Case Law Details
Dinesh Dharamshi Patel Vs ITO (ITAT Mumbai)
Summary: The ITAT Mumbai deleted additions towards alleged bogus purchases of ₹3.51 crore and management and consultancy fees of ₹4.20 lakh, holding that the Assessing Officer had failed to disprove the documentary evidence produced by the assessee. The Tribunal observed that the assessee had substantiated the purchases with purchase invoices, ledger confirmations, transport receipts, e-way bills, bank statements, GST records, and Input Tax Credit reflected in GSTR-2A, while the corresponding sales were never disputed and the books of account were not rejected. The AO had relied solely on a supplier’s claim that his PAN had been misused, without conducting further investigation, recording his statement under Section 131, or allowing cross-examination. The Tribunal held that mere non-filing of income tax returns by a supplier or an unverified allegation of PAN misuse cannot render genuine purchases bogus in the absence of contrary evidence. It further held that management and consultancy fees cannot be disallowed merely because the recipient possessed limited educational qualifications, particularly when services, business expediency, TDS deduction, and payment were not disputed. Accordingly, both disallowances were deleted and the assessee’s appeal was allowed in full.
Core Issue: The primary issues before the Tribunal were whether purchases could be treated as bogus merely on the basis of a third-party allegation of PAN misuse despite extensive documentary evidence supporting the transactions, and whether management and consultancy fees could be disallowed solely because the recipient was not highly educated.
Facts: The assessee, proprietor of Active Sports and engaged in the business of trading in fabrics, declared income of ₹1.15 crore for AY 2021-22. During scrutiny assessment, the Assessing Officer noticed purchases aggregating to ₹38.61 crore and focused on purchases of ₹3.51 crore from M/s Delightful Collections. In response to a notice issued under section 133(6), the alleged proprietor, Chandraprakash Shukla, claimed that his PAN had been misused by a friend. Based on this reply, the Assessing Officer treated the purchases as bogus despite the assessee furnishing purchase invoices, ledger confirmations, transport receipts, e-way bills, GST records, bank statements and evidence of corresponding sales. The Assessing Officer also disallowed management and consultancy charges of ₹4.20 lakh paid to Smt. Hetal Patel on the ground that she was only matriculate and her income was below the taxable limit.
Findings of the AO and CIT(A): The Assessing Officer held that purchases from Delightful Collections were non-genuine and represented an arrangement to suppress profits, primarily relying upon the reply of Chandraprakash Shukla. He accordingly made an addition of ₹3.51 crore. The Assessing Officer further disallowed consultancy charges of ₹4.20 lakh by doubting the recipient’s qualifications and the genuineness of services rendered. The CIT(A) confirmed both additions without recording any independent findings on the evidence furnished by the assessee.
ITAT Findings: The Tribunal observed that the assessee had produced complete documentary evidence in support of the purchases, including purchase invoices, transport receipts, e-way bills, GST returns, ledger confirmations and banking records. The payment had been credited to the bank account of Delightful Collections and corresponding sales were not disputed by the Revenue. The Tribunal noted that the Assessing Officer relied solely on the reply of Chandraprakash Shukla alleging misuse of PAN but failed to investigate the allegation further. No attempt was made to identify the alleged friend, no statement under section 131 was recorded, and no opportunity for cross-examination was provided to the assessee. Further, none of the documents produced by the assessee were found to be false, fabricated or manipulated. The books of account were not rejected and the gross profit disclosed by the assessee was consistent with earlier years. In the absence of any cogent adverse material, the Tribunal held that the purchases could not be treated as bogus and deleted the addition of ₹3.51 crore.
With regard to management and consultancy charges, the Tribunal held that the disallowance was based merely on suspicion regarding the educational qualification of the recipient. The Revenue had neither disputed the rendering of services nor the actual payment. No material was brought on record to establish that the expenditure was bogus or not incurred for business purposes. The Tribunal observed that business expediency is to be judged from the perspective of the businessman and not by the educational qualifications of the recipient. Accordingly, the disallowance of ₹4.20 lakh was also deleted.
Outcome: The Tribunal allowed the appeal in full. The addition of ₹3.51 crore on account of alleged bogus purchases was deleted as the Revenue failed to rebut the extensive documentary evidence produced by the assessee. The disallowance of ₹4.20 lakh towards management and consultancy fees was also deleted, the Tribunal holding that educational qualification alone could not be a basis to deny an otherwise genuine business expenditure.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal by assesseeis directed against the order of Ld. CIT(A)NFAC dated 30.10.2025 for Assessment Year (A.Y.) 2021-22. The assessee has raised following grounds of appeal:
“1. The order dated 30/10/2025 passed by the Hon’ble CIT(Appeal) NFAC, Delh i bearing no. ITBA/NFAC/S/250/2025-26/1082169052(1) under section 250 of the Income Tax Act, 1961 is unreasonable, arbitrary and against the provision o f Income Tax Act, 1961 and therefore liable to be quashed.
2. On facts and in the circumstances of the case and in law the Hon’ble C.I.T.(Appeals) has erred in confirming the disallowance made u/s.69 of the Income Tax Act, 1961 amounting to Rs.3,51,10,067/- on account of alleged bogus purchases made, without considering the written submissions and various documentary evidence submitted by the Appellant.
3. On facts and in the circumstances of the case and in law the Hon’ble C.1.T(Appeals) has erred in confirming the disallowance of Rs. 4,20,000/- on account of Management & Consultancy fees without any basis or findings.
4. The appellant craves to alter, add, delete, substitute, or modify and other grounds of appeal. ”
2. Brief facts of the case are that assessee is individual and proprietor of Active Sports, engaged in the business of trading in fabrics (cloth). The assessee filed his return of income for A.Y. 2021-22 on 13.12.2021 declaring income of Rs. 1.15 crore. Case was selected for scrutiny. During assessment, the Assessing Officer (AO) recorded that assessee has debited purchases of Rs. 38.61 crore. The AO further recorded that assessee has shown purchases from such parties who are non-filer of return of income. The assessee was asked to furnish list of persons from whom purchases of more than Rs. 2.00 lakhs during the year. The assessee furnished list of persons from whom purchases were made. The AO further recorded that he was having information that assessee has shown purchases from suppliers who are either non-filer or have filed non-business (ITR I & II) or reflected substantially lower turnover in their respective ITRs. The AO in order to verify the genuineness of purchases issued notice under section 133(6). In response to notice under section 133(6), one reply furnished by Chandraparakash Shukla on 05.12.2022 through ITBA portal. In the reply, it was stated that one of his friends has requested his PAN for employment purposes and he misused his PAN. He has already notified this fraud to GST Authority. On the basis of such reply, the AO issued fresh show cause notice to the assessee as to why purchases shown from Delightful Collections (Chandraparakash Shukla) should not be treated as bogus purchases. In response to show cause notice, the assessee filed his reply dated 12.12.2022, the contents of reply of assessee are recorded in para 4.1.2 of assessment order. In the reply, the assessee stated that he has purchased fabrics worth Rs. 3.34 crore from Delightful Collections. The purchases of Rs. 3.51 crore inclusive of 5.00% GST. To substantiate purchases, the assessee furnished purchase invoices, transport receipts, e-way bill, and bank statement highlighting payment to supplier. It was further stated that GST ITC credit from Delightful Collections was duly reflected in GSTR 2A, periodic return filed by said dealer for F.Y. 2020-21. The extract of GSTR 2A reflecting ITC credit from Delightful Collections was also furnished. The GST number of said dealer was not cancelled on 05.05.2020 as the dealer was furnishing return of e-way bill were generated, which is not possible if GSTR registration is cancelled. GST registration cannot be cancelled retrospectively. The assessee stated that payments to Delightful Collections is reflected in his bank account. If the statement / alleged reply of Chandraparakash Shukla is to be believed then it is a matter of record that name of individual/proprietor’s bank account which require full proof KYC. The bank account in the name of Chandraparakash Shukla. The affidavit if any of Chandraparakash Shukla may be to save his interest for non-compliance or non-payment of income tax. The assessee stated that there are corresponding sales of purchase. Sales is not possible in absence of purchases. The reply of assessee was not accepted. The AO by scanning part of affidavit of Chandraparakash Shukla disallowed the purchases of Rs. 3.51 crore by taking that such purchases are booked to suppress the profit.
3. The AO further noted that assessee has paid management and consultancy fee of Rs. 4,20,000/-. The assessee was asked to furnish details of the person to whom such fees was paid along with educational qualification of such person. The contents of reply are not recorded by AO in his order. The AO held that on perusal of submission, he found that such payment was made to Smt. Hetal Patel, who is only metric pass. The fees were paid for administrative work in office. The AO further noted that from return of income of Smt. Hetal Patel, it was seen that her return was below taxable limit and only receipt was shown by her from the assessee. The AO held that such expenses were claimed only to suppress the profit. On appeal before ld. CIT(A) both the disallowances were confirmed. Further, aggrieved the assessee has filed present appeal before Tribunal.
