Purchases Disallowed Merely Because Suppliers Failed to File ITR: ITAT Rejects Disallowance [Read Order]

The Income Tax Appellate Tribunal, Mumbai Bench (ITAT), held that purchase expenditure cannot be disallowed solely on the ground that suppliers failed to file their Income Tax Returns (ITRs). The tribunal rejected a 46% disallowance of purchases backed by documentary evidence.

The appellant, Everest Food Products Private Limited, is engaged in the business of manufacturing and trading of food products. The case arose pursuant to assessment proceedings wherein the Assessing Officer (AO) noticed that certain suppliers from whom purchases were claimed had allegedly not filed their ITRs.

On this sole reasoning, the AO treated purchases from four suppliers as doubtful and proceeded to disallow 46% of the total purchases, alleging that the transactions were not genuine.

The matter was carried in appeal, where the appellate authority, Commissioner of Income Tax (Appeals) [CIT(A)] examined the documentary evidence produced by the assessee. CIT(A) found no defect in the books of accounts, thereby deleting the disallowance which was based solely on non-filing of ITRs by the said suppliers. Aggrieved by the order, the Revenue approached the Income Tax Appellate Tribunal.

The Revenue contended that the failure of the vendors to file their ITRs was enough to doubt their existence and credibility. Therefore, the AO was justified in estimating profit and making a partial disallowance of purchases.

The appellant contended that burden of onus of proof is duly discharged through duly supported by invoices, ledger accounts, bank statements, and goods receipt records, which were duly accepted by the Department. Further, argued that non-filing of ITRs by the vendors could not be a determinative factor to disallow purchase expenditure, when there was no finding that the purchases were fictitious.

The Bench comprising Mahavir Singh, Judicial Member, and Manoj Kumar Aggarwal, Accountant Member, observed that disallowance of expenses towards purchases cannot be made merely because the suppliers had not filed their ITRs. The Tribunal noted that the AO had not brought any material on record to substantiate that the purchases were bogus.

Further, the tribunal remarked that in order for the Revenue to disallow bogus purchases corresponding sales recorded against such purchases must be ignored which is contrary to the present case where the sales records corresponding to the purchases were accepted. Subsequently, there was no rejection of books of account, rendering the estimation of profit at an arbitrary rate of 46% as unjustified.

Considering the lack of supporting evidence, the ITAT upheld the order of the CIT(A) and confirmed the deletion of disallowance made on account of purchases.

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