Bogus Purchase Addition Deleted! Delhi ITAT Holds That GST Registration Cancellation and Non-Response of Suppliers Cannot Defeat Genuine Purchase Evidence
Rahul Singhal v. Income Tax Officer | ITAT Delhi | AY 2020-21 | Order dated 24 April 2026
Can purchases be treated as bogus merely because the selling dealers failed to respond to notices issued by the Income-tax Department?
Can the subsequent retrospective cancellation of a supplier’s GST registration justify an addition under Section 69C of the Income-tax Act, 1961, when the supplier had disclosed the sales in its GSTR-1 and the buyer had furnished purchase invoices, stock records, e-way bills and evidence of payment?
Can the Assessing Officer arbitrarily estimate 8% profit on alleged bogus purchases when the quantitative details of purchases, sales and stock have been accepted?
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT), in the case of Rahul Singhal v. Income Tax Officer, has delivered an important ruling on these issues.
The Tribunal held that additions made by the Assessing Officer were based merely on suspicion, ignoring crucial documentary evidence furnished by the assessee.
The Tribunal deleted the addition of 8% profit on the alleged bogus purchases and also deleted the addition made on account of alleged excess liability under Section 41(1).
The judgment reinforces an important principle of income-tax jurisprudence: The genuineness of a purchase must be examined on the basis of the complete evidence available on record. Subsequent GST registration cancellation or non-response of a supplier, by itself, cannot establish that the purchases were fictitious.
Let’s examine the facts, legal issues and important observations of the Tribunal.
1. Background and Facts of the Case
The assessee, Rahul Singhal, filed his return of income for AY 2020-21 declaring total turnover of ₹24,67,57,594 and a gross profit ratio of 1.84%.
The case was selected for scrutiny on the ground that certain selling dealers from whom the assessee had made purchases had either:
– Not filed their income-tax returns;
– Filed returns declaring non-business income;
– Declared substantially lower turnover; or
– Failed to respond to notices issued by the Assessing Officer.
During the assessment proceedings, the assessee furnished purchase-related documents, including purchase bills, bilties and stock records.
The Assessing Officer conducted enquiries from the selling dealers.
In respect of four selling dealers, the Department found that the dealers had denied undertaking transactions with the assessee.
Accordingly, the Assessing Officer made an addition of the entire purchase amount aggregating to ₹3,77,13,080 under Section 69C of the Income-tax Act, 1961.
In respect of other selling dealers who did not respond to notices, the Assessing Officer made an addition of 8% of the purchase value, aggregating to ₹1,46,39,233.
An additional sum of ₹26,41,990 was also added under Section 41(1) on account of an alleged difference in the ledger balance of M/s Jain Sons India, Mathura.
The assessee challenged the assessment before the CIT(A).
The CIT(A) restricted the addition relating to the purchases of ₹3,77,13,080 to 8% of the purchase value, treating the same as the profit embedded in the alleged bogus purchases.
Aggrieved by the partial relief granted by the CIT(A), the assessee approached the ITAT. The Revenue also filed an appeal.
2. GSTN Portal Information: A Crucial Piece of Evidence
One of the most significant observations of the Tribunal concerned the information available through the GSTN portal.
The Tribunal noted that the Assessing Officer had access to primary information regarding the purchases made by the assessee.
The selling dealers had duly disclosed the sales made to the assessee in their GSTR-1 returns.
The Tribunal observed that GSTR-1 would have been filed by the selling dealer using its own credentials only if the registration was active at the time of the transaction.
This fact was considered crucial while examining the genuineness of the purchases.
The Tribunal held that mere subsequent cancellation of GST registration, even retrospectively, would not affect the genuineness of transactions undertaken prior to such cancellation.
Similarly, the mere non-response of the selling dealers to notices issued under Section 133(6) could not automatically establish that the purchases were bogus.
The existence of contemporaneous GST records cannot be ignored merely because the supplier subsequently becomes non-compliant.
This observation is particularly important for taxpayers whose purchases are questioned on the basis of later developments concerning their suppliers.
3. Subsequent GST Registration Cancellation Cannot Automatically Make Earlier Purchases Bogus
The Tribunal categorically observed that the subsequent cancellation of the GST registration of the selling dealers could not, by itself, be the basis for doubting the purchases undertaken before such cancellation.
The relevant question is whether the transactions were genuine when they were undertaken.
