Accepted Sales Mean Purchases Cannot Be Ignored: ITAT Restricts Bogus Purchase Addition to 1%
Can the Income Tax Department Treat Purchases as Bogus When the Corresponding Sales Are Accepted?
Allegations of bogus purchases continue to be one of the most litigated issues under the Income-tax Act. Quite often, the Investigation Wing identifies certain suppliers as accommodation entry providers, leading the Assessing Officer to question the genuineness of purchases made from them.
However, an equally important question arises:
If the sales are fully accepted, can the Department ignore the corresponding purchases and make substantial additions?
The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently reiterated that accepted sales necessarily imply the existence of corresponding purchases. While an assessee may still be required to explain the genuineness of the suppliers, the addition should ordinarily be confined to the profit element embedded in such purchases, particularly where payments have been made through banking channels and supporting documents are available.
The Tribunal also cautioned against adopting an arbitrary gross profit (GP) rate from a different assessment year having an entirely different business model.
Background of the Case
The case before the Tribunal was Kanta Devi Jalan v. Deputy Commissioner of Income Tax, Central Circle-31, New Delhi (ITA Nos. 807 to 810/Del/2023, order dated 24.06.2026).
The assessee was engaged in the trading of:
• food grains,
• pulses,
• and other agricultural commodities.
The assessments for AYs 2013-14 to 2016-17 were completed under Section 153A.
Why Were the Purchases Disputed?
The Investigation Wing reported that certain suppliers were allegedly engaged in providing accommodation entries.
Based on this information, the Assessing Officer:
• rejected the books of account under Section 145(3),
• doubted the purchases from those suppliers,
• but accepted the sales disclosed by the assessee.
Instead of disallowing the entire purchases, the Assessing Officer estimated the embedded profit by applying a gross profit (GP) rate of 3.69%, being the highest GP disclosed in Assessment Year 2019-20.
The Commissioner (Appeals) affirmed this approach.
What Evidence Was Produced by the Assessee?
The assessee placed several important documents on record, including:
• payments made through banking channels,
• VAT registration details of the suppliers,
• bank account particulars of the suppliers.
• he Department did not establish that any of these documents were fabricated or false.
Nevertheless, the assessee could not completely establish the genuineness of every disputed supplier.
ITAT’s Findings
The Tribunal adopted a balanced approach.
Accepted Sales Necessarily Mean Purchases Existed
The Tribunal observed that the Revenue had fully accepted the sales disclosed by the assessee.
Logically, those sales could not have been effected without corresponding purchases.
Therefore, the purchases themselves could not be ignored altogether.
The dispute was only regarding the identity or genuineness of the suppliers—not the existence of goods.
Banking Channels and VAT Records Strengthened the Assessee’s Case
The Tribunal attached significance to the fact that:
• payments had been made through banking channels;
• suppliers possessed VAT registrations;
• supplier bank details had been furnished.
Importantly, the Assessing Officer failed to demonstrate that these documents were false or manipulated.
This substantially weakened the Revenue’s allegation that the purchases were entirely fictitious.
Yet the Assessee Had Not Fully Discharged Its Burden
At the same time, the Tribunal noted that the assessee had not completely established the genuineness of every transaction.
Accordingly, the case did not warrant complete deletion of the additions.
Some estimation of additional profit was justified.
This approach is consistent with the settled principle that where purchases are not fully proved but sales are accepted, only the embedded profit element should ordinarily be brought to tax.
AO’s GP Rate Found Arbitrary
One of the most important findings concerned the gross profit rate adopted by the Assessing Officer.
The AO had applied the GP rate of Assessment Year 2019-20, namely 3.69%.
The Tribunal held that this approach was arbitrary because:
• AY 2019-20 involved a different business model;
• the product mix was different;
• market conditions had changed.
Historical profitability during the relevant assessment years provided a far more reliable basis.
Historical GP Was Much Lower
The Tribunal noticed that during the relevant assessment years, the assessee’s actual gross profit ranged only between:
• 0.67%, and
• 1.52%.
Considering this historical trend, the Tribunal held that estimating the addition at 1% of the disputed purchases would fairly meet the ends of justice.
Accordingly, the additions were substantially reduced.
Decision Based on Peculiar Facts
The Tribunal specifically clarified that its decision was rendered having regard to the peculiar facts of the case.
It should not automatically be treated as a precedent for every bogus purchase case.
Each matter must ultimately depend upon:
• the nature of evidence,
• business circumstances,
• and the facts of the individual case.
Judicial Precedents Considered
The Tribunal relied upon important judicial precedents, including:
• CIT v. Odeon Builders Pvt. Ltd.
• Andaman Timber Industries v. CCE
• Jai Bajrang Gur Bhandar v. ITO
These decisions emphasise the importance of proper evidence, natural justice, and rational estimation while dealing with disputed purchases.
Why This Judgment Matters
The ruling provides valuable guidance in bogus purchase litigation.
It reiterates that:
• accepted sales cannot ordinarily coexist with total disallowance of purchases;
• estimation must be based on relevant historical data;
• arbitrary GP rates from unrelated years cannot be mechanically adopted;
• documentary evidence such as banking transactions and VAT records deserves due consideration.
Practical Lessons for Taxpayers
Businesses facing bogus purchase allegations should preserve:
• bank payment records,
• GST/VAT registrations of suppliers,
• invoices,
• transport documents,
• delivery records,
• stock registers,
• purchase ledgers.
Even if supplier verification later becomes difficult, contemporaneous documentary evidence significantly strengthens the taxpayer’s defence.
Conclusion
The Delhi ITAT’s decision in Kanta Devi Jalan (Legal Heir of Late Shri Ved Prakash Agarwal) v. DCIT reflects a pragmatic and balanced approach to bogus purchase disputes. Recognising that accepted sales necessarily presuppose corresponding purchases, the Tribunal declined to uphold an excessive addition based on suspicion alone.
At the same time, it acknowledged that the assessee had not completely discharged the burden of proving the genuineness of every supplier. Accordingly, rather than deleting the addition in its entirety or endorsing an arbitrary gross profit rate from a later assessment year, the Tribunal adopted a reasonable estimate of 1% of the disputed purchases, aligned with the assessee’s historical profitability.
The judgment reinforces a well-settled principle of tax jurisprudence: where evidence points to irregularities in purchases but the existence of sales is undisputed, taxation should ordinarily be confined to the probable profit element and not the entire value of the purchases.
The copy of the order is as under:
Accepted Sales Mean Purchases Cannot Be Ignored: ITAT Restricts Bogus Purchase Addition to 1%
