Creative Thinks Media Pvt. Ltd. Vs Assessing Officer (ITAT Delhi)
Once AO Holds Entire Purchases Bogus, He Cannot Tax Only 25%: ITAT Upholds Section 263 Revision for 100% Addition u/s 69C at Section 115BBE Rate
Summary: The Delhi Bench of the Income Tax Appellate Tribunal has upheld revisionary proceedings u/s 263 where the AO, despite recording a finding that purchases of ₹28.18 crore were entirely non-genuine, added only 25% of such purchases and taxed the addition at the normal rate.
Relying principally upon N.K. Proteins Ltd., the Tribunal held that the issue was not debatable and sustained the PCIT’s direction to add the entire amount as unexplained expenditure u/s 69C and apply the special rate prescribed u/s 115BBE.
AO Adds 25% of Alleged Bogus Purchases
The assessee had made purchases aggregating to ₹28,18,00,184 during FY 2020-21. During assessment proceedings, the AO called for documentary evidence to verify the purchases. According to the assessment findings, the assessee failed to furnish the basic documents necessary to establish their genuineness.
The AO concluded that the purchases were non-genuine. However, instead of disallowing the entire amount, he estimated the addition at 25% of the purchases, amounting to ₹7,04,50,046. This addition was taxed at the normal corporate rate.
The assessment was completed u/s 143(3) r.w.s. 144B. The assessee filed an appeal before the CIT(A), challenging the addition of ₹7.04 crore.
PCIT Says 100% Should Have Been Added u/s 69C
On examining the assessment records, the PCIT observed that the AO’s conclusion and ultimate computation were inconsistent. If the entire purchases of ₹28.18 crore had been found to be bogus, there was no justification for restricting the addition to 25%.
According to the PCIT, the entire amount represented unexplained expenditure u/s 69C and ought to have been taxed at 60% u/s 115BBE, along with the applicable surcharge. The AO’s action resulted in both underassessment of income and application of an incorrect rate of tax.
The PCIT accordingly issued notice u/s 263.
The assessee contended that the AO had conducted comprehensive inquiries and consciously adopted the 25% estimation after considering the judicial precedents. Therefore, the assessment represented a plausible view and could not be revised merely because the PCIT preferred a higher disallowance.
It was also argued that the issue was already pending in appeal before the CIT(A).
Pending Appeal Did Not Bar Revision
The PCIT distinguished the question pending before the CIT(A) from the issues raised in revision.
According to him, the assessee’s appeal challenged the addition of ₹7.04 crore already made by the AO. In contrast, the revision proceedings concerned the AO’s failure to add the balance 75%, failure to invoke Section 69C and failure to apply the rate prescribed u/s 115BBE.
The PCIT therefore treated the issues as distinct and held that the pending first appeal did not prevent exercise of jurisdiction u/s 263.
PCIT Relies on N.K. Proteins & Kanak Impex
The PCIT relied upon the Supreme Court’s order in N.K. Proteins Ltd. v. DCIT, where the addition of the entire bogus purchases was sustained, and also referred to N.K. Industries Ltd.
Reference was additionally made to the Bombay High Court’s decision in Kanak Impex (India) Ltd., which held, on its facts, that the entire bogus purchase amount was disallowable and that the addition fell within Section 69C.
The PCIT held that the assessment order was covered by clauses (b) & (d) of Explanation 2 to Section 263. The AO had allegedly allowed excessive relief and had failed to follow the judicial position adverse to the assessee.
He therefore directed the AO to add the entire ₹28,18,00,184 u/s 69C and apply the special tax rate of 60% prescribed u/s 115BBE.
Assessee Relies on Axis Infoline
Before the Tribunal, the assessee relied upon the Delhi Bench decision in Axis Infoline Pvt. Ltd. v. PCIT. In that case, the AO had estimated 25% of bogus purchases, whereas the PCIT considered that 100% should be disallowed.
