Bogus Purchases: Bombay HC Sustains ₹6 Crore Income Tax Addition using Peak of Purchases [Read Order]

The Bombay High Court recently used the peak of purchases method to ascertain and uphold an income tax addition of ₹6.15 crore on a trader with regard to alleged bogus purchases done during the Assessment Years 2009-10 and 2010-11.

The assessee, Drisha Impex Pvt. Ltd. (Drisha Impex) is engaged in trading in electronic items, toys, electronics, etc and had filed their return for the Assessment Year 2009–10 declaring a total income of ₹10,60,910 which was accepted under Section 143(1) of the Income Tax Act, 1961.

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The Assessing Officer (AO) had documented multiple evidentiary deficiencies in the assessment of Drisha Impex including the assessee's failure to produce audited books of accounts, inability to provide supplier details despite summons, absence of documentation for ancillary expenses, and the questionable claim of losing transaction records stored on a portable hard disk. These findings led to an addition of ₹6.15 crore under Section 69C of the Income Tax Act, 1961, representing the peak value of unsubstantiated purchases.

In appeal, the Commissioner of Income Tax (Appeals) had reduced the addition to a nominal 1% of the disputed purchases, while the Income Tax Appellate Tribunal (ITAT) subsequently increased it to 3%.

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In the present matter before the Bombay High Court, Shilpa Goel appearing for the Revenue submitted that the Tribunal ought to have disallowed the whole of the peak purchases and not just 3% of the impugned purchases and that at this juncture, the High Court may not examine whether the Respondent-Assessee had proved the genuinity of the purchases.

Meanwhile, K Gopal and Neha Paranjape appearing for the Assessee countered that the Revenue had not proved any cash flowback and that Section 69C had not been invoked to contest the present matter.

The Division Bench of Justice M.S. Sonak and Justice Jitendra Jain noted that the Respondent may not challenge the findings of facts given by the final fact finding authority that is the ITAT, by relying on the submissions made before the Commissioner of Income Taxes (Appeals) ( CIT(A) ).

The Court further noted that despite the claims of payments having been undertaken through banking channels and availability of purchase invoices, the assessee failed to establish actual delivery of goods, produce confirmatory letters from suppliers, or maintain books and quantitative details.

The Bombay High Court further criticized the speculations made by the ITAT on the apparent purchases made by the Assessee to account for 3% of the disputed purchases. Adverting to the decision given by the ITAT in Pr. Commissioner of Income Tax-5 Vs Kanak Impex (India) ltd. (2021), the Court held that once purchases were found to be bogus, the entire addition must be sustained.

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In light of the observations, the High Court proceeded to reverse the order passed by the CIT(A) and the Tribunal, and answered the case in favour of the Revenue, restoring the addition made by the assessment officers in the assessment orders.

To Read the full text of the Order CLICK HERE

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