Satellite Polypack Industries Vs ITO (ITAT Rajkot)
Supplier’s Adverse GST Information Alone Cannot Justify Purchase Addition: ITAT Quashes Reassessment
Summary: The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, has held that reassessment based solely on adverse third-party information, without independent enquiry or verification of the assessee’s transactions, amounts to borrowed satisfaction and cannot be sustained.
In Satellite Polypack Industries v. ITO, the Tribunal also rejected an addition concerning allegedly bogus purchases, emphasising that allegations against a supplier do not automatically establish that the purchaser’s transactions are fictitious.
The order, pronounced on 5 November 2026, concerned Assessment Year 2020-21 in ITA No. 591/RJT/2026. The Bench comprised Accountant Member Dr. Arjun Lal Saini and Judicial Member Sonjoy Sarma.
Background of the Reassessment
The assessee, a partnership firm engaged in manufacturing, filed its return declaring total income of ₹1,05,960.
The Assessing Officer reopened the assessment on the basis of information available on the Insight Portal, under the category “High Risk CRIU/VRU”. The information concerned purchases of ₹42,69,335 from M/s Riya International during Financial Year 2019-20.
A notice under Section 148 was issued on 26 March 2024, followed by notices under Section 142(1).
Based on information from the CGST authorities and Investigation Wing, the Assessing Officer alleged that the supplier issued fake invoices and facilitated fraudulent input tax credit without actual supply of goods. The assessee was consequently asked to explain why its purchases should not be treated as bogus.
Documents Furnished by the Assessee
The assessee disputed the allegations and furnished purchase invoices, e-way bills, ledger accounts, bank statements and an audit report.
It maintained that the materials had actually been received and used in its manufacturing process, and that payments were made through banking channels.
The Assessing Officer nevertheless relied on the supplier’s failure to comply with notices issued under Section 133(6) and its failure to substantiate its business activities.
Holding that the assessee had not established the genuineness of the purchases, the officer rejected the books under Section 145(3) and treated the purchase amount as unexplained expenditure under Section 69C.
After reducing ₹36,716, representing a profit element of 0.86%, the officer made a net addition of ₹42,32,619. The reassessment dated 5 March 2025, passed under Section 147 read with Section 144, determined total income at ₹43,38,579.
First Appeal and Rival Arguments
The assessee challenged the purchase addition, rejection of books, application of Section 115BBE, and alleged denial of natural justice. However, the CIT(A), through the National Faceless Appeal Centre, sustained the assessment.
Before the Tribunal, the assessee argued that the officer had acted entirely on third-party information without independently examining its transactions.
Its representative submitted that the invoices, corresponding e-way bills, banking records, tax audit report and audited financial statements supported the purchases. No corroborative material had been brought on record to establish that the specific transactions were fictitious.
The Revenue defended the assessment, relying on the adverse CGST information and the supplier’s failure to substantiate its activities.
Reopening Based on Borrowed Satisfaction
The Tribunal found that the reassessment had been initiated solely on third-party information, without independent enquiry or verification by the Assessing Officer to establish escapement of income.
It held that the initiation reflected borrowed satisfaction rather than independent application of mind.
On these facts, the Tribunal ruled that reopening under Section 147 was bad in law. It therefore set aside the reassessment order and the CIT(A)’s order sustaining it, allowing the assessee’s legal ground.
Supplier Allegations Must Be Linked to Specific Purchases
The Tribunal separately examined the merits of the addition.
It observed that an allegation that a supplier issued invoices without supplying goods does not, by itself, conclusively establish that the particular purchases claimed by an assessee were fictitious.
The nature of the transactions and the supporting documents must be considered in their entirety.
Here, the assessment order did not adequately demonstrate how the material concerning Riya International had been independently correlated with the assessee’s specific purchases, particularly against the documentary evidence furnished.
The Tribunal accordingly held that the addition under Section 69C could not be sustained in the manner made.
Significance of the GST Records
The Tribunal also noted the submission that the assessee’s books and transactions reported in its GST returns had not been disturbed by the CGST authorities.
Since the reopening itself originated from CGST information, the Assessing Officer was required to independently examine the assessee’s transactions and evidence before drawing an adverse inference.
The Tribunal concluded that purchase genuineness could not be rejected merely by relying on adverse information about the supplier.
Final Decision
The Tribunal allowed the assessee’s appeal, set aside the impugned orders and directed the Assessing Officer to allow the assessee’s claim.
The ruling underscores the need for transaction-specific verification when using third-party intelligence. In this case, the absence of independent examination undermined both the reopening and the purchase addition, despite the allegations surrounding the supplier.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT RAJKOT
Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2020-21, is directed against the order under section 250 of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] passed by the National Faceless Appeal Centre [hereinafter referred to as ‘NFAC’], dated 26.02.2026, which in turn arises out of an order passed by assessing officer u/s. 147 read with section 144 of the Act, dated 05.03.2025.
