Alleged Bogus Purchases: What the Addition Comes To

An addition on alleged bogus purchases is commonly met with a denial that the purchases were bogus at all. That is frequently the weakest position available, and it is seldom the one that decides the appeal.

Of the judgments addressing the subject, the largest single outcome is partly allowed. The addition usually survives. What changes is its size, and the practitioner’s work lies there.

Where the sales are not disputed

The governing principle was stated in Sumermal K Sheth v. ITO, ITA No. 6774/Mum/2026, decided 22 September 2026:

where the purchases are treated as non-genuine but the corresponding sales have not been disputed, the entire amount of such purchases cannot be treated as income of the assessee and the addition has to be restricted to the profit element embedded in such purchases.

The reasoning is arithmetical rather than indulgent. If the sales are accepted, the goods existed; the assessee cannot have sold what he never had. What may be doubted is the identity of the supplier and the price recorded, and the gain from that is the margin, not the turnover.

The line of authority is CIT v. Simit P. Sheth, (2013) 356 ITR 451 (Guj), and CIT v. Bholanath Polyfab (P) Ltd, (2013) 355 ITR 290 (Guj). It is not uncontested. N.K. Proteins Ltd v. DCIT, (2017) 250 Taxman 22 (SC), where the special leave petition was dismissed, sustains the whole addition on its facts, and has recently been followed by the Bombay High Court in PCIT-5 v. Kanak Impex (India) Ltd. Which line applies turns on whether the sales survive scrutiny.

What fixes the rate

There is no standard percentage, and treating 12.5 per cent as one is an error in both directions. The rate is derived from the assessee’s own trading history.

ITO v. Tufail Ahmed Bakhshullah Siddiqui, ITA No. 2277/Mum/2026, decided 25 September 2026, shows the method. The Tribunal set out the gross profit the assessee had himself declared across the preceding years — 7.23 per cent, 6.01 per cent and 4.44 per cent, an average of approximately 5.58 per cent — held that the Commissioner (Appeals) estimate of 12 per cent was "on the higher side", and restricted the addition to 6 per cent of the disputed purchases of ₹35,41,340, being ₹2,12,480.

The rates sustained across recent judgments, and what tends to attract each:

The practical consequence is that the first document to prepare is not a defence of the supplier. It is the assessee’s own gross profit rate for the surrounding years. In Bharat Trading Corporation, ITA No. 2581/Mum/2026, a diamond trader went further and relied upon the Government’s Task Group for Diamond Sector report to establish that trade gross profit in that business is of the order of 2 per cent, and argued that the addition should follow the industry rate.

Where the addition does not survive at all

Two grounds have removed it entirely, and both are procedural rather than commercial.

The books were not rejected. In B R D Manufacturing Co. v. ITO, ITA No. 4/Kol/2026, decided 16 July 2026, the Tribunal asked "how the purchases can be disallowed in its entirety when the books are not rejected", and deleted the addition made under section 69C. An officer who accepts the books and simultaneously disallows what is recorded in them is taking two positions at once. The same reasoning appears in ITA No. 494/RPR/2026, decided by ITAT Raipur on 25 September 2026, where the books were not rejected and the sales were accepted, and a disallowance of 100 per cent was held "excessive and unjustified".

Cross-examination was refused. In Red Ray Laboratories v. ITO, ITA No. 49/Nag/2026, decided 11 September 2026, the assessee was given no opportunity to cross-examine the third party whose statement and seized records were relied upon. The Tribunal held this a serious violation of the principles of natural justice and deleted the addition of ₹36,29,200 outright. The demand is made in writing, and early, or it is not available later.

The papers that move the rate

In Paresh Vanitlal Shah v. ACIT, ITA No. 4696/Mum/2025, the Commissioner (Appeals) had *enhanced* the addition to 100 per cent. What was before the Tribunal was a stock register, quantitative details of stock, ledger accounts of the parties, bills, delivery challans, evidence of payment through banking channels, and audited books carrying no adverse remark from the auditor.

That list is the answer to the question the officer is really asking:

• A quantitative tally — goods in, goods out, closing stock. The single most persuasive document, because it demonstrates the goods existed whoever supplied them.
• Payment through banking channels, with the ledger account.
• Delivery evidence — challans, transport, weighbridge or octroi records.
• The gross profit comparison across years, which sets the rate if one is to be applied.
• Audited books without adverse remark, which makes rejection of the books harder to justify.

Penalty does not follow an estimate

A point frequently missed. In S Gupta & Company v. ITO, ITA No. 1103/Mum/2026, decided 18 August 2026, the quantum addition had been restricted by the Tribunal to 12.5 per cent of the alleged bogus purchases on an estimated basis. The penalty founded upon it was deleted: a penalty cannot rest upon an addition which is itself an estimate.

Where an addition has been reduced to a percentage, the penalty proceeding should be taken up separately on that footing rather than treated as settled by the quantum.

The ground that may end it before any of this

In ITO v. Mukesh Kumar Kanaiyalal Shah, ITA No. 5929/Mum/2025, decided 30 September 2026, the bogus purchase addition was never reached. The sanction under section 151 was held invalid, the reassessment was quashed, and the Tribunal recorded that it saw no reason to adjudicate the Revenue’s grounds.

Where the addition arrives through a reopening, the approval and the notice are worth examining before the purchases are. A jurisdictional defect ends the proceeding; an evidentiary one reduces it. The approval is considered in Sanction under Section 151, and the notice in Six Days Is Not Seven.

In short

1. Do not lead with the genuineness of the supplier. It is the hardest thing to prove and the least likely to decide the appeal.
2. Establish that the sales are not in dispute. That single fact moves the case from the whole purchase to the profit element.
3. Produce the gross profit history for the surrounding years before the officer settles on a figure.
4. Produce the quantitative tally. It is the document that shows the goods existed.
5. Demand cross-examination in writing of anyone whose statement is relied upon, and do it early.
6. Check whether the books were rejected. If they were not, say so.
7. Treat the penalty as a separate proceeding where the addition was an estimate.
8. Check the reopening first. It may dispose of the matter without any of the above.

This note is general information drawn from reported decisions and is not advice upon any particular matter. The lines of authority described above subsist alongside one another, and the rate applied in any case depends upon its own record.