The Coordinate Bench had held that where the AO had made inquiries and adopted one of two possible views supported by judicial precedents, the PCIT could not invoke Section 263 merely because he preferred a different quantum of disallowance.
That decision had also referred to Malabar Industrial Co. Ltd., DLF Ltd. and Ansal Housing & Construction Ltd. for the principle that a debatable issue or a mere difference of opinion cannot support revision u/s 263.
ITAT Finds Issue Not Debatable
The Tribunal, however, declined to apply Axis Infoline. It held that, having regard to the Supreme Court’s decision in N.K. Proteins, the question of restricting the disallowance to 25% did not remain debatable in the present case.
The decisive circumstance was that the AO himself had arrived at a categorical finding that the entire purchases of ₹28.18 crore were non-genuine. Having reached that conclusion, restricting the addition to 25% was considered inconsistent with the binding judicial position relied upon by the PCIT.
The assessment order was therefore erroneous as well as prejudicial to the interests of Revenue. The Tribunal found no reason to interfere with the PCIT’s direction and dismissed the assessee’s appeal.
Author’s Comments
The decision draws a distinction between cases where purchases are accepted as having actually occurred through alternative sources and only the profit element is estimated, and cases where the AO records a categorical finding that the entire expenditure itself is unexplained or fictitious.
The language used by the AO becomes crucial. If the goods are proved to have entered the trading chain and corresponding sales are accepted, several decisions have restricted the addition to the profit element saved through accommodation bills. Conversely, an unequivocal finding that no genuine purchases occurred may expose the whole amount to Section 69C.
There is nevertheless room for further debate. Dismissal of an SLP, without a reasoned declaration of law, does not ordinarily amount to affirmation of every proposition in the High Court judgment under Article 141. Further, whether ordinary purchase disallowance automatically constitutes unexplained expenditure u/s 69C depends upon the finding regarding the source of expenditure, not merely the genuineness of the vendor.
The present ruling must therefore be read in its peculiar factual setting: the AO had himself concluded that the entire purchases were non-genuine, yet taxed only 25% without reconciling that conclusion.
The practical lesson is crisp: where an AO intends to tax only the embedded profit, the assessment order must clearly establish actual receipt of goods, acceptance of corresponding sales and procurement from alternative sources; otherwise, a finding of wholly bogus purchases may invite 100% addition u/s 69C together with the harsh rate u/s 115BBE.
Cases Discussed
- N.K. Proteins Ltd. Vs Deputy Commissioner of Income Tax (Supreme Court) – (2017) 84 taxmann.com 195 (SC)
- N.K. Industries Ltd. Vs Deputy Commissioner of Income Tax – (2016) 72 taxmann.com 289
- PCIT Vs Kanak Impex (India) Ltd. (Bombay High Court) – Income Tax Appeal No. 791 of 2021
- Axis Infoline Pvt. Ltd. Vs PCIT (ITAT Delhi) – ITA No. 2613/Del/2025
- La Medica – 250 ITR 575 (Delhi High Court)
- Malabar Industrial Co. Ltd. Vs CIT (Supreme Court) – 243 ITR 83 (SC)
- DLF Ltd. – 350 ITR 555 (Delhi High Court)
- Ansal Housing & Construction Ltd. – 45 taxmann.com 223 (Delhi High Court); SLP granted – 51 taxmann.com 376 (SC)
FULL TEXT OF THE ITAT DELHI ORDER
The instant appeal filed by the assessee is directed against the order dated 20.03.2025 passed by the Principal Commissioner of Income-tax (Appeals), Delhi-1 under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of the Assessment Order dated 29.12.2022 passed by the Assessment Unit, Income-tax Department under Section 143(3) r.w. Section 144B of the Act for Assessment Year 2021-22.
2. Upon examination of the assessment records, it was found by the Ld. PCIT that the assessee made substantial purchases of Rs. 2,818.00 lakh in the F.Y 2020-21 and in the absence of basic documents required for the purpose of verification of purchases since not filed the Ld. AO. made an addition of 25% of the said purchases to the tune of Rs. 704.50 lakhs and taxed at normal rates.
3. According to the Ld. PCIT the purchases having been bogus 100% of the same should have been disallowed as unexplained expenditure under Section 69C of the Act and tax at special rates provided under Section 115BBE of the Act meaning thereby the assessment ought to have been made upon making addition of the total amount of bogus purchases of Rs. 2,818/- under Section 69C of the Act and taxed under special provisions of Section 115BBE of the Act. Such mistake has resulted on short levy of tax of Rs. 24,84,45,048/- and applicable interest. In that view of the matter, the assessment completed under Section 143(3)/144B of the Act for A.Y 2021-22 dated 29.12.2022 appears to be erroneous in so far as prejudicial to the interest of the revenue as per the provisions of Section 263 of the Act and, therefore, show cause notice dated 07.03.2025 was issued to the assessee allowing opportunity as to why in terms of the provisions of Section 263 of the Act may not be invoked for A.Y 2021-22 in the following manner:-
“You have filed return of income for the A.Y. 2021-22 on 04.01.2022 at income of Rs. 1,75,87,880/-. In your case, the assessment was completed u/s 143(3)/144B vide order dated 29.12.2022 at an income of Rs. 8,80,37,926/-.
2. I have called for the assessment records from the AO and examined the same. On perusal of the records, it is noticed that as per para no. 4.6 of the assessment order, you have made substantial purchases of Rs. 2,818.00 lakh in F.Y. 2020-21 and not furnished the basic documents required for the purpose of verification of purchases. The AO added Rs. 704.50 lakh as 25% of the said purchases and taxed at normal rates.
2.2. However, being bogus purchases, 100% of the total amount of bogus purchases should have been disallowed as unexplained expenditure u/s 69C of the I. T. Act and taxed at special rates provided u/s 115BBE. Accordingly, in the assessment order, the whole amount of bogus purchases amounting to Rs. 2,818.00 lakh should have been added to your total income u/s 69C of the Act and taxed under special provisions of section 115BBE of the Act. This mistake has resulted in short levy of tax of Rs. 24,84,45,048/- and applicable interest.
3. Thus, the assessment completed in your case u/s 143(3)/144B of the I. T. Act, 1961 for A.Y. 2021-22 on 29.12.2022 appears to be erroneous in so far as it is prejudicial to the interest of revenue under the ambit of the provisions of section 263 of the I. T. Act, 1961.
4. You are, therefore, required to show cause as to why an order in terms of provision of section 263 of the I. T. Act may not be passed in your case for A.Y.2021-22.
5. In view of this, you are allowed an opportunity of being heard preferably by filing written submission through ITBA Portal/online on or before 17.03.2025 at 12:30 P.M. giving reasons as to why the assessment order passed by the Assessing Officer in your case on 29.12.2022 for A.Y. 2021-22 be not revised and depending upon the circumstances of the case, an order be not passed including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. In case you also want to represent your case personally apart from filing written submissions, you may appear before the undersigned, either personally or through your authorised representative, on 17.03.2025 at 01:00 P.M.
6. Please note that in case of non-compliance, it shall be presumed that you have no objection to the proposed action u/s 263 of the I. T. Act, 1961 and the revision of assessment order, as referred above, will be carried out under the provisions of section 263 of the I. T. Act on the basis of submissions/facts available on record. You may submit your reply on official e-mail ID: [email protected] also.”