02. Brief facts of the case are that the assessee is a partnership firm engaged in the business of manufacturing. For the Assessment Year 2020-21, the assessee filed its return of income declaring total income of Rs.1,05,960/-. The case was reopened under section 147 of the Income-tax Act, 1961, on the basis of information available on the Insight Portal under the category “High Risk CRIU/VRU”, indicating that the assessee had made purchases of Rs.42,69,335/- from M/s Riya International during the Financial Year 2019-20. Accordingly, notice under section 148 was issued on 26.03.2024, followed by notices under section 142(1) of the Act. During the reassessment proceedings, the Assessing Officer issued a show-cause notice proposing to treat the purchases from M/s Riya International as bogus, in view of information received from the CGST authorities and the Investigation Wing alleging that the said entity was engaged in issuing fake invoices and facilitating fraudulent input tax credit without actual supply of goods. In response, the assessee furnished its reply along with purchase invoices, e-way bills, ledger account, bank statements and audit report, contending that the purchases were genuine, the materials had actually been received and utilised in the manufacturing process, and payments had been made through banking channels. The Assessing Officer, however, observed that M/s Riya International had failed to comply with the notices issued under section 133(6) of the Act and had not substantiated its business activities. Holding that the assessee had failed to establish the genuineness of the purchases, the Assessing Officer rejected the books of account under section 145(3) of the Act and treated the entire purchase amount of Rs.42,69,335/- as unexplained expenditure under section 69C of the Act. After reducing Rs.36,716/-, representing profit at the rate of 0.86% allegedly embedded in the purchases, the Assessing Officer made an addition of Rs.42,32,619 and completed the reassessment under section 147 read with section 144 of the Act vide order dated 05.03.2025, determining the total income at Rs.43,38,579. Penalty proceedings under sections 271AAC(1), 270A and 272A(1)(d) of the Act were also initiated separately.
03. Aggrieved by the assessment order, the assessee preferred an appeal challenging the addition under section 69C of the Act, rejection of books of account under section 145(3) of the Act, reduction of the profit element, alleged violation of the principles of natural justice, and application of the provisions of section 115BBE of the Act. Where, the Ld. CIT(A), who dismissed the appeal and sustained the order passed by the Assessing Officer.
04. Still, aggrieved thereby, the assessee is in appeal before the tribunal, challenging the reassessment proceedings as well as the addition made under section 69C of the Income-tax Act, 1961.
05. During the course of hearing, the Ld. AR submitted that the impugned assessment order was passed on an erroneous appreciation of facts and solely on the basis of third-party information received from the CGST authorities, Ahmedabad, concerning M/s Riya International. The assessee had made purchases aggregating to Rs.42,69,335/- from the said party, and the Assessing Officer had also referred to a profit element of Rs.36,716/- allegedly embedded in such purchases. The Ld. AR contended that the assessee was engaged in regular business activities and had furnished copies of purchase invoices, corresponding e-way bills, ledger accounts, bank statements evidencing payments through banking channels, the tax audit report under section 44AB of the Act and the audited financial statements for the relevant assessment year. These documents, according to the Ld. AR, were sufficient to substantiate the genuineness of the transactions. The Ld. AR further submitted that the Assessing Officer had proceeded merely on the basis of information alleging that M/s Riya International was engaged in issuing invoices without actual supply of goods, without conducting any independent enquiry or bringing any corroborative material on record to establish that the purchases claimed by the assessee were fictitious. It was argued that the reopening of the assessment on the basis of third-party information, without independent verification of the assessee’s transactions, was legally unsustainable. Accordingly, the Ld. AR prayed that the reassessment proceedings and the consequential addition be set aside.
06. On the other hand, the Ld. DR supported the orders of the authorities below and submitted that the Assessing Officer had rightly treated the purchases as non-genuine in view of the information received from the CGST authorities and the failure of M/s Riya International to substantiate its business activities.
07. We have heard the rival submissions and perused the material available on record. The principal issue for consideration is whether the reassessment proceedings and the addition of Rs.42,69,335/- under section 69C of the Act can be sustained when the addition is founded primarily on third-party information concerning the supplier. On the issue of reopening of the assessment as made in the case of the assessee was based solely on third-party information, without any independent enquiry or verification conducted by the Assessing Officer to establish the escapement of income. The reassessment proceedings were thus initiated on the basis of borrowed satisfaction rather than the independent application of mind by the Assessing Officer. In these circumstances, we hold that the initiation of reassessment proceedings under section 147 of the Income-tax Act, 1961, is bad in law and cannot be sustained. Accordingly, the reassessment order passed by the Assessing Officer and sustained by the Ld. CIT(A) is hereby set aside. The legal ground raised by the assessee is allowed.
On merit, we note that the assessee has relied upon documentary evidence comprising purchase invoices, e-way bills, ledger accounts, bank statements evidencing payments through banking channels and audited financial statements. The mere fact that the supplier was alleged to have issued invoices without actual supply of goods would not, by itself, conclusively establish that the particular purchases claimed by the assessee were fictitious. The nature of the transactions and the supporting evidence furnished by the assessee must be considered in their entirety. In the present case, the addition has been made substantially on the basis of information relating to M/s Riya International. The assessment order, as placed before us, does not adequately demonstrate how the material concerning the supplier was independently correlated with the assessee’s specific purchase transactions, particularly in the face of the documentary evidence relied upon by the assessee. The genuineness of the purchases, therefore, cannot be determined solely by reference to the adverse information concerning the supplier without proper consideration of the evidence relating to the assessee’s own transactions.
In view of the above facts and circumstances, we are of the considered view that the addition made under section 69C of the Act cannot be sustained in the manner in which it has been made.
Further, we note that the Ld. AR submitted that the books of account and the transactions recorded therein had not been rejected or disturbed by the CGST authorities. The Assessing Officer initiated the reassessment proceedings on the basis of information received from the CGST Department alleging that the transactions with M/s Riya International were not genuine. However, the same transactions, as recorded by the assessee in its books of account and reported in the GST returns, had not been disturbed by the said department. In these circumstances, when the reassessment itself was initiated on the basis of information received from the CGST Department, the Assessing Officer was required to independently examine the assessee’s specific transactions and the supporting documentary evidence before drawing an adverse inference. In the absence of such independent verification, the genuineness of the purchases could not be rejected merely on the basis of third-party information concerning the supplier. Accordingly, the impugned orders of the authorities below are set aside and the Assessing Officer is directed to allow the assessee’s claim.
08. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on this 5th day of November, 2026.
