Case Law Details
Krishnasamy Sendilkumar Vs ITO (ITAT Bangalore)
Bangalore ITAT: Entire Bogus Purchases Cannot Be Added When Sales Are Accepted; Only Profit Element Taxable
The Bangalore ITAT held that the entire value of alleged bogus purchases cannot be treated as income where the corresponding sales have been accepted, and only the embedded profit element can be brought to tax. The assessee, engaged in the wholesale trading of scrap batteries, was subjected to an addition after the Verification Unit found that three alleged suppliers had denied the transactions and were either not carrying on business or were otherwise non-genuine. Based on these enquiries, the Assessing Officer treated the entire purchases from those parties as bogus and added the full amount to the assessee’s income.
Before the Tribunal, the assessee produced additional evidence, including a stock register authenticated by the Chartered Accountant, demonstrating that there was a complete correlation between purchases and sales. The Tribunal admitted the additional evidence and observed that the Revenue had not disputed the sales, nor had it pointed out any disproportion between purchases and sales. In such circumstances, it held that the goods sold must necessarily have been sourced through purchases, even if the purchases were ultimately found to have been made from unidentified or non-genuine suppliers. Therefore, the entire purchase value could not be assessed as income.
Following the Bombay High Court’s decision in PCIT v. Mohammad Haji Adam & Co. and the Supreme Court’s ruling in CIT v. Williamson Financial Services that income-tax is levied on profits and not on gross receipts, the Tribunal restricted the addition to the profit element embedded in the disputed purchases. Considering the nature of the assessee’s business, it estimated the profit margin at 1.15% of the disputed purchases and directed the Assessing Officer to tax only that amount instead of the entire purchase value. The appeal was accordingly partly allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is filed by the Assessee against the order of NFAC, Delhi dated 16-072025 for the Assessment Year 2021-22.
2. The brief facts of the case are that the assessee is an individual and doing the business of wholesale trading in scrap batteries purchased from various companies. The assessee filed his return of income on 15/02/2022. The case of the assessee was selected for scrutiny since the purchases are from non-filers or filed non-business ITR or shown a lower turnover in the ITR. Notices u/s. 143(2) as well as u/s. 142(1) were issued. The assessee also filed the details and documents of the sellers. The AO through the verification unit verified the three sellers of the assessee who have denied any such transactions with the assessee. The report of the verification unit states that the alleged two sellers are aged and not doing any business and one seller is working as a labourer. The verification unit physically verified the sellers since they have not responded to the notice issued u/s. 133(6) of the Act. The AO had also verified the GST portal and found that the two sellers registration were suspended w.e.f. 27/07/2022 and 01/09/2021. The AO issued show cause notice for which the assessee replied that the purchases are genuine and payments in respect of two dealers were made through banking channels and submitted that the transactions are genuine. The AO relied on the verification unit and concluded that purchases from the said parties are bogus purchase and added the purchase as income of the assessee.
3. As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) had also confirmed the order of the AO by dismissing the appeal.
4. The assessee challenged the said order before this Tribunal with a delay of 27 days. We have considered the application to condone the said delay and also considered the reasons as well as the number of days delay. We are satisfied that the assessee had sufficient cause for not filing the appeal in time and therefore we condone the delay of 27 days in filing the appeal.
5. At the time of hearing, the Ld.AR submitted that in spite of the furnishing of the various details about the alleged bogus purchases, the authorities below had erred in confirming the said as bogus purchases and added the same in the income of the assessee, which is not correct. The Ld.AR further submitted the verification report and the statement given by the sellers were relied on without giving proper opportunity to the assessee to rebut the same. The Ld.AR also submitted that the assessee was not provided an opportunity to cross examine the sellers. Alternatively, the Ld.AR submitted that the AO had erred in denying the purchase expenditure when the corresponding sales are accepted. The Ld.AR filed two paper books enclosing the ledger extract of the parties and also the stock register by way of additional evidences and also filed an application to accept the additional evidence and prayed to allow the appeal.;
6. The Ld.DR on the other hand submitted that the AO had done proper enquiries and based on that arrived a conclusion that the purchases are bogus and prayed to dismiss the appeal.
7. We have heard the arguments of both sides and perused the materials available on record.
8. The assessee had effected purchases of old batteries and sold the same for recycling purposes. On verification, the AO found that the three sellers are bogus dealers and not at all doing the business and therefore concluded that the said three purchases are bogus ones. The assessee relied on the various documents to prove that the purchases are genuine. But the AO made a detailed enquiry through the verification unit and found that the dealers are bogus.
9. Before us, the assessee had filed various documents and also filed an application to admit the stock book showing the purchases and sales which are authenticated by the Chartered Accountant. The certificate of the Auditor says that the stock book was prepared based on the primary records such as purchase and sale invoices. In such a situation, we are admitting the additional evidence to decide the issue judiciously.
10. By going through the stock book, there is no variation in the purchase and sale of goods. The sales are out of the purchases. When the sales are not disputed by the authorities, the same could be out of the purchase offered by the assessee. The purchases may by from unknown sources but still there are purchases and sales were made out of the said purchases. The authorities have also not pointed out disproportionate sales. In such circumstances, the entire purchase could not be treated as income. At the most, the profit element may be treated as the income of the assessee. The profit margin obtained by the assessee may be reasonably estimated at 1.15% of the purchase value and the same may be added as income of the assessee.
11. We draw our support from the judgment of the Hon’ble Bombay High Court reported in (2019) 103 com 459 in the case of PCIT vs. Mohammad Haji Adam & Co, wherein it was held that the Tribunal correctly restricted the additions limited to the extent of bringing the gross profit rate on purchases at the same rate of other genuine purchases.
12. Similarly, the Hon’ble Supreme Court in the case of CIT vs. Willamson Financial Services reported in (2007) 165 Taxman 638 (SC) has held that under the Income Tax Act, the tax is on the income and not on gross receipts. Further held that, what is to chargeable to tax under the Income Tax Act is the profit and gains of a year.
13. Respectfully following the above judgments, we are also inclined to accept the alternate argument and adopt the profit margin at 1.15% on the bogus purchase value, which worked at Rs. 2,56,437/- and directed the AO to treat the same as income.
14. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 14th July, 2026.
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