If the supplier had an active GST registration at the time of the transaction and had disclosed the corresponding sales in its GSTR-1, the subsequent cancellation of registration cannot automatically invalidate the earlier transaction.
The Tribunal also took note of the possibility that the assessee might have been duped by an intermediary or broker.
The assessee had explained that purchases were made through a broker and had furnished the broker’s details.
The Tribunal considered this explanation reasonable in the circumstances of the case.
This is an important distinction.
The subsequent conduct or non-compliance of a supplier cannot automatically be attributed to the purchasing assessee, particularly when the purchaser has furnished documentary evidence supporting the transaction.
4. Quantitative Stock Records, E-Way Bills and Payment Evidence Cannot Be Ignored
The Tribunal examined the quantitative details furnished by the assessee.
The assessee had provided records showing:
– Opening stock;
– Purchases during the year;
– Sales during the year;
– Closing stock;
– Payments made through the books of account;
– E-way bills evidencing movement of goods; and
– Quantitative details of sales.
The Tribunal noted that these quantitative records had not been found to contain any infirmity.
The corresponding sales had also been accepted by the Department.
Further, the gross profit ratio disclosed by the assessee had not been rejected on the basis of any evidence or past reference.
In such circumstances, the Tribunal held that the purchases could not reasonably be treated as completely bogus.
The Tribunal observed that if the assessee provides quantitative stock records, payment evidence and e-way bills showing movement of goods, while the quantitative details of sales are accepted, the transactions may indicate purchases from the grey market rather than entirely fictitious purchases.
This observation is particularly significant in cases involving trading businesses, where the goods purchased are subsequently reflected in sales and closing stock.
5. Bogus Purchase Versus Grey-Market Purchase: An Important Distinction
The Tribunal made an important distinction between a transaction that is entirely fictitious and one where the goods may have been purchased through an unverified or grey-market source.
The distinction can be understood as follows:
Particulars| Completely bogus purchase| Grey-market purchase
Actual movement of goods| May be absent| May be established
Purchase invoices| May be fictitious| May be available but source questionable
Stock records| May not support the transaction| May reflect actual goods
Corresponding sales| May be doubtful| May be accepted
Quantitative reconciliation| May fail| May be available
Tax treatment| Depends on facts and law| Profit element may require examination
The Tribunal observed that where the assessee has furnished relevant evidence and the quantitative aspects of the books of account are accepted, the purchases should not be treated as entirely fictitious merely because the supplier’s response is suspicious.
The distinction between a bogus transaction and an unverified source of purchase is therefore fundamental.
6. Addition of 8% Profit on Alleged Bogus Purchases Deleted
The Assessing Officer had made an addition under Section 69C on account of alleged bogus purchases.
The CIT(A) had restricted the addition to 8% of the purchase value, treating it as the profit embedded in the alleged bogus purchases.
However, the ITAT found that even the estimation of profit at 8% was not justified in the facts of the case.
The Tribunal observed that:
– The quantitative records were furnished;
– The stock details were not found to contain any infirmity;
– The sales were accepted;
– The gross profit ratio was not rejected on the basis of evidence;
– The purchases were supported by documentary evidence; and
– The Assessing Officer’s conclusion was based merely on suspicion.
Accordingly, the Tribunal held that the addition of 8% profit on the alleged bogus purchases deserved to be deleted.
The Tribunal also held that the CIT(A) had erred in sustaining the addition on this basis.
This is a significant ruling because it demonstrates that even a restricted profit addition cannot be sustained merely as a matter of routine where the documentary and quantitative evidence supports the transaction.
7. N.K. Proteins and Kanak Impex Distinguished
The Revenue relied upon certain judicial precedents, including:
– N.K. Proteins Ltd. v. Deputy Commissioner of Income Tax;
– Kanak Impex (India) Ltd. v. Principal Commissioner of Income Tax; and
– Global Stainless v. Assistant Commissioner of Income Tax.
The Tribunal distinguished these decisions on facts.
In the case of Global Stainless, the issue involved an addition under Section 68 relating to alleged unsecured loans.
The Tribunal observed that the factual circumstances of that case were different from the present matter.
Similarly, the Tribunal distinguished N.K. Proteins Ltd. and Kanak Impex (India) Ltd., noting that those decisions involved circumstances where additions under Section 69C were made in respect of unexplained expenditure on alleged bogus purchases.
