Genuineness of purchases
Introduction
The taxpayers during the course of carrying out business of manufacture, wholesale trade and retail trade incur business expenditure by way of purchase of raw materials, consumables, finished goods.
The said expenses are incurred in the normal course of business. Therefore, expenditure by way of purchase is an allowable expenditure while calculating business profits under Income-tax Act, 1961.
However, during the course of scrutiny assessment proceedings under section 143(3) or during the course of re-assessment proceedings under section 147 of the Income-tax Act, 1961, the purchases claimed by the assessee are disallowed by the Assessing Officer and added back to the income of the assessee on the allegation that such purchases are bogus, fake and non-genuine.
The said allegations are framed on the basis of either of the following grounds:
- The invoices in respect of purchases are raised without actual delivery of goods or
- The suppliers from whom goods were purchased are not traceable or
- GST Registration of suppliers has cancelled before purchase of goods
Now the issue under consideration is that how to rebut the allegation of bogus purchases framed by the Assessing Officer and how to plead for allowability of expenses by way of purchases from business profits which are disallowed and added back to the total income on the ground of being bogus.
Genuineness of purchases backed by sufficient documentary evidences
As is discussed above, one of the grounds for alleging that purchases are bogus is that invoice is raised without actual delivery of goods.
This ground can be rebutted by placing before the Assessing Officer, the stock register wherein complete and correct day-to-day stock record is maintained and receipt of stock item wise and party wise is recorded in quantity as well as in amount.
Therefore, actual delivery of goods can be substantiated by the production of stock register before the Assessing Officer and accordingly genuineness of purchases can be proved.
Further the movement of goods can be substantiated by furnishing copies of e-way bills generated by the supplies before delivery of goods.
Further, the genuineness of purchases can be substantiated from the fact that the payment for the said purchases is made through regular banking channels. If the payment for purchases is reflected in bank statements of the assessee then the onus shifts to the Assessing Officer to bring on record material on record so as to indicate that any part of the payments made for purchase by the assessee to the suppliers came back to the assessee.
If the Assessing Officer is not able to show that the funds disbursed by the assessee for the payment of the purchases is routed back to the assessee then the purchases cannot be termed as fake.
Thus, genuineness of the purchases can be proved by furnishing of following documents before the adjudicating officer:
- Invoices
- Purchase register
- Stock register
- Bank statements evidencing payments
- Confirmation from suppliers
- Supplier’s ledger
- Supplier’s income tax return
- GST returns
Judgments
a. CIT vs. Odeon Builders (P.) Ltd. [2019] 418 ITR 315 (SC)
The Honourable Supreme Court in this case held that
“Where assessee had submitted purchase bills, transportation bills, confirmed copy of accounts and VAT Registration of sellers as also their Income-tax Return and payment was made through cheques, impugned purchases could not be disallowed”
b. CIT vs. M.K. Brothers [1987] 163 ITR 249 (Gujarat High Court)
The High Court of Gujarat observed that nothing is shown to indicate that any part of the fund given by the assessee to these parties came back to the assessee in any form.
c. Fancy Wear vs. ITO [(2017) 167 ITD 621 (Mumbai Tribunal)
The Tribunal observed that The AO or the FAA have not rejected the books of accounts of the assessee nor have doubted the purchases made by it. The recognized principles of accountancy and tax jurisprudence hold that no sales can take place without purchases. Thus, the case under appeal is not about non genuineness of purchases itself, but it is about non genuineness of suppliers. Whether provisions of section 69C of the Act can be applied in the matters where all the purchase and sales transactions part of regular books of accounts. Basic precondition for invoking the section 69C is that the expenditure incurred by the assessee should be out of books of accounts. Here, the payments to the suppliers, as stated earlier, have been made by cheques. So, it cannot be held that expenses were incurred by the assessee outside the books of accounts. Section 69C was introduced in to the statute with a specific purpose. A bare reading of the section makes it clear that if the assessee incurred any expenditure, but offered no explanation about the source of such expenditure or part thereof, or the explanation so offered is not satisfactory, such expenditure may be deemed to be the income of the assessee. The assessee has offered satisfactory explanation about the source of the expenditure in the case before us.
d. ACIT vs. Vijaya Process [MANU/IB/0147/2010] (Ahmedabad Tribunal)
The Tribunal held that once the payments are made by account payee cheques against receipts of goods and even there is no defect in the books of account and the purchases as well as sales are recorded in the stock register and even the movement of goods are established by the assessee, the purchases cannot be treated as non-genuine or bogus.
