Certification course on Balance Sheet Finalisation

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

Date - 23/03/2013


Recently the Income Tax Department is sending Show Cause Notices to many Assessee’s stating that their Purchases from some suspected parties are Hawala Purchases & why that should not be disallowed?

This action of the Income Tax Department is being initiated from the recent information received by the I.T. Department from the Sales Tax Department of HAWALA PARTIES. The Maharashtra Sales Tax Department has put on their Official website, a list of dealers registered under the MVAT Act, as Suspected or Actual HAWALA dealers. The MVAT Department has disallowed the Input Tax Credit ( ITC ) of the Dealers who have claimed ITC in such purchases from such Hawala Parties due to the peculiar wordings in the Section in the MVAT Act related to the ITC. With this information, the I.T. Department is issuing Show cause Notices to the Assessee’s to disallow their purchases.

In the above Context , there can be 2 situations:

a. Where the Assessee has just purchased bills ( i.e. Hawala ) to reduce its Profits. Or

b. The Assessee had given an order to an Agent for Certain Purchases & the assessee has received the Goods & the Bill from an agent.

There is no point talking about the 1st situation, but the 2nd situation needs some consideration.

In many cases it happens so, that there are some Agents who take orders for some specific Items from the assessee’s. The Agent is responsible for the Quality & timely delivery of such goods & in turn receives Commission for the services. In some cases what has happened is, that the agent already has the goods with him & does not have proper Invoice or bill for the same. So he takes the fake bills from such Hawala Parties & sends his goods alongwith the fake bill to the assessee who has ordered the goods. The Assessee has no knowledge of such facts & is under the belief that he has received the Goods ordered by him alongwith a genuine bill for the same.

Now say an Assessee covered by the 2 nd Situation receives such a Notice from the I.T. Department, then ?


We have some support for this issue in :

1) INCOME TAX OFFICER vs. PERMANAND ITAT, JODHPUR BENCH - (2007) – where it was held that - Income from undisclosed sources—Addition under s. 69—Alleged bogus purchases—AO received information from the Sales-tax Department that the purchases made by the assessee from two parties were bogus—Solely relying on the same, AO made addition under s. 69—Not justified—No addition can be made in the hands of the assessee merely on the basis of observations made by a third party—While making the assessment, it is the satisfaction of the AO which is of prime importance—It cannot be substituted by the satisfaction of someone else—Assessee has discharged the primary onus cast on him by showing the purchases in the books of accounts, payment by way of account payee cheques and producing the vouchers of sale of goods—AO did not make requisite investigations against the said sellers—Moreover, no opportunity was given to the assessee to confront the sellers—Addition rightly deleted.

2) JAGDAMBA TRADING COMPANY vs. INCOME TAX OFFICER ITAT, JODHPUR ‘SMC’ BENCH - (2007) -  where it was held that - ………………. As regards the averment of the seller in his affidavit submitted in sales-tax proceedings that he has not made any sales during the relevant year, same cannot be relied upon, particularly when no opportunity of cross-examination was given to the assessee—Said affidavit having been filed during the sales-tax proceedings of the seller, it hardly has any evidentiary value against the assessee in the income-tax proceedings Therefore, the purchases in question cannot be held to be bogus—Impugned addition deleted.

3) COMMISSIONER OF INCOME TAX vs. LEADERS VALVES (P) LTD.- HIGH COURT OF PUNJAB & HARYANA - (2006) - where it was held that - Reference—Question of fact—Genuineness of purchases—CIT(A) held that there was no basis for treating the purchases made by the assessee from seven scrap dealers as bogus as the consumption stood fully proved and the existence of said parties could not be denied—Tribunal has concurred with the conclusion of the CIT(A) in view of the fact that the trading results of the assessee have been accepted all along and the purchases from these very parties have been accepted by the Department to a large extent in the subsequent assessment year—It has also accepted the contention of the assessee that if the AO’s conclusion is accepted and purchases worth Rs. 1.49 crores are treated as bogus it would be impossible to manufacture the goods shown to have been manufactured by it—This is simply a finding of fact based upon appreciation of material on record—No question of law arises.

4) J.R. SOLVENT INDUSTRIES (P) LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX*- ITAT, CHANDIGARH THIRD MEMBER BENCH - (1999)  - where it was held that - Accounts—Rejection—Alleged bogus purchases—Purchase of 11,600 qtls. of rice bran from one firm RK disbelieved by AO for various reasons—Assessee could not prove the identity of said firm because it had ceased to exist by the time assessment was taken up—However, said material was purchased by assessee from whatever source and went into production of rice bran oil—This stood duly established by day-to-day records in which no discrepancies were pointed out—Sales has been accepted by AO—Hence the production stood accepted and purchases would also stand accepted—If the said purchases are treated as bogus, output would be more than input which is not possible in the rice bran oil extraction industry and yield could not be normal—Therefore, purchases cannot be treated as bogus .Accountant Member rightly directed the AO to recompute addition on the ground that there was an element of inflation in the purchase price—Also justified in confirming addition of Rs. 1,45,600 on the ground that purchases of 1,300 qtls. Of rice bran was not genuine.

5) NIKUNJ EXIMP ENTERPRISES PVT LTD. vs. COMMISSIONER OF INCOME TAX, MUMBAI – BOMBAY HIGH COURT – (2012) - where it was held that – Respondent Assessee having been filed letters of confirmation of suppliers, copies of bank statement showing entries of payment through Account Payee cheques to the suppliers, copies of invoices for purchases and stock statement i.e. stock reconciliation Statement giving complete details with regard to opening stock, purchases, sales and closing stock and no fault with regard to it being found & the books of accounts not being rejected & the sales not being doubted – the purchases cannot be treated as bogus & be disallowed merely because the suppliers have not appeared before the Assessing Officer or the CIT(A) on the basis of suspicion & merely on the basis of 1 of the parties categorically being denying in having business dealings with the assessee company, one cannot conclude that the purchases were not made by the respondent assessee, when there are material on record to prove otherwise.


Therefore it can be said from the above that,

a. Just on the Information from the Sales Tax Department & on the statement of any party & without actually verification & putting on record & without giving an opportunity of cross examination, the Purchases from such suspected parties cannot be disallowed by the I.T. Department, i.e. the crux of the matter is that the third party information or evidence should not be the sole basis for conclusion of a matter.

b. If Consumption can be proved & if it can be proved that such quantity of stocks could not be traded or such quantity of stocks could not be manufactured if the purchases are treated as Bogus , i.e. by submitting stock wise details for trading concern or Consumption of stocks in a manufacturing concern, then notwithstanding the fact that the ITC being disallowed by the MVAT Department, the Purchases from such suspected parties cannot be disallowed by the I.T. Department.


The views expressed in this article are the personal views of the author & the opinion expressed in this article should not construed to legal or expert advice, the author would not be responsible for any decisions taken by the readers on the basis of these views.

Krunal J. Davda

Chartered Accountant



CAclubindia's WhatsApp Groups Link


Published by

(Practising Chartered Accountant)
Category Income Tax   Report

3 Likes   261 Shares   80373 Views


Related Articles


Popular Articles

Follow us Zoho Course 2023

CCI Articles

submit article