Court’s Decision
The Bombay High Court, comprising Justice G.S. Kulkarni and Justice Aarti Sathe, dismissed the Revenue’s appeal under Section 260A of the Income Tax Act, 1961, holding that no substantial question of law arose from the concurrent findings of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal.
The Court ruled that additions for alleged bogus purchases cannot be made merely on the basis of general information obtained from the Sales Tax Department without conducting an independent inquiry or allowing the assessee to cross-examine the alleged hawala dealers.
The Bench observed:
“To wholly reject these documents merely on general information received from the Sales Tax Department would not be a proper approach on the part of the Assessing Officer, in the absence of strong documentary evidence.”
Accordingly, the appeal filed by the Revenue was dismissed, and the findings restricting the disallowance to 15% of the alleged bogus purchases were upheld.
Facts
The respondent company, engaged in the power transmission and distribution business, filed its return of income declaring ₹7.65 crore for the Assessment Year 2009–10. The case was reopened under Section 148 after the DG Investigation, Pune, reported alleged hawala transactions of ₹2.05 crore, purportedly based on information from the Maharashtra Sales Tax Department involving 12 parties issuing bogus bills.
The Assessing Officer (AO) added the entire ₹2.05 crore as bogus purchases, holding that the parties were non-existent and that the assessee failed to furnish confirmation letters or stock reconciliation statements. He also initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars.
The assessee contended that it had produced all purchase bills, VAT auditor certificates, ledger accounts, and bank payment proofs. It argued that one of the supplier entries—M/s Entech Enterprises—contained a typographical error and that actual purchases were only ₹11.63 lakh instead of ₹1.16 crore. The CIT(A) accepted this contention, reduced the addition accordingly, and applied a 15% profit rate on the reduced figure, restricting the disallowance to ₹15.12 lakh.
The ITAT later upheld this decision, confirming that the Revenue’s case was based solely on third-party information without any independent verification or cross-examination.
Issues
- Whether the ITAT was justified in restricting the addition to 15% of the alleged bogus purchases instead of the entire amount.
- Whether the Assessing Officer erred in relying solely on Sales Tax Department information without supplying it to the assessee or conducting an independent inquiry.
- Whether a typographical correction in the purchase figure (₹11.63 lakh vs ₹1.16 crore) could be accepted based on the assessee’s VAT auditor certificate.
Petitioner’s (Revenue’s) Arguments
The Revenue contended that the assessee failed to prove the genuineness of the purchases, and therefore, the entire amount should have been disallowed. It argued that:
- The onus was on the assessee to establish the genuineness of its purchases; failure to do so warranted full addition.
- Payments made through banking channels could not validate transactions where the sellers were non-existent.
- Both the CIT(A) and ITAT erred in relying on the assessee’s VAT auditor certificate and ignored the Maharashtra VAT Department’s classification of the suppliers as bogus.
- The authorities failed to consider the Gujarat High Court judgment in N.K. Industries Ltd. v. DCIT (2016) 72 Taxmann.com 289, and its affirmation by the Supreme Court in N.K. Proteins Ltd. v. DCIT (2017) 84 Taxmann.com 195, which upheld full disallowance of bogus purchases.
Respondent’s (Assessee’s) Arguments
The assessee maintained that it had submitted complete documentation including purchase bills, VAT records, and bank payment proofs, demonstrating genuine purchases. It argued that the AO had not identified any defect in the invoices or provided an opportunity to cross-examine the alleged hawala dealers.
It further submitted that the VAT assessment proceedings for the same period were pending and that completing the income-tax assessment on the basis of unverified third-party information would cause severe hardship. The assessee reiterated that sales to state-run entities (MSETCL and MSEDCL) confirmed the genuineness of the purchases, and if any disallowance was warranted, it should be confined to the profit element embedded in such purchases.
Analysis of the Law
The Court analyzed Sections 143(3) and 147 of the Income Tax Act, observing that the AO’s re-assessment was solely based on external information from the Sales Tax Department, without sharing that material with the assessee or establishing its veracity through independent investigation.
The Court reiterated that principles of natural justice require that such material be disclosed to the assessee and an opportunity for rebuttal or cross-examination be provided.
Justice Sathe observed:
“Merely relying on the information from the Sales Tax Department without granting an opportunity to cross-examine the hawala purchasers violates basic principles of fairness and natural justice.”
It was further noted that VAT assessments were still pending, and making tax additions before their conclusion was “an inappropriate and unacceptable position.”
Precedent Analysis
- Principal Commissioner of Income Tax v. SVD Resins and Plastics Pvt. Ltd. (Bombay HC) – The Court held that information from the Sales Tax Department cannot justify additions unless the assessee is confronted with that material and given an opportunity to respond. Additions must rest on concrete proof, not general data.
- CIT v. Simit P. Seth (2013) 356 ITR 451 (Gujarat HC) – Only the profit element embedded in bogus purchases can be taxed; entire purchase amount cannot be disallowed. The CIT(A)’s reliance on this decision was approved.
- N.K. Industries Ltd. v. DCIT (2016) 72 Taxmann.com 289 (Gujarat HC) and N.K. Proteins Ltd. v. DCIT (2017) 84 Taxmann.com 195 (SC) – Relied on by the Revenue but distinguished by the Court, noting that in those cases, there was conclusive evidence of falsity, unlike here where the Revenue’s case rested on unverified third-party information.
Court’s Reasoning
The Bench found that both the CIT(A) and ITAT had correctly appreciated the evidence and adopted a reasonable approach by restricting the addition to 15%.
The Court emphasized that the AO failed to furnish the Sales Tax Department’s report or demonstrate that the alleged suppliers were fictitious in relation to the assessee. Without this proof, the addition was based on conjecture.
The judges observed that:
“A full addition could be made only on the basis of proper proof of bogus purchases… In the absence of such proof, it is difficult to accept that the Assessing Officer was correct in his approach.”
They noted that the assessee had produced all necessary purchase bills and bank statements, and the authorities below had rightly applied the Simit P. Seth principle to limit the addition.
Conclusion
The High Court upheld the concurrent findings of the CIT(A) and ITAT, observing that their conclusions were factual and did not raise any substantial question of law. The Court reiterated that tax additions must rest on independent verification and not merely on departmental information.
Accordingly, the Revenue’s appeal was dismissed, and the ITAT order restricting the addition to 15% of the alleged bogus purchases was confirmed.
“All these issues are findings of fact, which do not give rise to any substantial question of law requiring interference.”
Implications
This judgment reinforces that tax authorities cannot rely solely on Sales Tax Department data or generalized third-party information to make additions for bogus purchases. Independent verification, proper disclosure, and adherence to principles of natural justice are essential.
It further strengthens the judicial position that only the profit component of alleged bogus purchases may be taxed, not the entire transaction value—ensuring fairness and proportionality in taxation.