Mumbai ITAT Deletes Entire Bogus Purchase Addition: General Hawala Statements Cannot Override Site-Level Evidence

DCIT Vs Naozer Bejon Baldawala (ITAT Mumbai)

Mumbai ITAT Deletes Entire Bogus Purchase Addition: General Hawala Statements Cannot Override Site-Level Evidence

The Mumbai ITAT upheld the deletion of an addition of ₹1.07 crore made on account of alleged bogus purchases, holding that generalized statements of alleged hawala dealers cannot outweigh direct documentary evidence establishing actual purchase, delivery, and consumption of materials.

The assessee, engaged in property development, renovation and repair contracts, had been subjected to reassessment based on information from the Maharashtra Sales Tax Department that certain suppliers were listed as suspicious dealers. The Assessing Officer treated the entire purchases as bogus and added the full amount to income. However, in the first appellate round, it was accepted that the assessee had actually executed contract work and necessarily consumed materials, leading only to an estimated addition on the profit element.

Pursuant to a later remand by the Tribunal for the limited purpose of providing statements and cross-examination, the Assessing Officer again added the entire purchase amount. The Tribunal held that the AO exceeded the scope of the remand because earlier findings regarding execution of contracts and consumption of materials had already attained finality and could not be reopened.

The Tribunal further noted that none of the statements relied upon by the Department specifically named the assessee, referred to any particular invoice, quantity, work site or transaction. Moreover, no effective cross-examination of the deponents was provided. On the other hand, the assessee produced purchase invoices, supplier ledgers, bank payment records, delivery challans acknowledged by site engineers, and site-wise material records showing receipt and utilization of construction materials.

Observing that the contract receipts and execution of work were never disputed by the Department and that no defect was found in the assessee’s documentary evidence, the ITAT held that the conclusion that no purchases had been made was commercially implausible. Accordingly, the deletion of the entire addition of ₹1.07 crore was upheld and the Revenue’s appeal was dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal has been filed by the Revenue and cross objection filed by the assessee against the impugned order dated 18.12.2025 passed by the learned CIT(A)-51, Mumbai, arising out of the assessment framed under section 143(3) read with section 254 of the Income Tax Act, 1961 for Assessment Year 2010-11. The Revenue is aggrieved by the action of the learned CIT(A) in deleting the addition of Rs.1,07,13,732/- made by the Assessing Officer on account of alleged bogus purchases.

2. The relevant facts are that the assessee is an individual engaged in the business of development of properties, painting, renovation and execution of repair contracts. The return of income was filed declaring total income of Rs.43,19,670/-. Subsequently, on the basis of information received from the Sales Tax Department, Government of Maharashtra, alleging that the assessee had obtained accommodation purchase bills from certain entities appearing in the list of suspicious dealers, the assessment was reopened. During the reassessment proceedings, the Assessing Officer examined purchases aggregating to Rs.1,07,13,732/- claimed to have been made from various parties alleged to be hawala operators and accommodation entry providers. Relying upon the information received from the Sales Tax Department, statements recorded from certain dealers, cancellation of VAT registrations and the fact that such parties were listed as suspicious dealers, the Assessing Officer, vide assessment order dated 25.03.2015, held that the purchases were non-genuine and represented accommodation entries. Accordingly, the entire purchases of Rs.1,07,13,732/- were disallowed and added back to the income of the assessee.

3. In the first round of appellate proceedings, the learned CIT(A), after considering the nature of business carried on by the assessee, the contract receipts disclosed, the evidences regarding execution of renovation and repair work and the material consumed in the course of such execution, did not accept the extreme proposition adopted by the Assessing Officer that no purchases whatsoever had been made. The learned CIT(A) recorded a categorical finding that the assessee was engaged in execution of contracts and that such contracts could not have been executed without procurement and consumption of material. While accepting that the purchases could not be treated as entirely non-existent, the learned CIT(A), considering the possibility that purchases may have been sourced through the grey market while bills were obtained from the listed parties, estimated the profit element embedded therein at 25% of the alleged bogus purchases and restricted the addition accordingly. Thus, the entire disallowance made by the Assessing Officer was not sustained and only an estimated addition representing profit element was upheld.

4. Against the aforesaid order, both the parties carried the matter before the Tribunal. The Tribunal initially affirmed the order of the learned CIT(A). Thereafter, a Miscellaneous Application was preferred by the assessee pointing out that certain grounds and contentions relating to the statements relied upon by the Department and the issue of cross-examination had remained unadjudicated. Taking note of the said grievance, the Tribunal recalled its earlier order and restored the matter to the file of the Assessing Officer with specific directions to furnish copies of the statements relied upon by the Department, afford opportunity of cross-examination of the concerned parties and thereafter pass a fresh order in accordance with law. Significantly, while recalling the earlier order, the Tribunal did not disturb the findings already recorded regarding execution of contract work, acceptance of contract receipts and consumption of material. The remand was thus confined to a limited purpose concerning compliance with principles of natural justice and examination of the evidentiary worth of the statements relied upon by the Department.

