Estimated 10% Purchase Disallowance Unsustainable Without Defects in Books: ITAT Deletes ₹9.90 Crore Addition [Read Order]

The Income Tax Appellate Tribunal (ITAT) Mumbai Bench has deleted an addition of ₹9.90 crore made under Section 69C of the Income Tax Act after holding that an estimated 10% purchase disallowance cannot be sustained in the absence of defects in books of account or supporting evidence establishing bogus purchases.

The bench comprising Amit Shukla and Arun Khodpia dismissed the Revenue’s appeal and upheld the order of the Commissioner of Income Tax (Appeals) deleting the addition.

The assessee INVT Electric India Private Limited company engaged in the business of industrial automation and energy power solutions had disclosed that nearly 95% of its purchases were imports from its Chinese group entity, Shenzhen INVT Electric Co. Ltd. During scrutiny proceedings, the Assessing Officer (AO) relied upon certain information available on the Insight Portal and alleged discrepancies relating to purchases from 22 parties.

However, the assessee produced complete books ofaccount, stock registers, purchase and sales registers, audited financial statements, bank statements, invoices, ledger accounts and transportation details to substantiate the genuineness of purchases.

The company categorically denied having any transactions with the parties identified by the AO through third-party information.Despite the documentary evidence, the AO proceeded to make an ad hoc disallowance of 10% of total purchases amounting to ₹99.04 crore and treated ₹9.90 crore as unexplained expenditure under Section 69C. The amount was also subjected to tax under Section 115BBE.

The assessee argued that no defect had been pointed out in the books of account, quantitative records, or purchase documents, and that the AO had neither rejected the books under Section 145 nor established that the purchases were bogus.

Accepting the assessee’s contention, the CIT(A) deleted the addition.

The Tribunal upheld the deletion and observed that the entire addition was founded merely on suspicion arising from portal-based information without any corroborative evidence.

The Tribunal noted that the AO failed to identify discrepancies in stock records, purchase registers, sales records or banking transactions. It further observed that once purchases were duly recorded and corresponding sales accepted, arbitrary estimation could not substitute evidence.

The bench held that Section 69C applies only where expenditure remains unexplained and not where transactions are properly recorded and substantiated, the Tribunal concluded that the estimated disallowance was arbitrary and unsustainable in law.

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