3. The assessee duly replied to the same, the Ld. PCIT examined and observed as follows: –
“7.3. In the written submissions filed during the course of these proceedings u/s 263, the assessee’s Ld. A/R has objected to the AO’s action of treating the purchases made by the assessee as non-genuine purchases. The Ld. A/R has submitted that against the said addition, the assessee has already filed appeal before Ld. CIT(A). The A/R has contended that during assessment proceedings, AO had made comprehensive enquiries and therefore this is not a case of no enquiry or even insufficient enquiries and therefore such an order is outside the scope of provisions of s.263 of the Act as such an order cannot be held erroneous and prejudicial to the interest of revenue. The A/R has contended that the Ld. AO after making detailed enquiries and examination of documents and relying on the SC judgements has passed a detailed speaking order by applying his mind, therefore, order cannot be said as prejudice to the revenue. The A/R has contended that the power u/s 263 should not be exercised to examine the issue on merits and revise the assessmentorder, merely because there is difference of opinion that disallowance should be 100% rather than 25%. The A/R has concluded his submissions by stating that the Ld. AO relying on the SC judgements has made disallowance to the extent of 25% of purchases wisely and smartly and the matter is pending before the First Appellate Authority, and in such situations, power u/s 263 should not be exercised to examine the issue on merits and revise the assessment order.
7.4. I have carefully considered the assessee’s submissions. In the present proceedings u/s 263, the merits of AO’s findings of treating the purchases debited in the P & L A/c as non-genuine purchases is not an issue under consideration, as this issue is already sub-judiced before CIT(A), who is going to adjudicate on merits of such addition. The question is, whether the issue on which appeal has been filed by the assesses before CIT(A) is identical to the issue which has been highlighted in the SCN u/s 263 issued to the assessee, for which the present proceedings are under progress. The clear answer is: “NO”. The appeal before CIT(A) has been filed by the assessee in which the addition made by AO has been challenged. Therefore, the appeal before CIT(A) is only limited to the quantum of addition made by AO in the assessment order. As already stated above, in the case, as per facts emanating from the assessment order, the AO, after carrying out comprehensive enquiries and verification, arrived at the conclusion that the assessee had made unexplained purchases to the tune of Rs.28, 18,00,184/-. Accordingly, the purchases to the extent of Rs.28,18,00,184/- were treated by AO as non-genuine. However, while computing total income, AO added only 25% of the total unexplained purchases of Rs. 28,18,00,184/-. This resulted in overall addition of only Rs. 7,04,50,046/-. This is despite the fact that AO found that the entire purchases amounting to Rs. 28,18,00,184/- remained non genuine purchases as the assessee failed to establish the genuineness of these purchases. In the appeal before CIT(A), the addition of Rs. 7,04,50,046/- has been challenged by the assessee.
Quite contrary to the above, in the present proceedings u/s 263, the issues under consideration are, whether, after arriving at the conclusion that purchases to the tune of Rs. 28,18,00,184/- were non-genuine purchases, whether the AO has erred in computing the total income corresponding to the purchases to the tune of Rs. 28,18,00,184/-, which were held by AO as non-genuine purchases. The further issue under consideration is, whether the AO applied correct provisions of Income Tax Act, 1961, while computing the total income corresponding to the unexplained purchases to the tune of Rs. 28,18,00,184/-. The third issue involved is, whether the AO has applied the correct rate of tax in accordance with the relevant provisions of Income Tax Act, 1961?, on the addition made to the total income corresponding to the purchases to the tune of Rs. 28,18,00,184/-. In that view of the matter, the issue pending before CIT(A), as raised by the assessee are not identical to the issue whichhas been highlighted in the SCN u/s 263 issued to the assessee, for which the present proceedings are under progress.
7.5. In the written submission, the assessee has also objected to the revisionary powers of PCIT u/s 263 of the Act, in the light of facts involved in the case of assessee. The assessee has contended that in its case, so far as the issues raised in the SCN issued u/s 263 of the Act are concerned, the AO’s order cannot be held to be erroneous and prejudicial to the interest of revenue as the AO has passed the order after making various enquiries and has finally adopted one of the plausible views. The AR has contended that the power u/s 263 should not be exercised to examine the issue on merits and revise the assessment order, merely because there is difference of opinion that disallowance should be 100% rather than 25%. The A/R has concluded his submissions by stating that the Ld. AO relying on the SC judgements has made disallowance to the extent of 25% of purchases wisely and smartly and the matter is pending before the First Appellate Authority, and in such situations, power u/s 263 should not be exercised to examine the issue on merits and revise the assessment order.
