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July 25, 2022

On bogus purchases only profit element can be added to the income

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

On bogus purchases only profit element can be added to the income

Facts and Issues of the case

The respondent / assessee is involved in the execution of civil works like road construction etc. under the Public Works Department of the Government of Maharashtra and the Municipal Corporation of Greater Mumbai. For the assessment year 2010-11, the assessee filed a return declaring a total income at Rs.1,56,21,670/-. Based on the information received from the Sales Tax Department of the Government of Maharashtra, the Assessing Officer (for short “A.O.”) during the course of assessment proceedings asked the assessee to explain purchases to the tune of Rs.4,74,54,793/- from twelve parties, which were stated to be bogus purchase entries as per the information received by the A.O.

Despite the stand taken by the assessee, the A.O., upon failure of the assessee to produce the twelve parties for verification, held that the assessee in fact had not purchased the goods from the suppliers, and therefore held the purchase bills as bogus and consequently held an amount of Rs.4,74,54,793/- as non-genuine expenditure and added the same to the total taxable income of the assessee for the relevant assessment years.

Observations by the Court

The Tribunal upheld the findings recorded by the learned CIT(A)  two grounds. Firstly, that the consumption report with regard to material purchases had never been controverted by the A.O and secondly that the  completion certificate in regard to the contract works submitted by the assessee had been accepted by the A.O., in the light of which, it could not be said that the purchases were totally bogus and consequently ought not to be fully disallowed. The Tribunal also upheld the addition estimated at Rs.59,31,849/- based upon estimated profit at the rate of 12.5% on the total purchases in question.

The court is of the opinion that the view expressed by the Tribunal in upholding the order passed by the learned CIT(A), cannot be said to be in any manner perverse or legally untenable, inasmuch as, if the entire amount of Rs.4,74,54,793/- were to be held as non-genuine purchases, then it would not be possible to justify as to how the works allotted to the assessee for execution by the semi Government Agencies could be completed. Therefore the argument that the entire amount of Rs.4,74,54,793/- ought to have been added to the income of the assessee is untenable, especially when the learned CIT(A) in its order as upheld by the Tribunal in the order impugned held that the purchases per se were not in dispute but the parties from whom the purchases are shown to have been made are disputed. In our opinion, the order passed by the Tribunal is legally valid warranting no interference.


The profit element on the bogus purchases can be added to income.


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