Sales not disturbed
The action of the Assessing Officer of disallowing purchases on the ground being bogus without disputing or rejecting sales value is not tenable in law.
Without corresponding purchases being made, the assessee could not have effected sales. It is well-settled principle of law that when corresponding sales has been accepted then disallowance purchases on the ground of being bogus is not sustainable.
Accordingly, the assessee can plead for allowability of purchases before the Assessing Officer on the ground that the sales value has been accepted and not at all disputed or rejected.
Judgments
a. ACIT vs. Shri Mahesh K. Shah [ITA No. 5194/Mum/2014] (Mumbai Bench, ITAT)
The Tribunal observed that while it may be true that the said parties did not appear before the AO, for whatever reason, the fact remains that the assessee had filed copies of purchase invoices; extracts of stock ledger showing entry/exit of materials, copies of bank statements to evidence that payments for these purchases were made through normal banking channels, etc. to establish genuineness of the aforesaid purchases. From the record it is evident that the AO has not doubted the sales affected by the assessee and therefore it would be logical to conclude that without corresponding purchases being made, the assessee could not have effected sales.
b. DCIT vs. Sharp Mint Limited [ITA No. 1088 to 1093/Del/2021] (Delhi Bench, ITAT)
The Tribunal held that when corresponding sales have been accepted, disallowance for bogus purchase is not sustainable.
Mere non-appearance of suppliers cannot be a ground of disallowance of purchases
In order to conduct enquiry regarding the genuineness of the purchases, the Assessing Officer issues the notice under section 133(6) of the Income-tax Act, 1961 to the suppliers who supplied the goods. The said notices are issued for calling relevant documents from the supplier in order to substantiate the genuineness of purchases.
However, in certain situations, the suppliers do not appear before the Assessing Officer due to reasons like the notice remained unserved or notice was returned back or the supplier is untraceable.
Solely on the ground of non-appearance of the suppliers before the Assessing Officer, the purchases are treated as bogus and disallowed.
It is a well-settled principle of law that merely non-appearance of the supplier in absence of any other corroborative evidence cannot be a basis to justify the stand of the Revenue that the transaction of purchase is bogus.
Assessee can contend that while it may be true that the suppliers did not appear before Assessing Officer for whatever reason when notice under section 133(6) were issued upon them, however, if the assessee had filed copies of purchase invoices; extracts of stock ledger showing entry/exit of materials, copies of bank statements to evidence that payments for these purchases were made through normal banking channels, etc. to establish genuineness of the impugned purchases then the allegation of bogus purchases is not sustainable.
In such scenario, nothing prevents the Assessing Officer from making the verification from the bankers of the assessee as to whether the payments made by the assessee through regular banking channels had indeed been credited only to the account of the supplier or not.
So, even if the suppliers do not respond to the notice issued under section 133(6) of the Income-tax Act, then the Assessing Officer can conduct enquiries from the bankers of the assessee.
The Honourable High Court of Bombay in the case of CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. [2015] 372 ITR 619 (Bombay High Court) held that merely because the suppliers have not appeared before the Assessing Officer or the Commissioner of Income-tax (Appeals), one cannot conclude that the purchases were not made by the assessee from the said parties.
Judgments
a. M/s Beauty Tax vs. DCIT [ITA No. 508/JP/2016] (ITAT, Jaipur Bench)
The Tribunal held that merely non-appearance of the supplier in absence of any other corroborate evidence cannot be a basis to justify the stand of the Revenue that the transaction of purchase is bogus.
b. ACIT vs. Bharat Hi-Tech (Cement) Pvt. Ltd. [(2016) 176 TTJ (Kol) 166 (ITAT, Kolkata Bench)]
The Tribunal observed that nothing prevented the Learned AO from making the verification from the bankers of the assessee as to whether the payments made by the assessee through account payee cheaques had indeed been credited only to the account of the supplier or not.
c. Sports Infratech Pvt. Ltd. vs. DCIT [MANU/ID/0548/2018] (ITAT, Delhi Bench)
The Tribunal observed that the AO made the addition only on this basis that the notices issued u/s. 133(6) of the Act to the suppliers were returned by the postal authorities. In our opinion, the said basis was not sufficient to conclude that the assessee had not made the purchases of cement particularly when the consumption of the cement was not doubted and the sales have been accepted.
Conclusion
It is a well-settled principle of law that once the payments are made through regular banking channels against receipts of goods and even there is no defect in the books of account and the purchases as well as sales are recorded in the stock register and even the movement of goods are established by the assessee then the purchases cannot be treated as non-genuine or boguss.