The court ruled that when purchases are deemed bogus, the entire amount should be disallowed, rejecting the Tribunal's speculative estimation of profit margin.

JUDGMENT :

Jitendra Jain, J.

1. These appeals, filed by the Appellant-Revenue for Assessment Years (AY) 2009-10 and 2010-11, challenges the common order of the Income Tax Appellate Tribunal (ITAT), Mumbai, dated 21 June 2017.

2. These appeals were admitted on 30 January 2025 on the following substantial questions of law:

SUBSTANTIAL QUESTIONS 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. Protiens 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. Protiens Ltd, that 100 % disallowances on bogus purchases is upheld ?

3. Since the facts of both appeals are similar, they are, by consent, disposed of by common order by treating Income Tax Appeal No.1240 of 2018 for AY 2009-10 as a lead matter.

Brief Facts:

4. The Respondent-Assessee is engaged in trading in electronic items, toys, electronics, etc. A return of income was filed declaring total income of Rs.10,60,910/-, and the same was accepted under Section 143(1) of the Income-tax Act (hereinafter referred to as 'the Act').

5. Subsequently, the case of the Respondent-Assessee was reopened on the ground that the purchases made by the Respondent-Assessee from certain parties were non-genuine. On 28 March 2014, an order under Section 143 (3) read with Section 147 of the Act was passed, wherein Rs.6,15,71,284/-, the peak of the purchases made from the parties mentioned in the assessment order, was added as bogus purchases.

6. The Assessing Officer (AO), in Paragraph 5.8 of his order, has given his reasoning for making the disallowance. It is important to note that in the assessment order, AO recorded that Respondent-Assessee has expressed its inability to produce regular books of accounts that were duly audited under the Income-tax Act. It is also recorded that the Respondent-Assessee has confirmed that no incidental expenses relating to these purchases by way of octroi, transport, delivery expenses, etc. were incurred. It also records the submissions made by the Respondent-Assessee, during the assessment, that they are not able to locate the suppliers.

7. The Summons issued to these suppliers were returned unserved. The Respondent-Assessee also admitted during the assessment proceedings that they cannot submit the suppliers' ledger since it is in the VAT department's custody. It is also further stated that the portable hard disk containing all the accounts has been lost. The officer, in his order, has noted that no books of accounts were produced, no stock register is maintained, there is an outstanding liability on account of unpaid VAT, purchases have been inflated, suppliers and agents cannot be found at the addresses given by the Respondent-Assessee, and the Respondent-Assessee expressed its inability to provide new addresses or produce the parties.

8. Based on the above material and reasoning, the officer concluded that the Respondent-Assessee had not discharged its onus to establish the genuineness of the purchases from these parties. Therefore, although the purchases from these parties amounted to Rs.9,12,33,855/-, the peak of these purchases, amounting to Rs.6,15,71,284/-, was disallowed.

9. The assessment order was challenged before the Commissioner (Appeal), who, vide his order dated 30 December 2015, granted