7.6. I have carefully considered the arguments made by the assessee in regard to scope of revisionary powers of PCIT u/s 263 of the Act, in the light of facts involved in the case of assessee. However the same is not acceptable. Explanation 2 of the section 263 of the Income Tax Act 1961, is reproduced as under:-
[Explanation 2. For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, – TAXDEPAR
(a) the order is passed without making inquiries or verification which should made:
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119: or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.]
7.7. The facts involved in the case, as emanating from the assessment order reveals that AO, after comprehensive enquiries and verification carried out, arrived at the conclusion that the assessee had made unexplained purchases to the tune of Rs. 28,18,00,184/-, However, even after AO had arrived at clear findings that purchasesto the extent of Rs. 28,18,00,184/- were non genuine, AO added only 25% of the said unexplained purchases to the total income of the assessee.
7.8. The above conclusion of AO, of adding only a part of total non-genuine purchases, was directly contradictory to the ruling granted by Hon’ble Supreme Court of India in the case of N.K. Proteins Ltd. Vs Deputy Commissioner of Income Tax (judgement dated January 16, 2017), reported in 84 taxmann.com 195 (SC), where it was ruled by Hon’ble Apex Court that 100% of such nongenuine/bogus purchases was required to be treated as taxable income of the assessee and not just the profit element embedded in them. In the said case, Hon’ble ITAT had restricted the addition on account of bogus purchases at 25%. On further appeal, the Hon’ble Gujarat High Court modified the order to Tribunal and directed for addition of entire bogus purchases. After hearing the counsels, the Supreme Court dismisses the SLP filed by the assessee and confirmed the decision of High Court for treating 100% of such bogus purchases as taxable income of the assessee. Hon’ble Apex Court reaffirmed the same view taken in the case of N.K. Proteins Ltd. Vs Deputy Commissioner of Income Tax (judgement dated January 16, 2017), where Special Leave Petition filed in another case of M/s N.K. Industries Ltd. against the decision of Gujarat High Court was dismissed by the Hon’ble Supreme Court, following its decision in N.K. Proteins Ltd. The decision was reported in (2016) 72 taxmann.com 289.
7.9. In the instant case of the assessee, the facts involved are identical to the case decided by Hon’ble Apex Court (N.K. Proteins Ltd. and M/s N.K. Industries Ltd), which is evident from the various enquiries made by AO as recorded in the assessment order. This aspect has been more elaborately discussed in the subsequent part of this order. Therefore, in the present case, AO has clearly passed an order, which is both erroneous as well as prejudicial to the revenue, as even after arriving at clear conclusion that the assessee had made non-genuine purchases of Rs. 28,18,00,184/- were non genuine, AO added only 25% of the said unexplained purchases to the total income of the assessee, which was in direct contradiction to the judgements delivered by Hon’ble Apex Court as discussed above. At the time of passing of assessment order, these judgements had already been delivered by Hon’ble Apex Court so this is also not the situation here that these judgements were delivered by Hon’ble Apex Court after the assessment order had been passed by AO.
In this view of the matter, the assessee’ case gets directly covered within the scope of clause (d) of Explanation 2 of the section 263 of the Income Tax Act 1961, according to which, if the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of assessee or any other person, then such an order isdirectly within the scope of s.263 of the Act. The contents of Explanation 2 of the section 263 of the Income Tax Act 1961 has already been reproduced above. Specifically, contents of clause(d) of Explanation 2 of the section 263 of the Income Tax Act 1961 are once again reproduced as under:
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
In this case, by adding only a percentage of the total non-genuine purchases, it cannot be said that after making enquiries, the AO has adopted one of the plausible views after due application of mind [as argued in the written submissions filed by Ld. A/R], as the view adopted by AO was in direct contradiction to the judgements delivered by Hon’ble Apex Court, which has resulted in revenue loss.
