Income Tax Tribunal: No Addition for ‘Bogus’ Purchases Unless Books Rejected

In a significant ruling, the Income Tax Appellate Tribunal (ITAT) has stated that an Assessing Officer (AO) cannot add expenses related to alleged ‘bogus’ purchases if the AO has not rejected the company’s books of accounts or disputed the declared sales figures. This decision provides crucial clarity for businesses facing scrutiny over their purchase transactions.

The Core Issue: Selective Acceptance of Sales

The central point of contention revolved around whether the AO could selectively accept the declared sales while simultaneously disallowing related purchase expenses. The assessee argued that such a practice is legally unsustainable and violates the principles of natural justice. This means fairness dictates that either both sales and purchases are accepted or both are rejected.

ITAT’s Stand: A Legally Unsustainable Position

The ITAT concurred with the assessee’s argument, emphasizing that if the books of accounts are not rejected outright, it implies acceptance of the declared sales. In such a scenario, selectively disallowing related purchases without providing adequate justification is deemed legally unsound. The Tribunal highlighted that the AO must demonstrate compelling reasons for rejecting the books or sales before making additions based on alleged bogus purchases.

This landmark ruling offers significant relief to taxpayers facing similar assessments. It underscores the importance of maintaining accurate records and challenging arbitrary additions made by the assessing authorities.

• The AO must present sufficient evidence if books of accounts are to be rejected.
• Simply alleging ‘bogus’ purchases is not enough; justification is required.
• Declared sales cannot be accepted while related purchases are arbitrarily disallowed.