In the present case, however, the assessee had furnished relevant evidence dispelling the suspicion arising from the responses of the selling dealers, while the quantitative aspects of the financial statements and books of account were accepted.
Therefore, the precedents relied upon by the Revenue did not justify sustaining the addition in the present case.
8. Addition Under Section 41(1) on Alleged Excess Liability Also Deleted
Apart from the alleged bogus purchases, the Assessing Officer had made an addition of ₹26,41,990 under Section 41(1) on account of an alleged difference in the ledger balance of M/s Jain Sons India, Mathura.
The Department had alleged that there was a difference between the balance shown by the supplier and the balance reflected in the assessee’s books.
The assessee furnished the ledger account and supporting evidence of payments made through its HDFC Bank account.
The Tribunal observed that where the assessee supports its claim with invoices and payments made through the banking channel, the tax authorities are required to examine the evidence.
However, no adequate factual finding had been recorded to establish that the difference represented a cessation or remission of liability attracting Section 41(1).
The Tribunal accordingly held that the addition of ₹26,41,990 was not justified and directed its deletion.
This part of the ruling is also important because a mere difference in ledger balances does not automatically establish that a liability has ceased to exist.
9. Final Decision of the ITAT Delhi
The Tribunal allowed the assessee’s appeal and rejected the corresponding grounds raised by the Revenue.
The important conclusions were:
A. Addition under Section 69C
The addition of 8% profit on alleged bogus purchases was deleted.
B. GST registration cancellation
Subsequent retrospective cancellation of the supplier’s GST registration could not automatically affect the genuineness of transactions undertaken before cancellation.
C. Non-response under Section 133(6)
The mere failure of suppliers to respond to notices could not establish that the purchases were fictitious.
D. Quantitative stock records
The stock records, purchase evidence, payment details and e-way bills were important corroborative evidence and could not be ignored.
E. Section 41(1) addition
The addition of ₹26,41,990 on account of alleged excess liability was also deleted.
The Tribunal’s ruling reinforces the principle that additions must be supported by proper evidence and cannot be sustained merely on the basis of suspicion.
10. Practical Implications for Taxpayers and Tax Professionals
The judgment has considerable importance for businesses dealing with suppliers whose GST registration is subsequently cancelled or who fail to respond to departmental notices.
Taxpayers should ensure that they maintain the following records:
1. Purchase invoices containing complete supplier details.
2. GST returns reflecting the purchase transactions.
3. GSTR-2A/2B reconciliation, wherever applicable.
4. E-way bills supporting the movement of goods.
5. Transport receipts, bilty and delivery documents.
6. Stock register and quantitative reconciliation.
7. Evidence of payment through banking channels.
8. Corresponding sales records.
9. Vendor-wise ledger accounts.
10. Details of brokers or intermediaries involved in the transaction, wherever relevant.
The ruling also highlights the importance of responding adequately to notices issued during assessment proceedings.
Where purchases are questioned, the assessee should furnish complete documentary evidence rather than relying merely on the fact that payments were made through banking channels.
Conclusion: Suspicion Cannot Replace Evidence in Bogus Purchase Cases
The Delhi ITAT’s decision in Rahul Singhal v. Income Tax Officer reinforces an important principle of income-tax law.
The subsequent cancellation of GST registration, non-filing of income-tax returns by suppliers or non-response to notices under Section 133(6) cannot, by themselves, establish that purchases are fictitious.
Where the assessee has furnished purchase invoices, quantitative stock records, evidence of payment, e-way bills and corresponding sales details, the Assessing Officer must examine the complete evidence before making an addition under Section 69C.
The distinction between a completely bogus purchase and a purchase from an unverified source is also important.
A supplier’s subsequent default cannot automatically become the purchaser’s tax liability.
The judgment is a useful reminder that assessment proceedings must be based on evidence, proper verification and reasoned conclusions.
After all, in tax litigation, suspicion may initiate an enquiry, but it cannot replace proof!
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Case Law Reference
Rahul Singhal v. Income Tax Officer, Ward 2(3)(2), Bulandshahr, ITA Nos. 6081/Del/2025 and 5943/Del/2025, Assessment Year 2020-21, Delhi Bench of the Income Tax Appellate Tribunal, order dated 24 April 2026.
Citation: (2026) 1 NYPCTOTTJ 1319 (Del).
The copy of the order is as under:
