The court established that acceptance of a percentage of unproven purchases necessitates full disallowance under Section 69C, emphasizing the burden of proof lies with the assessee.

JUDGMENT :

Per Jitendra Jain, J.

1. This appeal filed by the appellant-revenue for the assessment year 2010-11 was admitted on 29 January 2025 on the following substantial question of law:-

"(i) Whether the Tribunal after accepting that this a case of bogus purchases, could have proceeded to determine profit rate without confirming the disallowance of purchases, without considering the provisions of Section 69C of the Income Tax Act, 1961 and without considering the decision of the Gujarat High Court in the case of N.K. Industries Ltd. Vs. Deputy Commissioner of Income Tax, (2016) 72 taxmann.com 289 since the Special Leave Petition against the said decision was dismissed by the Hon'ble Supreme Court in case of N. K. Proteins Ltd. Vs. Deputy Commissioner of Income Tax, on 16 January 2017, (2017) 84 taxmann.com 195 (SC) ?

(ii) On the facts and circumstances of the case and in law, the ITAT has erred in restricting the disallowance to profit margin on unproven purchases without considering the position of law established by the Hon'ble Apex Court in the case of N.K. Proteins Ltd, that 100% disallowances on bogus purchases is upheld ?"

Brief Facts :

2. The assessee is a firm engaged in the business of Real Estate. The assessee filed its return of income declaring income of Rs. 61,05,420/-. The said return was selected for scrutiny assessment.

3. On 25 March 2013, an assessment order under Section 143(3) of the Income-tax Act, 1961 (‘the Act’) was passed assessing income at Rs.15,41,95,860/-. In the assessment order, Rs.14,30,90,442/- was added on account of alleged bogus purchases from various parties. A sum of Rs.50,00,000/- was also added under Section 68 of the Act. The said order was challenged by filing an appeal to the Commissioner of Income Tax (Appeals) [CIT (A)].

4. On 29 May 2015, the CIT (A) with respect to the alleged bogus purchases deleted the additions with regard to all the suppliers except M/s Neptune Trading Co. and Hari Om Traders. With respect to these two parties, the additions made by the Assessing Officer (AO) was confirmed to the extent of only 12.5% of the purchases made from these parties.

5. The appellant-revenue challenged the order of the CIT (A) by filing an appeal to the Tribunal. In the grounds of appeal, the appellant-revenue challenged the deletion of the purchases made from various parties. With respect to M/s Neptune Trading Co. and Hari Om Traders, a specific ground was also taken by the appellant-revenue to the effect that the CIT (A) erred in estimating profit at 12.5% on the bogus purchases. It is important to note that the respondent-assessee has not challenged the additions sustained by the CIT (A) to the extent of 12.5% on the purchases made from M/s Neptune Trading Co. and Hari Om Traders.

6. The Tribunal vide its order dated 24 May 2017 upheld the order of the CIT (A) in toto insofar as the issue of bogus purchases is concerned. It is on the above backdrop that the the appellant-revenue has challenged the order of the Tribunal on substantial questions of law reproduced above.

7. Ms. Gokhale, learned counsel for the appellant-revenue relied upon the order of the AO and submitted that the CIT (A) and the Tribunal ought to have confirmed the additions made by the AO. She further submitted that with respect to M/s Neptune Trading Co. and Hari Om Traders, the respondent-assessee has not challenged the estimation of 12.5% made by the CIT(A) by filing an appeal to the Tribunal. She further submitted that the respondent-assessee, therefore, has admitted the purchases made from M/s Neptune Trading Co. and Hari Om Traders are bogus. She further submitted that the reasoning given with respect to the deletion of the purchases made from other parties would not be applicable to the purchases made from M/s Neptune Trading Co. and Hari Om Traders, since the bank details were not submitted to show that the cash has not been withdrawn which was the case with respect to other parties. She therefore, submitted in the