Addition on Account of Alleged Bogus Purchases – Matter Remanded for Fresh Verification

ACIT, Circle-1 v. Taparia Tools Ltd., Nashik (and Vice-Versa)
ITAT Pune | ITA No. 1337/PUN/2025 & CO No. 30/PUN/2025

Date of Order: 10 December 2025

Core Issue:-Whether purchases amounting to ₹87.64 crore made by the assessee from M/s Sharp King Trading Pvt. Ltd. (SKTPL) could be treated as entirely bogus and disallowed under section 37(1) of the Income-tax Act, 1961 merely on the basis of abnormal financial ratios of the supplier, absence of transportation bills and adverse findings in the supplier’s assessment, despite documentary evidence of purchases and subsequent verification by GST authorities.

Factual Matrix:-The assessee, a listed limited company engaged in manufacturing and trading of hand tools and forgings, filed its return for AY 2017-18 declaring income of ₹17.50 crore. Based on information received from the office of the ITO, Mumbai, alleging bogus purchases by SKTPL, reassessment proceedings were initiated.

The Assessing Officer observed that SKTPL had effected sales of ₹87.65 crore to the assessee, constituting nearly 98% of its total turnover, while declaring abnormally low profits and incurring negligible operating and freight expenses. The AO further noted that neither the assessee nor SKTPL could furnish transportation bills evidencing actual movement of goods. Physical verification of SKTPL’s premises allegedly revealed inadequate infrastructure inconsistent with the scale of operations. Reliance was also placed on the assessment order of SKTPL, wherein its books were rejected and its sales were treated as non-genuine.

On these premises, the AO disallowed 100% of the purchases under section 37(1), invoking the ratio of N.K. Industries Ltd. as affirmed by the Supreme Court, and initiated penalty proceedings for misreporting under section 270A.

Findings of the CIT(A)
The Commissioner (Appeals) reversed the disallowance after undertaking a substantive factual analysis. The CIT(A) held that for branding a purchase as bogus, the Revenue must establish a complete cycle of accommodation entry, namely issuance of fake invoices, banking trail, cash withdrawal and return of cash to the assessee. In the present case, no evidence of cash circulation or money-back was brought on record.

Reliance was placed on the investigation conducted by GST authorities, including a closure communication indicating that materials were actually supplied by SKTPL to the assessee. The CIT(A) also accepted the explanation that tools and forgings do not necessarily require large warehouse space, and low margins alone cannot justify branding transactions as sham.

It was further observed that sales, stock records and audited books were not rejected in the assessee’s case, profit margins were consistent with industry trends and discrepancies pointed out by the AO were marginal in nature. On an overall appreciation of facts, the CIT(A) concluded that SKTPL was an existing entity and transactions between the parties were genuine, and accordingly deleted the addition.

Revenue’s Challenge Before the Tribunal
The Revenue contended that the CIT(A)’s order was non-speaking and violative of section 250(6) and Rule 46A, particularly because reliance was placed on GST closure communications which were allegedly not produced before the AO. It was argued that the GST letter relied upon was limited to mismatch of vehicle data and did not conclusively establish genuineness of purchases. Heavy emphasis was placed on absence of freight documentation, abnormal financial ratios of SKTPL and adverse findings in its assessment.

The Revenue sought restoration of the AO’s order or, alternatively, remand of the matter for fresh adjudication.

Assessee’s Submissions
The assessee demonstrated that it had discharged its primary onus by furnishing purchase orders, invoices, delivery challans, confirmations, ledger accounts and bank statements evidencing payments through banking channels. It was submitted that GST and MVAT authorities had independently examined the transactions and found no adverse material. The assessee clarified that transportation was arranged by the supplier and delivery challans bearing vehicle details were available, though some records could not be collated earlier due to a fire incident.

Without prejudice, the assessee fairly conceded that if the Tribunal considered GST-related material as additional evidence, the matter could be remanded to the AO for verification.

Decision of the ITAT
The Tribunal held that the issue required fresh examination. While the AO’s conclusions were largely drawn from deficiencies in transportation evidence and findings in the supplier’s case, the assessee had subsequently produced extensive documentary material, including GST investigation and closure reports, which were admittedly not examined by the AO.

The Tribunal noted that these GST proceedings, including search and enquiry, constituted a significant development and could not be ignored. At the same time, it accepted the Revenue’s contention that such material required verification by the jurisdictional AO in accordance with law.

Accordingly, the Tribunal set aside the order of the CIT(A) on merits and restored the issue to the file of the Assessing Officer for the limited purpose of examining the genuineness of purchases from SKTPL, after considering all documentary evidence and affording due opportunity to the assessee.

Gist of Cases Relied on

1. N.K. Industries Ltd. v. Dy. CIT (Gujarat HC; SLP dismissed by SC)
Full disallowance of purchases is justified only where transactions are proved to be completely bogus, with clear evidence of accommodation entries and cash circulation. The ruling applies only when sham nature is conclusively established.

2. CIT v. Nikunj Exim Enterprises Pvt. Ltd. (Bombay HC)
Purchases cannot be disallowed merely because suppliers fail to appear or have deficiencies, when invoices, delivery evidence and banking payments exist and sales are accepted.

3. PCIT v. Jagdish Thakkar (Bombay HC)
Additions cannot be based on suspicion or third-party allegations alone. Once the assessee discharges its role, the burden shifts on the Revenue to prove purchases as bogus with strong evidence.