Consequently, in the present case, AO has not adopted one of the plausible views after due application of mind, but has adopted a view which is both erroneous as well as prejudicial to the interest of revenue, as the same falls within the scope of clause (d) of Explanation 2 of the section 263 of the Income Tax Act 1961. This aspect has been further elaborated in the subsequent paras of this order.”
4. Finally, considering the different judicial precedent on this aspect of the matter, the Ld. PCIT held the order passed by the Ld. AO as erroneous so far as it is found to be prejudicial to the interest of the revenue. Relying upon the order passed by the Hon’ble Apex Court in the case of N. K. Protein Ltd. Vs. Dy. CIT dated 16thJanuary 2017, the entire bogus purchases made by the assessee was found to be disallowable expenditure and therefore, 100% of such bogus purchases was directed to be added as unexplained purchases by the Ld. AO amounting to Rs. 28,18,00,184/- to the income of the Assessee with the following observations:
“7.14. In view of the above stated judicial rulings delivered by Hon’ble Apex Court in the case of N. K Protiens Ltd, ruling that 100% bogus purchases are disallowable expenses and further affirming its decision in the case of N.K.Industries Ltd. Vs. Deputy Commissioner of Income Tax, (2016) 72 taxmann.com 289, where the Special Leave Petition filed by the assessee against the decision of Hon’ble Gujarat High Court was dismissed by the Apex Court (following N. K. Protiens Ltd. Vs. Deputy Commissioner of Income Tax, on 16 January 2017, (2017) 84 taxmann.com 195 (SC)), and further observing that the said decision of Hon’ble Apex Court has now been comprehensively applied by Hon’ble Bombay High Court in its very recent decision dated 03-03-2025, delivered in the case of “Kanak Impex (India) Ltd.”, in INCOME TAX APPEAL NO. 791 OF 2021, where the issue has been decided in favour of revenue and against the assessee ruling that entire bogus purchases made by the assessee are disallowable expenses and therefore 100% of such bogus purchases should be added to taxable income of the assessee, in the instant case also, the entire unexplained purchases were required to be disallowed by AQ and added to the taxable income of the assessee u/s 69C of the Act, as the facts involved in the case of assessee are also identical to the facts involved in cases of N. K. Protiens Ltd., N.K.Industries Ltd. and Kanak Impex (India) Ltd. The facts involved in the case, as emanating from the assessment order reveals that AO, after comprehensive enquiries and verification carried out, arrived at the conclusion that the assessee had made unexplained purchases to the tune of Rs. 28,18,00,184/-. Consequently, in the present case, even after arriving at clear conclusion that purchases amounting Rs.28,18,00,184/-remained non genuine purchases as the assessee failed to establish the genuineness of these purchases, still, by adding only 25% of these non-genuine purchases of Rs. 28,18,00,184/- to the taxable income of the assessee, that too without invoking expressly, the provisions of section 69C of the Act, AO has passed an erroneous order so far as it is found to be prejudicial to the interest of the revenue. The AO is accordingly directed to add entire unexplained purchases, amounting to Rs.28,18,00,184/- to the total income of the assessee. Section 69C of the Income Tax Act clearly states that where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof or the explanation, if any, offered by him is not in the opinion of the [Assessing]Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.
Accordingly, the AO is directed to add entire unexplained purchases, amounting to Rs.28,18,00,184/- by invoking provisions of s.69C of the I.T. Act.
