the authorities below have adopted a contradictory stand. On the one hand, they accepted that invoices and payment details were furnished. On the other hand, they disallowed only a part of the purchases from the same supplier without explaining the basis for selecting that figure. If the revenue had material to show that all invoices were bogus, the entire set of invoices should have been examined and a clear finding should have been given. If, on the other hand, only some invoices were doubtful, then the exact invoices and reasons for doubting them ought to have been specified. Since neither has been done, the addition of Rs. 20,16,630/- lacks factual foundation and suffers from complete absence of proper correlation between the alleged information and the actual transactions recorded by the assessee.
8.7 The Ld. AR then invited attention to the financial statements and submitted that the Profit and Loss account clearly disclosed GST purchases of Rs. 2,10,00,377/-, which included the purchases made from M/s Royal Enterprises, and GST sales of Rs. 2,45,21,340/-. He argued that the AO had accepted the sales disclosed by the assessee and had not disturbed the turnover at all. Once the sales have been accepted and the books reflect corresponding purchases, it is not open to the AO to disallow purchases selectively without demonstrating how the sales were effected in the absence of such purchases. According to him, no trading concern can effect sales without corresponding procurement of goods, and when the revenue has not disputed the sales, stock position, or gross business results, the disallowance of purchases on a pure presumption is not justified.
8.8 The Ld. AR argued that the addition is also contrary to commercial reality. He submitted that the assessee is engaged in regular business and the purchases were recorded in the books maintained in the ordinary course. Payments were made through banking channels, the invoices were placed on record, and the resulting sales were duly disclosed in the accounts. In such circumstances, the burden had shifted on the AO to bring positive material to show that the purchases were only book entries and that no goods had actually moved. Instead of doing so, the AO merely relied on general information against the supplier. He submitted that suspicion, however strong, cannot take the place of proof.
8.9 The Ld. AR further contended that the appellate authority also fell into error by affirming the addition without appreciating the documentary details placed on record. The Ld. CIT(A) confirmed the addition on a general presumption that the purchases were not genuine, without meeting the assessee’s objections on facts. Therefore, according to Ld. AR, the order of the Ld. CIT(A) is also vitiated by non-consideration of material evidence and failure to deal with the core submissions raised by the assessee.
8.10 It was also submitted by the Ld. AR that the authorities below failed to appreciate the difference between a doubtful supplier and a non-genuine purchase. Even assuming, without admitting, that the supplier had come under the scanner of the Commercial Tax Department, that fact alone does not establish that every transaction entered into by such supplier was bogus or that the assessee did not receive the goods. The real issue was whether the assessee’s purchases were genuine in the context of his own books and business records. Since, the assessee had produced invoices, books, bank details, sales details, and financial statements, and since no defect had been pointed out in such records, the purchases could not have been rejected merely because the supplier was allegedly involved in issuing accommodation bills in some other cases.
8.11 The Ld. AR therefore submitted that the addition of Rs. 20,16,630/- was made and sustained without any tangible evidence directly linking the assessee to a bogus billing arrangement. In these circumstances, he submitted that the entire addition rests only on presumption and borrowed satisfaction and is liable to be deleted.
8.12 On the strength of the above submissions, the Ld. AR prayed that the orders of the lower authorities be set aside on this issue and the addition of Rs. 20,16,630/- made on account of alleged bogus purchases from M/s Royal Enterprises be deleted in full.
9. On the contrary the contrary the learned DR supported the orders of the Ld. AO and the Ld. CIT(A) and submitted that the addition has been made on the basis of credible and specific information received from the Commercial Tax Department, wherein M/s Royal Enterprises was identified as a bogus bill provider engaged in issuing accommodation entries without actual supply of goods. It was argued that such information emanates from a statutory investigation and cannot be brushed aside lightly.
9.1 The Ld. DR further submitted that mere production of invoices and proof of payment through banking channels does not establish genuineness of purchases, particularly when the supplier itself has been found to be non-existent or engaged in providing bogus bills. Reliance was placed on the principle that surrounding circumstances and human probabilities must be considered while examining such transactions.
9.2 It was also contended that the assessee failed to discharge the onus cast upon him to prove the genuineness of the purchases with cogent evidence such as transportation details, stock records or independent confirmations. Therefore, the Ld. AO was justified in treating the purchases as non-genuine and the Ld. CIT(A) has rightly confirmed the addition.
10. We have heard the rival contention of both the parties and perused the materials available on record. The issue for our consideration is whether the authorities below were justified in treating the purchases made from M/s Royal Enterprises as non-genuine and disallowing the same.
10.1 At the outset, we note that the entire addition has been made by the Ld. AO and sustained by the Ld. CIT(A) primarily on the basis of alleged information received from the Commercial Tax Department, Government of Karnataka, wherein M/s Royal Enterprises was stated to be an accommodation entry provider engaged in issuing bogus invoices without actual supply of goods. Except placing reliance on such third-party information, no independent enquiry has been conducted by the Ld. AO in the case of the assessee to verify the genuineness of the impugned purchases.