4. We have heard rival submissions of both the parties and have gone through the orders of lower authorities carefully. Ground no. 2 relates to disallowance of purchases from Delight Collections which is proprietary firm of Chandraparakash Shukla. The assessee has made purchases from Delightful Collections and made payment through cheques. Copy of ledger confirmation from Delightful Collections, purchase invoice, transport receipt, e-way bill, bank statement and GST return reflected of ITC was furnished. The purchase consideration includes 5.00% of GST and basic amount of Rs. 3.34 crore. The AO simply relied upon the reply of Chandraparakash Shukla that his PAN was misused by his friend. The name and address of his friend is not brought on record by AO. The AO has not further investigated the matter, if Chandraparakash Shukla was giving misleading reply to avoid his own tax liability. The AO furnished periodic GST return of the said dealer reflected ITC credit from Delight Collections. The purchase consideration was credited in the bank account of Delightful Collections which is operated by Chandraparakash Shukla being proprietor. The assessee has shown corresponding sale against the purchases. The AO has not summoned Chandraparakash Shukla for recording his statement under section 131. Non-furnishing income tax return or no return of income cannot be a basis for treating the purchases has not genuine when the assessee has furnished complete evidence to substantiate the purchases. The ld. CIT(A) confirmed the action of AO without giving independent finding of fact. The e-way bill duly mentioned the details of material including weight, number of packets, description of goods, value of goods, amount of GST, despatch documents and vehicle number and GST/PAN No. of transporter. Contract number of transporter on the e-way bill which sufficiently proved the actual delivery of goods. None of the documents furnished by assessee was found to be false or fabricated. The ld. AR of the assessee prayed the delete to entire disallowances purchases from Delight Collections.
5. Against ground no. 3, the ld. AR of the assessee submits that assessee paid consultancy to Hetal Patel which is genuine. The TDS was deducted the AO has not brought on record any evidence to show. The assessee has made payment of reduce the taxable income. The addition is made on frivolous ground. The business expediencies are not disputed by AO. The qualification cannot be a ground to doubt the genuine payment.
6. On the other hand, the learned Senior Departmental Representative (ld. Sr. DR) for the Revenue, on the disallowance of purchases from Delightful Collections submits that proprietor of such firm as disputed is business collection and stated that his PAN was misused by his friend. Thus, Chandraparakash Shukla who was shown as a proprietor of Delightful Collections was not engaged in the genuine business activities rather expenses were sold to inflate the extra profit. The ld. Sr. DR prayed for upholding the orders of lower authorities. On the disallowance of consultancy charges, the ld. Sr. DR for the Revenue submits that assessee has made payment a professional fees and consultancy charges to a person who is not well qualified and therefore, doubted the genuinely of such expenses.
7. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. Ground no. 1 is general in nature and needs no adjudication. Ground no. 2 relates to disallowance of purchase of Delightful Collections of Rs. 3.51 crore. We find that AO disallowed the expenses of purchases from Delightful Collections on the basis of information about suspicious dealer who have shown very meagre return of income while filing return of income. The assessee during assessment proceedings was asked to furnish details of seller parties from whom the assessee has shown purchased of more than Rs. 2.00 lakhs. The assessee furnished details of all such sellers including of Delightful Collections. The assessee also furnished details of ledger confirmation, purchase invoices, purchase bills, e-way bill, lorry receipt with GST return of seller. In order to verify the transaction of purchases, the AO issued notice under section 133(6) to Delightful Collections. In response to such show cause notice one Chandraparakash Shukla filed response and stated that his PAN number was misused by his friend. The said Chandraparakash Shukla has not provided the name and address of his friend who has misused his PAN. The AO has not carried out any further investigation about alleged misuse of PAN of Chandraparakash Shukla, who is the proprietor of Delightful Collections. The assessee claimed that Delightful Collections is a proprietary concern and the payment of purchases was credited in the bank account of Delightful Collections. Delightful Collections has furnished return of GST and also claimed Input Tax Credit (ITC). We find that no comments were made by AO on various other evidences furnished by assessee. The copies of evidences furnished by assessee before AO and CIT(A) are placed on record. The transport receipt contents the all details like GST number of seller party, GST number of purchase party, nature and items of goods, value of such goods, which is supported by e-way bills. No adverse material for evidence is brought on record against such evidence. The statement of Chandraparakash Shukla was not recorded by AO nor was he called for his cross-examination to substantiate the contents of his affidavit. We find that sales of assessee were not disputed by AO. Books result of assessee is not rejected by AO. Thus, in absence of any adverse evidence against the evidences furnished by assessee, disallowance of purchases is not justified. From the material on record, we find that assessee is consistently shown the gross profit more than 6.00%, for the year under consideration; the gross profit is around 7.00% (6.94%). Thus, in view of aforesaid factual discussion, we do not find any justification for disallowing purchases of Rs. 3.51 crore. In the result, ground no. 2 is allowed.
8. Ground no. 3 relates to disallowance of management and consultancy charges. We find that payment of management and consultancy charges is disallowed by lower authorities on the ground that Hetal Patel is not much educated. The services rendered or payment made is not disputed. Further, AO also held that nature of payment does not commensurate with the work done. We find that assessee has paid Rs. 35,000/- per month only that is Rs. 4,20,000/- in aggregate for one year. We find that no adverse material was brought on record by AO except to doubt the expenditure. The management and consultancy fees, keeping in view, the volume of business activity and return of income is not unreasonable when business expediency are not disputed. Thus, we do not find any justification disallowance of such expenses. In the result, ground no. 3 is also allowed.
9. In the result, the appeal of the assessee is allowed.
Order was pronounced in open Court on 18/06/2026.
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