7.15. Perusal of the assessment order and the corresponding computation sheet generated by AO reveals that not only the AO has under assessed the income (in as much as the AO has made addition of just 25% of the total unexplained purchases, instead of adding them 100%), but even the rate of tax has been incorrectly applied on the said addition to total income. The unexplained/non-genuine purchases debited to P&L Account are in the nature of unexplained expenditure and therefore addition on account of disallowance of such unexplained/non-genuine purchases falls within the purview of s.69C of the I.T. Act, 1961. However, while computing tax payable on the addition made by AO on account of unexplained purchases, the AO has applied normal rate of tax of 30%, instead of applying special rate of tax of 60% as specified u/s 115BBE of the I.T. Act, 1961. Section 115BBE of the I.T. Act, 1961 clearly specifies that any addition made under section 69C of the I.T. Act, 1961 is to be taxed at special rate of 60%. Speaking in more elaborate manner, section 69C of the Income Tax Act states that where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof or the explanation, if any, offered by him is not. in the opinion of the [Assessing] Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year. Further, Section 115BBE of the Income Tax Act. 1961, provides that where the total income of an assessee determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished u/s 139, or determined by the Assessing Officer include any income referred to in these sections, the income-tax payable shall be the aggregate of the amount of income tax calculated on the income at the rate of 60 per cent (surcharge u/s 115BBE is 25 percent of income tax) (w.e.f. AY 2017-18). The section further specifies that no deduction in respect of any expenditure or allowance or set off any loss shall be allowed to the assessee under any provision of this Act in computing his income.
On this aspect, the case of assessee clearly gets covered both under clause (b) and clause (d) of the Explanation 2 of the section 263 of the Income Tax Act 1961.
In terms of clause (b) of the Explanation 2 of the section 263 of the Income Tax Act1961, by not specifying the correct provisions of act in respect of addition made in respect of non-genuine purchases, which very much fell within the scope of s.69C of the Act, the AO has granted undue relief to the assessee as the tax rate @60% u/s 115BBE could not have been applied on any addition which has not been made under the deeming provisions of section 68, section 69, section 69A, section 69B, section 69C or section 69D. The addition was subject by AO to normal rate of tax @30% instead of applicable rate @60%, thus resulting into revenue loss.
In terms of clause (d) of the Explanation 2 of the section 263 of the Income Tax Act 1961, Hon’ble Apex Court in the case of N. K Proteins Ltd, ruled that 100% bogus purchases are disallowable expenses and further affirming its decision in the case of N.K.Industries Ltd. Vs. Deputy Commissioner of Income Tax, (2016) 72 taxmann.com 289, where the Special Leave Petition filed by the assessee against the decision of Hon’ble Gujarat High Court was dismissed by the Apex Court (following N. K. Protiens Ltd. Vs. Deputy Commissioner of Income Tax, on 16 January 2017, (2017) 84 taxmann.com 195 (SC). In both these decisions, the Hon’ble Apex Court affirmed the action of AO of making addition on account of bogus purchases within the scope of s.69C of the Act. The above stated decisions of Hon’ble Apex Court, has now been comprehensively applied by Hon’ble Bombay High Court in its very recent decision dated 03-03-2025, delivered in the case of “Kanak Impex (India) Ltd.”, in INCOME TAX APPEAL NO. 791 OF 2021, where the issue has been decided in favor of revenue and against the assessee ruling that entire bogus purchases made by the assessee are disallowable expenses and therefore 100% of such bogus purchases should be added to taxable income of the assessee, and further any addition made on account of bogus purchases will fall within the scope of s.69C of the Act.
Consequently, by applying normal rate of tax @30% to the addition made to the total income corresponding to the non genuine purchases, instead of applying special rate of tax of 60% as specified u/s 115BBE of the I.T. Act, 1961, the AO has passed an erroneous order so far as it is prejudicial to the interest of the revenue. In accordance with the provisions of s.115BBE read with s. 69C, the AO is directed to apply special tax rate of 60% on the addition to be made on account of unexplained purchases, amounting to Rs.28,18,00,184/-, as the same has to be made under provisions of s.69C of the I.T. Act.
8. In light of the provisions of Section 263 of the IT Act, the above order u/s 143(3) read with section 144B of the Income tax Act dated 29-12-2022, for AY 2021-22 is held to be erroneous, in so far as it is prejudicial to the interest of revenue under the ambit of the provisions of section 263 of the I. T. Act, on the issues highlighted in this order above and specifically in para 7.14 and 7.15 of the order. The Assessing Officer is directed to pass an order u/s 263 r.w.s. 143(3) and 144B of I.T Act, 1961 and take necessary remedial action on various issues involved, as directed in the order.”
