Facts of the Case

The assessee, engaged in garment manufacturing and export, declared purchases amounting to ₹6.77 crores for raw materials during Assessment Year 2010–11. These purchases were claimed to have been used for export production and associated drawback benefits were also claimed.

During scrutiny, the Assessing Officer (AO) found that the suppliers from whom purchases were allegedly made were non-existent or untraceable. Notices issued to them were returned unserved, and the assessee failed to produce these parties or establish their identity.

Consequently, the AO treated the purchases as bogus and added the entire amount under Section 68. The CIT(A) upheld the AO’s findings, concluding that the purchases were unverifiable and not genuine.

 Issues Involved

  1. Whether the ITAT erred in setting aside the addition made under Section 68 for bogus purchases.
  2. Whether, after rejection of books under Section 145(3), the ITAT was justified in applying Gross Profit (GP) rate instead of sustaining addition for bogus purchases.

Petitioner’s Arguments (Revenue)

  • The assessee failed to prove the identity, genuineness, and creditworthiness of suppliers.
  • Purchases were rightly treated as bogus and added under Section 68.
  • Once the purchases were found to be non-genuine, ITAT could not substitute the addition with GP estimation.
  • ITAT’s approach of applying GP rate was legally unsustainable.

Respondent’s Arguments (Assessee)

  • The assessee had provided details such as names and identities of suppliers.
  • Transactions were conducted through banking channels.
  • Even if discrepancies existed, entire purchases could not be disallowed.
  • ITAT correctly applied GP rate considering past profitability trends.

 Court Findings / Order

  • The High Court held that the assessee failed to discharge the burden of proof required under Section 68.
  • Suppliers were not traceable, and genuineness of transactions was not established.
  • Mere banking transactions do not prove authenticity of purchases.
  • The AO and CIT(A) correctly treated the purchases as bogus.
  • ITAT erred in applying GP rate after accepting that purchases were non-genuine.

 Important Clarifications by Court

  • Burden lies on the assessee to prove identity, genuineness, and creditworthiness under Section 68.
  • Rejection of books under Section 145(3) does not justify ignoring bogus purchases.
  • GP estimation cannot replace addition when transactions are proven to be fictitious.
  • Payments through banking channels alone are insufficient to prove genuineness.

Sections Involved

  • Section 68 of the Income Tax Act, 1961 (Unexplained Cash Credits)
  • Section 145(3) of the Income Tax Act, 1961 (Rejection of Books of Accounts)
  • Section 144 of the Income Tax Act, 1961 (Best Judgment Assessment)

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:688-DB/PRJ01022019ITA662018.pdf

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