10.2 It is an undisputed fact on record that the assessee had furnished before the Ld. AO the details of purchases, copies of invoices, bank statements evidencing payments through banking channels, and also produced details of sales and other financial records. The Ld. AO himself has recorded that such details were filed. However, without pointing out any specific defect in the books of account, purchase invoices, or corresponding sales, the Ld. AO proceeded to treat the purchases as non-genuine solely on the basis of external information. In our considered view, such an approach reflects lack of independent application of mind.
10.3 We further note a crucial factual inconsistency in the action of the lower authorities. The assessee had produced invoice-wise details of purchases from M/s Royal Enterprises aggregating to Rs. 30,99,407/-. However, the Ld. AO has made disallowance only to the extent of Rs. 20,16,630/- without identifying which specific invoices out of the total 25 invoices were alleged to be bogus. Neither the assessment order nor the appellate order specifies the basis on which this particular amount was selected for disallowance. This clearly demonstrates that the addition has been made in an ad hoc manner without any correlation to the material placed on record.
10.4 In our view, if the Revenue had credible material to hold that the purchases were non-genuine, it was incumbent upon the Ld. AO to examine the invoices produced by the assessee, identify the specific transactions which were doubtful, and bring cogent material on record to establish that the goods were not actually received. No such exercise has been undertaken. The disallowance, therefore, lacks factual foundation and is based merely on generalized allegations.
10.5 We also find merit in the contention of the assessee that the Ld. AO has not carried out any independent verification of the transactions. There is no enquiry with transporters, no verification of stock records, no examination of quantitative details, and no attempt to reconcile purchases with sales. The conclusion of bogus purchases has been drawn only by borrowing the findings of another department. It is a settled principle that information received from another agency can at best be a starting point for enquiry, but cannot substitute the requirement of independent verification by the Assessing Officer. Failure to do so renders the addition unsustainable.
10.6 Another important aspect which cannot be ignored is that the Ld. AO has accepted the sales declared by the assessee and has not disturbed the turnover. Once the sales are accepted, the corresponding purchases cannot be disallowed in entirety without demonstrating that the sales were effected without actual purchase of goods. The trading results of the assessee, including gross profit and net profit margins, have also not been found to be abnormal. In absence of any adverse finding on these aspects, disallowance of purchases on mere suspicion is not justified.
10.7 We also observe that the material allegedly relied upon by the Revenue was not furnished to the assessee and no opportunity of cross-examination was granted. Though the Ld. CIT(A) has attempted to justify the same, the fact remains that the addition is based on third-party information which was never subjected to verification in the hands of the assessee. This further weakens the foundation of the addition.
10.8 On an overall consideration of facts, it is evident that the authorities below have proceeded on presumption that since the supplier was allegedly involved in issuing accommodation bills, the purchases of the assessee must also be bogus. Such presumption, without supporting evidence, cannot be sustained. It is settled passion of law that suspicion, however strong, cannot take the place of proof.
10.9 In our considered view, in the present case, the addition has been made without proper enquiry, without identifying specific defects, without correlating the alleged information with the assessee’s transactions, and without application of mind to the material available on record. The arbitrary disallowance of Rs. 20,16,630/- out of total purchases of Rs. 30,99,407/- itself demonstrates that the addition is based on surmise and conjecture.
10.10 Before parting we further note that reliance placed by the Revenue on the principle of surrounding circumstances and the decisions of Hon’ble Supreme Court in the cases of Sumati Dayal 214 ITR 801 and Durga Prasad More 82 ITR 540, in our view, is misplaced on the facts of the present case. The said judgments lay down that apparent documentation may be disregarded where surrounding circumstances clearly indicate that the transaction is not real. However, such principle can be invoked only when the Revenue brings on record cogent material and conducts proper enquiry to demonstrate that the apparent is not real. In the present case, the authorities below have not carried out any independent verification of the assessee’s transactions, nor have they pointed out any specific defect in the books, invoices, or corresponding sales. The addition has been made merely by relying on general information relating to the supplier without linking the same to the assessee’s actual business transactions. Therefore, in absence of any direct or corroborative evidence against the assessee, the application of the test of human probabilities and surrounding circumstances, as laid down in the above decisions, is not justified and cannot be used to sustain an addition based purely on presumption.
10.11 In view of the foregoing detailed discussion, we hold that the Ld. AO was not justified in disallowing the purchases from M/s Royal Enterprises and the Ld. CIT(A) erred in confirming the same without proper appreciation of facts. Accordingly, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition of Rs. 20,16,630/-. Thus, the grounds of appeal raised by the assessee on this issue are hereby allowed.
10.12 Since we have deleted the addition and allowed the substantive ground of the assessee, we are not inclined to deal with the other issues raised by the assessee through Ground Nos. 1 to 3 and 9. Accordingly, the same are hereby dismissed as infructuous.
11. In the result, the appeal of the assessee is partly allowed.
Order pronounced in court on 20th day of April, 2026
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