5. According to the Ld. Counsel appearing for the assessee, the Ld. AO has rightly added 25% as bogus, unexplained and relied upon the order passed by the Co-ordinate Bench in the case of Axis Infoline Pvt. Ltd. Vs. PCIT passed in ITA No. 2613/Del/2025 wherein debatable issue has not been approved for any proceedings under Section 263 of the Act as the ratio laid down therein and submitted that the order impugned is bad in law and not sustainable.
6. Under the facts and circumstances of the matter, we therefore, further considered the judgment passed by the Co-ordinate Bench wherein following observation has been made:
“3. We have considered the rival submissions and have gone through the case records, along with the paper book and case laws filed by the assessee. The primary issue that needs to be decided in this case is whether when the AO has taken a considered view about a certain disallowance then is it open to the Pr. CIT to arrive at a different quantum of the disallowance from the same transaction. It is seen that while the Ld. AO has relied on certain case laws to arrive at a figure of 25% of the bogus purchases to be disallowed, the Ld. PCIT has also relied on certain case laws to arrive at the conclusion that 100% of bogus purchases deserve to be disallowed. Thus, what is not in doubt is that the purchases have been certainly held to be bogus and the assessee’s offer of surrender merely strengthens this fact finding by the Ld. AO. However, the moot point here is not whether the AO is correct or the Ld. Pr. CIT is correct in his assumption, rather the issue is whether when two views are certainly possible, at least on the peculiar facts of this case, ITA No.2613/Del/2025 6 and both views more or less supported by different case laws, then can there be a sustainable action u/s 263 of the Act or not. Again, by way of an academic discussion, even the Hon’ble Delhi High Court in the case of La Medica reported in 250 ITR 575 (Del) has arrived at a conclusion somewhat similar to the Kanak Impex case (supra) regarding the treatment to be given to bogus purchases. Be that as it may, we find that even in the case of Malabar Industrial (supra), in para 9 of this decision, the Hon’ble Apex Court has not approved of a situation where two views are possible and the AO has adopted one such view with which the Commissioner does not agree. The caveat here is that the action of the AO should not be unsustainable in law. We find that the action of the AO is certainly not unsustainable in law but is merely suffering from a possibility of there being two views on the matter. Also, in the case of DLF Limited reported in 350 ITR 555 (Del.), on facts, a debatable issue has not been approved for any proceedings u/s 263 of the Act. We also find that the Hon’ble Delhi High Court in the case of Ansal Housing Construction Ltd. reported in 45 taxmann.com 223 (Del.), has held that a debatable issue would be an unjustified ground for invoking the provisions of section 263 of the Act. It may be mentioned that probably the last word on this issue is yet to come since the Ansal Housing & Construction Ltd. case travelled upto the Hon’ble Supreme Court where an SLP has been granted [51 taxmann.com 376 (SC)], even though a diligent search of judicial literature does not reveal any order from the ITA No.2613/Del/2025 7 Hon’ble Apex Court as yet in this particular case. Considering this discussion, it deserves to be held that the action of Ld. PCIT is fatally hit by the issue being debatable at best on facts. Accordingly, we are unable to persuade ourselves to agree with it.”
7. It is found that the issue before us does not appear to be a debatable particularly having regard to the order passed by the Hon’ble Apex Court the in case of NK Protein (supra) and, therefore, in our considered opinion the Judgment relied upon passed by the Co-ordinate Bench is not applicable to the case in hand and having regard to the order passed by the Hon’ble Supreme Court, the order impugned passed by Ld. PCIT, in our considered opinion is just and proper so as not to warrant interference. Assessee’s appeal is thus, dismissed.
Order pronounced in the open court on 21/08/2026.
