Non-discharge of Onus of Proof by AO: Bombay HC quashes treatment of Purchase Expenses as Bogus [Read Order]

The Bombay High Court ( Bombay HC ) recently set aside an order by the Income Tax Appellate Tribunal ( ITAT ) and Revenue Department, ruling that the purchase expenses claimed by the petitioner could not be treated as ‘bogus’ due to the failure of the Revenue Department to discharge the onus of proof required to purport such an allegation.

An Income Tax Appeal was filed before the Bombay High Court by taxpayer Ashok Kumar Rungta, seeking relief that the all the purchases made by the Appellant be treated as genuine as opposed to the Order passed by the Income Tax Appellate Tribunal (ITAT), upholding the order of the Commissioner of Income Taxes – Appeals ( CIT(A) ) disallowing 10% of certain suspect purchases under the premise that they are bogus purchases

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The Appellant, represented by N.M. Porwal lodged three separate Income Tax Appeals against the Revenue Department and Union of India, represented by Swapna Gokhale – all pertaining to the same subject matter before the Bombay HC regarding Assessment Years 2009-10, 2010-11 and 2011-12, all of which were jointly adjudicated by the Bombay HC through the present decision.

The Bombay High Court laid reference to the reasoning behind the decision of the ITAT in rendering 10% of the purchases as ‘bogus’ wherein it was held by ITAT that, the Revenue has failed to produce cogent evidence discrediting the Appellant’s purchase expenses; in similar vein, the Appellant had also failed to produce requisite documentation and the parties from whom the purchases had been made – suggesting that the purchases had been made by the Assessee from the gray market in order to evade taxes.

While ITAT appreciated the Assessee’s filing of sales tax returns and VAT Audit Report, the Tribunal sustained the addition of 10% of the total purchases as bogus purchases.

The Coram of the Bombay High Court constituted by Justice G.S. Kulkarni and Justice Somasekhar Sundaresan observed that the ITAT had returned a firm finding citing the lack of incriminatory material against the Appellant in the Assessment Order; in the event a quasi-judicial authority finds the lack of cogent or convincing evidence against the Assessee, it would be wrong to expect the Assessee to still prove its innocence.

In light of the findings made, the Bombay High Court referred to its own decision in the case of Principal Commissioner of Income-tax-1 Vs. SVD Resins & Plastics (P.) Ltd. (2024) wherein the High Court observed that any ‘half-hearted approach by the AO to make additions on the issue of bogus purchases on the basis of general information, lacking proof would not be conducive to the purpose of law’.

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In light of the findings on record, the Bombay High Court set aside the Impugned Orders and allowed the Appeals holding that such addition by ITAT is repugnant in the absence of concrete evidence.

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