Bogus Purchases & Real Income: ITAT Ahmedabad’s Ruling on Leela Greenship Recycling Pvt. Ltd.
Ahmedabad, India – In a significant cross-appeal ruling on June 26, 2025, the Income Tax Appellate Tribunal (“ITAT”), “D” Bench, Ahmedabad, addressed a dispute between Leela Greenship Recycling Pvt. Ltd. (formerly Ganpatrai Jaigopal Shipbreakers Pvt. Ltd.) and the Deputy Commissioner of Income Tax for the Assessment Year 2018-19. The core of the case revolved around alleged bogus purchases and the application of Section 69C of the Income-tax Act, 1961 (“the Act”).
The assessee, Leela Greenship Recycling Pvt. Ltd., engaged in ship breaking and trading of iron and steel, had initially declared a total income of Rs. 15,86,750/- for A.Y. 2018-19. However, the case was reopened under Section 147 based on information from the Anti-Evasion Wing of CGST, Kutch Commissionerate. This intelligence suggested that M/s. Mahadev Trading Co., a concern run by Shri Bharat Vaghajibhai Prajapati, was involved in issuing accommodation invoices without actual supply of goods or services. The assessee was alleged to have made purchases totaling Rs. 1,40,03,670/- from this party in F.Y. 2017-18.
The Assessing Officer (“AO”) subsequently treated the entire purchase amount as unexplained expenditure under Section 69C, increasing the assessed income to Rs. 1,55,90,420/-. This decision was based on the AO’s conclusion that the physical movement of goods could not be conclusively proven.
Upon appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] upheld the validity of the reassessment but partially allowed the assessee’s challenge on the merits of the addition. The assessee had furnished extensive documentary evidence, including purchase invoices, ledger extracts, supplier confirmations, stock records, weighment slips, transportation documents, RTGS payment details, bank statements, and GSTR-2A copies. The assessee also clarified a company name change from Ganpatrai Jaigopal Shipbreakers Pvt. Ltd. to Leela Greenship Recycling Pvt. Ltd. on March 14, 2018, explaining invoice discrepancies.
The CIT(A) noted that the AO did not dispute the banking channel payments, the recording of purchases in books and audited financials, the reflection of goods in stock, or the taxation of sales arising from these purchases. Crucially, the CIT(A) found that the AO failed to provide direct evidence to rebut the assessee’s documentation, concluding that the AO’s findings were based on “suspicion, surmises, and conjectures”. The CIT(A) also highlighted violations of natural justice, as material relied upon by the AO was not furnished to the assessee, and cross-examination was not provided.
While agreeing that Section 69C was misplaced due to the undisputed source of payment, the CIT(A) acknowledged the possibility of inflated purchases and, following judicial precedents, restricted the disallowance to a 5% profit margin on the disputed purchases. This resulted in an addition of Rs. 7,00,184/- and a deletion of Rs. 1,33,03,486/-.
Both the Revenue and the assessee filed cross-appeals to the ITAT. The Revenue sought full disallowance, citing the supplier’s non-existence and lack of prior dealings. The assessee argued for complete deletion or further reduction, emphasizing the genuineness of purchases and the consistent stance of the Gujarat High Court that only a profit element should be estimated when sales are not doubted.
The ITAT, after careful consideration, distinguished the case from cited precedents like Principal Commissioner of Income-tax v. Shree Ganesh Developers and N.K. Industries Ltd. v. DCIT. The ITAT noted the absence of independent bank verification or incriminating search material, which were present in the distinguished cases. Reiterating the consistent view of the Gujarat High Court, the ITAT affirmed that full disallowance of purchases is not justified when sales are undisputed and transactions are evidenced by books and banking channels; instead, an estimation of the profit element is appropriate.
To ensure justice, the ITAT restored the matter to the AO for “limited verification”. The AO is directed to:
– Obtain and verify bank account details of M/s. Mahadev Trading Co. for any cash trail, i.e., whether payments made by the assessee were withdrawn in cash by the supplier or its associates.
– If a cash trail is established, disallowance should be made accordingly.
– If no cash-back trail is found, the addition will be restricted to the 5% estimated profit element as determined by the CIT(A).
– Specifically verify the outstanding balance of Rs. 15,09,016/- from the total purchases of Rs. 1,40,03,670/-. If unpaid, the AO must examine its nature and reasons.
– The assessee is mandated to cooperate fully.
– The AO must provide a reasonable opportunity of hearing and complete the fresh assessment within the defined scope.
Both appeals were partly allowed for statistical purposes. The ruling underscores the importance of concrete evidence beyond mere suspicion in tax assessments, particularly in cases involving alleged bogus purchases.
Keywords: Income Tax Appellate Tribunal, ITAT Ahmedabad, Bogus Purchases, Section 69C, Leela Greenship Recycling, Mahadev Trading Co., Tax Assessment, Income Tax Act 1961, A.Y. 2018-19, CIT(A), Tax Appeal, Unexplained Expenditure.
The copy of the order is as under:
