'Estimation Theory Doesn't Apply To Sham Purchases': ITAT Mumbai Restores Full Disallowance Of ₹26.49 Lakh

The Income Tax Appellate Tribunal (ITAT) Mumbai has held that where purchases are conclusively proven to be bogus and the assessee fails to substantiate the genuineness of suppliers, the entire purchase amount must be added to income and the benefit of estimating profit element cannot be applied. A Bench of Smt. Beena Pillai (Judicial Member) and Shri Omkareshwar Chidara (Accountant Member) was hearing a Revenue appeal against the order of the CIT(A) which had restricted disallowance of alleged bogus purchases to 15% on the ground that sales were not doubted. The Bench reversed the partial relief and restored 100% addition in respect of four purchase parties. Section 37(1) of the Income-tax Act, 1961: The primary section used for disallowing bogus purchases, because such purchases are treated as expenditure not incurred wholly and exclusively for business. The assessee, engaged in the business of building and developing properties, declared its income. On the basis of findings of the Maharashtra Sales Tax Department and the Investigation Wing, the Assessing Officer ordered reassessment and held that the assessee had issued purchase bills worth ₹26.49 lakh from five suppliers identified as hawala dealers. Summons under Section 131 and notices under Section 133(6) to all parties were returned unserved; the assessee did not produce a single party or supporting logistics documentation. Most significantly, in his own statement under Section 131, the assessee admitted that the suppliers were accommodation providers and no material was supplied. The Assessing Officer accordingly disallowed 100% of the purchases under Section 37(1). Aggrieved by the said Order, the assessee preferred appeal before Commissioner(Appeals). The Commissioner(A) however restricted the addition to 15% on estimation basis, holding that sales were not doubted. Aggrieved by the Order of Commissioner(Appeals) the Revenue preferred appeal before the ITAT. The Revenue argued that the CIT(A) ignored conclusive evidence from the Sales Tax Department as well as the assessee's admission. The Revenue relied on the Bombay High Court's ruling in Pr. Commissioner of Income Tax-5, Mumbai Vs Kanak Impex(India) Ltd. in Income Tax Appeal No. 791 of 2021, wherein it was observed that once purchases are proved to be entries from bogus suppliers, entire disallowance must be sustained. The assessee failed to appear before the ITAT despite repeated hearing dates, leading to an ex parte adjudication. The Bench held that the case in hand is a case of non-existence of suppliers and absence of any evidence of purchase transactions, including all five parties identified as hawala operators by statutory authorities, all summons and notices returned unserved, no delivery, transport or stock evidence produced and assessee's self-admission that the parties issued accommodation bills. The Bench stated that in cases where purchases are found completely non-genuine, the estimation theory does not apply. It is well-settled that where purchases are sham and not merely unverifiable, the entire addition is warranted. In view of the above, the Bench partly allowed the Appeal in favour of the Revenue. Case Title: DCIT, Circle- 41(3)(1) Mumbai Vs. Deepak Shah Case No: ITA No. 3870/Mum/2024 Appearance for the Appellant: None Appearance for Respondent: Shri Bhagirath Ramwat, Sr. D/R Click Here To Read/Download Order

'Estimation Theory Doesn't Apply To Sham Purchases': ITAT Mumbai Restores Full Disallowance Of ₹26.49 Lakh

Rajnandini Dutta

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'Estimation Theory Doesn't Apply To Sham Purchases': ITAT Mumbai Restores Full Disallowance Of ₹26.49 Lakh

Rajnandini Dutta

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INR 1099+GST

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