Adhoc Disallowance Without Complete Verification Unsustainable: ITAT Deletes ₹22 Lakh Addition for Cash Purchases from URD
There was no flaw in the books of accounts or the quantitative records, which were properly audited and approved year after year, noting the fact that the simple lack of response from a few minor suppliers does not automatically make the entire purchase unverifiable.
In a matter of jewellers and traders dealing with unregistered vendors, the Pune Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that an adhoc disallowance of purchases without complete verification is unsustainable in law.
G. N. Adgaonkar Jewels, a partnership firm engaged in the jewellery business in Nashik, which faced a 50% disallowance of its cash purchases from unregistered dealers (URD) amounting to ₹22,05,077 under Section 69C of the Income Tax Act, 1961.
The Assessing Officer made the addition on the ground that out of total URD cash purchases worth over ₹44 lakh from 762 small vendors, only a few were test-checked and some failed to respond or provide confirmation.
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The assessee argued that such cash purchases from walk-in customers and small vendors are a routine feature in the jewellery trade, supported by consistently maintained quantitative stock records and audited books of accounts.
It was pointed out that URD purchases constituted around 44% of total purchases in the relevant year, a figure consistent with the pattern from earlier years, and that only a minor portion was in cash transactions involving small amounts, often as low as ₹66 to ₹19,940 per vendor.
The Tribunal noted that the Assessing Officer did not point out any discrepancies in the assessee’s stock registers or quantitative tally and failed to conduct a complete verification exercise. Instead, the AO had relied on an arbitrary test check, drawing adverse inference merely because some small vendors could not be traced or did not respond to a common occurrence in retail jewellery business where walk-in sellers of scrap gold or old ornaments are not easily traceable.
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The ITAT held that there was no flaw in the books of accounts or the quantitative records, which were properly audited and approved year after year, noting the fact that the simple lack of response from a few minor suppliers does not automatically make the entire purchase unverifiable. The AO's ad hoc disallowance, which the CIT(A) confirmed, was seen to be unwarranted in the absence of any proof of fraudulent purchases or inexplicable expenditure.
Allowing the appeal, the bench of Manish Borad ( Accountant member) deleted the entire addition of ₹22 lakh, reiterating that disallowance must be supported by specific findings and cannot be made arbitrarily when the primary records substantiate the transaction and the business reality of the trade is clear.
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