The Revenue must provide cogent evidence to substantiate claims of bogus purchases; arbitrary disallowance without proper analysis is impermissible.

JUDGMENT :

Somasekhar Sundaresan, J.

1. This batch of Appeals challenge an Order and Judgment of the Income Tax Appellate Tribunal (“ITAT”) dated August 9, 2017 (“Impugned Order”) upholding an Order dated April 27, 2015 passed by the Commissioner of Income Tax - Appeal (“CIT-A”), disallowing 10% of certain suspect purchases on the premise that they are bogus purchases. Originally, the Assessing Officer had passed an order dated March 21, 2014 (“AO Order”) on reassessment of returns for three Assessment Years, disallowing all the expenses incurred towards purchase from certain entities, and thereby adding such expenses to the income of the Appellant-Assessee.

2. Income Tax Appeal No.1753 of 2018 relates to Assessment Year 2009-10; Income Tax Appeal No.2780 of 2018 relates to Assessment Year 2010-11; and Income Tax Appeal No.1759 of 2018 relates to Assessment Year 2011-12.

3. The questions of law raised by the Appellant-Assessee are manifold. Mr. N.M. Porwal, Learned Counsel appearing on behalf of the Appellant-Assessee submitted that he would only be pressing four out of the seven questions raised in these Appeals. However, at the heart of these questions, lies a single issue, namely, whether the ITAT was right in upholding the findings of the CIT-A, by disallowing 10% of the total purchases alleged to have been bogus, and adding such sum to the income of the Appellant-Assessee for the relevant Assessment Years. 4. The Appellant-Assessee wants this Court to hold that all the purchases were genuine and must be allowed as legitimate expenses. The Respondent-Revenue had wanted this Court to hold that all the expenses ought to have been treated as bogus and that the ITAT was wrong in disallowing only 10% of such expenses. It is a matter of record that Income Tax Appeal No. 1349 of 2018, filed by the Revenue against the very same Impugned Order, was not entertained by a Division Bench of this Court by an order dated April 24, 2024.

5. The grievances of the Revenue being different from the grievances of the Assessee, the dismissal of the Revenue’s appeal is not conclusively determinative of the status of the Assessee’s grievances. We have heard the parties at length with this specific perspective in mind.

6. We are conscious that our jurisdiction relates to answering substantial questions of law. Having heard Mr. N.M. Porwal, Learned Counsel on behalf of the Appellant-Assessee and Ms. Swapna Gokhale, Learned Counsel on behalf of the Respondent-Revenue, we find that the ITAT had been faced with cross appeals from the decision of the CIT-A. The Assessee had been aggrieved by 10% of his purchases being disallowed while the Revenue was aggrieved by only 10% the purchases being disallowed. Examining the flow of the findings in the AO Order and the CIT-A’s order, the ITAT expressed the following view:-

“13. We notice that the AO has treated the entire purchases of Rs 2,37,63,659/- made from the 12 parties mentioned the assessment order without rejecting the transacting of sale. Once the sale is accepted then it cannot be said that the assessee has sold the goods without making any purchase. So, the findings of the AO are not based on any cogent and convincing evidence. On the other hand the assessee has also failed to produce the parties, from whom the alleged purchases were made and other documents to prove the movement of goods. The said facts however, suggest that the assessee has purchased the goods from gray market in order to evade taxes. The Hon'ble Bombay High Court in CIT vs. Nikunj Eximp Enterprises 372 ITR 619(Bom) has held that merely because the suppliers had not appeared before the AO or the CIT, one could not conclude that the purchases were not made. In our considered opinion the findings of the Ld. CIT(A) is in accordance with the ratio laid down by the jurisdictional High Court in CIT vs. Nikunj Eximp Enterprises (supra) as the facts of both the case are almost similar. The Ld. CIT(A) has restricted the addition to 10% of the to