Purchases cannot be treated as bogus when corresponding sales are accepted and the books remain unrejected.

For assessment year 2021–22, the Assessing Officer added ₹4,38,61,650 as bogus purchases and ₹93,88,980 as contract and commission expenses under Section 37 of the Income Tax Act, 1961.

The Assessing Officer relied, among other things, on enquiries indicating that certain suppliers could not be located or denied the transactions, and concluded that the assessee had not substantiated the expenses.

The Commissioner of Income Tax (Appeals) deleted the additions, noting that the sales were not doubted, the assessee had provided supporting documents, and the Assessing Officer had not established that the payments were bogus.

The Income Tax Appellate Tribunal dismissed the Revenue’s appeal, relying on the documentary evidence and the accepted sales and books of account. The Revenue appealed to the High Court, proposing seven substantial questions of law.

1. Whether the Tribunal’s deletion of the ₹4,38,61,650 addition for alleged bogus purchases was perverse or raised a substantial question of law, given the Assessing Officer’s findings concerning the suppliers and the evidence of purchases

2. Whether the Tribunal’s deletion of the ₹93,88,930 addition for contract and commission expenses raised a substantial question of law, given the Revenue’s contention that the expenses were not shown to be incurred wholly and exclusively for business

3. Whether the Tribunal’s findings were otherwise affected by illegality or perversity, including in light of the Revenue’s reliance on N.K. Proteins Ltd. v. DCIT

Section 37 of the Income Tax Act, 1961, governs the deductibility of business expenditure, including the requirement that expenditure be incurred for business purposes.

The High Court applied the principle stated in Principal Commissioner of Income Tax–18, Kolkata v. Pravesh Kumar Jaiswal: where the corresponding sales are accepted, a purchase cannot ordinarily be treated as bogus on that basis alone, since the completed sale presupposes a source of goods; unless the sale is also found to be bogus, the purchase may instead be from a bogus entity.

The Tribunal, as the final fact-finding authority, determines factual issues; its conclusions do not warrant interference in an appeal raising substantial questions of law absent legal error or perversity.

The Tribunal had upheld the appellate authority’s findings that the assessee produced records including cash-book entries, bank-payment evidence, ledgers, e-way bills, supplier details and confirmations, and that the sales to the Gorkha Hill Council were not disputed and the books were not rejected.

Applying Pravesh Kumar Jaiswal, the High Court held that the accepted sales undermined the Revenue’s challenge to the purchases as bogus.

As to the contract and commission expenses, the Tribunal had found that the assessee furnished recipient details and supporting records, that the recipients reported the payments in their returns, and that the Revenue had not established that the payments were bogus or unreasonable. The High Court found no perversity or illegality in the Tribunal’s factual conclusions.

The Revenue’s appeal was dismissed, as was its stay application; there was no order as to costs.