An overview of recent cases by Bombay High Court on Bogus Purchase vs. Addition under section 69C

 

Recently Hon’ble Bombay High Court in PCIT v. Kanak Impex (India) Ltd. [2024] 172 taxmann.com 283 rendered a landmark judgement on 03.03.2025 wherein it has been held that purchases to be disallowed if not explained

Let us have a Short Overview of the case:  

 

What the Hon’ble High Court held –

– Assessee has not explained the purchases and hence the same are not allowable in view of s. 69C

– Assessee did not appear before A.O., filed scanty details before CIT(A) who sustained profit of 12.5% on such purchases and deleted balance addition. Before ITAT, no submissions canvassed on genuineness of purchases and only pleaded for estimation of % of bogus purchases. ITAT directed AO to retain addition to the extent of bringing the GP rate of disputed purchases in parity with that of other genuine purchases.

– Disallowance of purchases by applying G.P. rate was incorrect as the case of the A.O. was not of low profit

How to overcome the rigours of this decision –
– Explain purchases with all possible evidence
– Get confirmation from the parties. Alternatively, request A.O. to make suitable enquiries with the parties
– Explain nexus between purchase and sales.
– If it is a case of manufacturer, explain how the purchases from disputed parties would be relevant to manufacture desired quantity of the sales
– Even if G.P. rate is applied, do not surrender on the claim of genuine purchases
– Appear before all authorities and file necessary documents
– Take all legal arguments including applicability of real income theory to taxation laws

Decisions rendered in the past and relevant on the issue :
The Hon’ble Bombay High Court in PCIT v. Dhondiram Naryan Limbhore – [2023] 153 taxmann.com 539 rendered on 26.02.2022 has that where there was no discrepancy between purchases and sales declared, entire purchases could not be added and addition to be limited to GP rate on purchases. This decision followed the decision of the Court in Mohammad Haji Adam & Co. [2019] 103 taxmann.com 459. The SLP against the said decision is also dismissed

The Hon’ble Bombay High Court in PCIT v. Rushail Pharmadin (P.) Ltd. [2024] 163 taxmann.com 195 – rendered on 03.04.2024 has held that where AO had not disputed sales made out of alleged bogus purchases, only profit element embedded in such purchases could be brought to tax.

The Hon’ble Bombay High Court in PCIT Vs SVD Resins & Plastics (P) Ltd. [2024] 166  taxmann.com 242 rendered on 07.08.2024 also held addition of entire purchases not warranted.

There are many more decisions of various courts on the subject which may be equally relevant.