5. Pursuant to the aforesaid directions, the Assessing Officer initiated fresh proceedings under section 143(3) read with section 254. Copies of statements recorded by the Sales Tax Department were supplied to the assessee. Summons under section 131 were also issued to the concerned parties. However, according to the Assessing Officer, most of the summons either remained unserved or were returned with remarks such as “left”, “not known” or remained uncomplied with. The assessee was also called upon to produce the parties for cross-examination. Since none of the parties ultimately appeared before the Assessing Officer, no effective cross-examination could take place.

6. The Assessing Officer thereafter reproduced and relied extensively upon the statements recorded by the Sales Tax Department wherein certain persons had allegedly admitted that they were merely issuing accommodation bills without actual supply of goods and were earning commission from such activities. The Assessing Officer further observed that several concerns were found non-existent at their registered addresses, some registrations stood cancelled and the names of such concerns appeared in the list of hawala dealers maintained by the Sales Tax Department. According to the Assessing Officer, the assessee failed to rebut the adverse material gathered by the Department. He held that mere production of invoices, delivery challans, ledger accounts and payments through banking channels could not establish genuineness because such documents were often generated in accommodation entry transactions as well. Proceeding on this reasoning, the Assessing Officer once again concluded that the purchases represented accommodation entries and restored the addition of the entire purchase amount of Rs.1,07,13,732/-.

7. Before the learned CIT(A), it was submitted that the Assessing Officer had travelled beyond the scope of the remand granted by the Tribunal. It was contended that in the first round of proceedings, a categorical finding had already been recorded that the assessee had actually executed the contract work, the contract receipts had been accepted and the work undertaken necessarily required purchase and consumption of material. It was submitted that these findings had not been disturbed while recalling the earlier order and therefore had attained finality. The assessee further submitted that none of the statements relied upon by the Department specifically referred to the assessee, identified the assessee as a beneficiary or contained any transaction-specific details such as invoice numbers, quantities, dates or site particulars. The assessee also furnished purchase invoices, delivery challans bearing signatures and stamps of site engineers, supplier ledgers, bank statements and site- wise details evidencing receipt and utilization of material in execution of contracts.

8. After examining the entire material on record, the learned CIT(A) accepted the contentions of the assessee. The learned CIT(A) held that the remand granted by the Tribunal was not an open remand but a limited remand confined to examination of the statements relied upon by the Department and grant of opportunity of cross-examination. He further held that the earlier findings regarding execution of contract work and consumption of material had not been disturbed and therefore could not be reopened by the Assessing Officer. The learned CIT(A) also observed that the statements relied upon by the Department were general in nature, did not specifically implicate the assessee and did not contain transaction-specific details connecting the assessee with the alleged accommodation entries. The learned CIT(A) further recorded a detailed factual finding that the assessee had produced delivery challans showing actual delivery of materials at the respective sites, duly acknowledged by site engineers, and that the materials purchased were fully consistent with the nature of business carried on by the assessee. Since no defect or falsity was found in the primary documentary evidence produced by the assessee, the learned CIT(A) concluded that the purchases stood established and accordingly deleted the entire addition.

9. We have heard the rival submissions, perused the orders of the authorities below and carefully examined the entire material placed on record. The controversy before us has to be appreciated in the backdrop of the peculiar procedural history of the case. In the original assessment completed vide order dated 25.03.2015, the Assessing Officer had proceeded to disallow the entire purchases of Rs.1,07,13,732/- treating the same as bogus purchases on the basis of information received from the Sales Tax Department. However, in the first round of appellate proceedings, the learned CIT(A), after examining the nature of business carried on by the assessee, the contract receipts disclosed, the execution of renovation and repair work and the consumption of material required for such execution, did not accept the fundamental premise of the Assessing Officer that no purchases whatsoever had been made. The learned CIT(A) had categorically observed that the assessee was engaged in execution of contracts and that such work could not have been carried out without purchase and consumption of material. Having accepted the existence of purchases and consumption of material, the learned CIT(A) merely estimated the profit element embedded in such purchases at 25% and restricted the addition accordingly. The order of the learned CIT(A) was initially affirmed by the Tribunal. Subsequently, on a Miscellaneous Application filed by the assessee pointing out non-adjudication of certain grounds relating to statements relied upon by the Department and the issue of cross-examination, the earlier order was recalled and the matter was restored to the file of the Assessing Officer.

10. A careful reading of the order recalling the earlier decision would show that the remand granted by the Tribunal was neither unrestricted nor open ended. The Tribunal had not disturbed the findings already recorded regarding execution of contract work, acceptance of contract receipts and consumption of material. The matter was restored only for the limited purpose of furnishing the statements relied upon by the Department, granting opportunity of cross-examination and thereafter examining the evidentiary value of such statements. Thus, the jurisdiction of the Assessing Officer in the second round stood circumscribed by the directions contained in the remand order and did not extend to reopening issues which had already attained finality. Once the earlier appellate authorities had accepted that the assessee had actually executed the contracts and had necessarily consumed material in the course of such execution, the Assessing Officer could not, in the second round, revert to the original position and once again hold that the purchases themselves were entirely non-existent. To that extent, the learned CIT(A), in our opinion, was justified in observing that the Assessing Officer had travelled beyond the scope of the remand proceedings.

11. Even on merits, we find that the conclusions drawn by the Assessing Officer are not borne out from the material brought on record. The entire case of the Revenue rests substantially upon statements recorded by the Sales Tax Department from certain dealers who were alleged to be accommodation entry providers. A notable feature emerging from these statements is that none of the deponents has referred to the assessee by name, identified the assessee as a beneficiary of accommodation entries, referred to any specific invoice, specified any quantity of goods, identified any work site or furnished any transaction-specific detail connecting the assessee with the alleged accommodation entries. The statements are in the nature of general statements concerning the alleged modus operandi adopted by certain dealers. Such statements may undoubtedly constitute relevant information for initiating inquiry; however, unless they are directly linked to the transactions undertaken by the assessee, they cannot by themselves constitute conclusive evidence for disallowing purchases, particularly where the assessee has furnished contemporaneous documentary evidence in support of the transactions.

12. Another important aspect which cannot be overlooked is that despite the directions of the Tribunal, no effective cross-examination of the deponents ultimately took place. The Assessing Officer has proceeded on the footing that the assessee failed to produce the parties. In our opinion, the approach itself is misconceived. Once the Department chooses to rely upon third-party statements, such persons become departmental witnesses and the burden to secure their attendance cannot be shifted upon the assessee. The inability of the Department to produce such witnesses may not render the entire inquiry invalid, but certainly diminishes the evidentiary value of the statements relied upon. In the present case, where the statements are not transaction-specific and no effective cross-examination was afforded, such statements could at best constitute corroborative material and could not override direct documentary evidence furnished by the assessee.

13. On the other hand, the assessee has produced extensive primary evidence in support of the purchases. The learned CIT(A) has recorded a detailed factual finding that purchase invoices, supplier ledger accounts, bank statements evidencing payments through banking channels, delivery challans and site-wise material records were furnished before the Assessing Officer. More importantly, the delivery challans contained the names of the sites where the materials were delivered and bore acknowledgements, signatures and stamps of the site engineers who had received the materials. The materials purchased comprised G.I. Pipes, M.S. Pipes, marble and other construction-related items, all of which were wholly consistent with the nature of business carried on by the assessee. These findings recorded by the learned CIT(A) are based on examination of documentary evidence and have not been shown before us to be either incorrect or perverse. Significantly, the Assessing Officer has nowhere alleged that these documents were fabricated, manipulated or false. No discrepancy in the quantitative details has been pointed out. No material has been brought on record to show that the goods reflected in the delivery challans were never delivered at the sites mentioned therein.

14. It is equally important to note that the contract receipts disclosed by the assessee have throughout been accepted by the Department. The execution of work has never been disputed. No finding has been recorded by the Assessing Officer that the contracts themselves were sham or that the work was executed without consumption of material. In a case of this nature, where the business activity is accepted, the contract receipts are accepted and contemporaneous evidence demonstrates receipt and utilization of material, the conclusion that no purchases whatsoever were made becomes commercially implausible. The findings recorded by the learned CIT(A) in the first round that purchases and consumption of material stood established were never disturbed and had, therefore, attained finality. The Assessing Officer was thus not justified in completely disregarding those findings while passing the order pursuant to remand.

15. Having regard to the totality of the facts and circumstances of the case, we are of the considered opinion that the learned CIT(A) has correctly appreciated both the scope of the remand proceedings as well as the evidentiary material available on record. The Revenue has failed to demonstrate any infirmity in the factual findings recorded by the learned CIT(A). The addition sustained by the Assessing Officer is founded principally on generalized third-party statements unsupported by any direct evidence against the assessee, whereas the assessee has furnished contemporaneous documentary evidence establishing purchase, delivery and utilization of material in execution of accepted contract work. We, therefore, find no reason to interfere with the conclusion reached by the learned CIT(A) in deleting the addition of Rs.1,07,13,732/-. Accordingly, the grounds raised by the Revenue are dismissed.

16. As regards to the Cross Objection filed by the assessee is concerned, since we have already dismissed the appeal of the revenue, therefore, the Cross Objection filed by the assessee has become infructuous and dismissed.

17. In the result, the appeal filed by the Revenue and cross objection filed by the assessee are dismissed.

Order pronounced on 11t^h June, 2026.