Where the sales are accepted and the stock records tally, the argument on bogus purchases is almost never about the whole amount.
The information has come from another wing of the Department. A list of suppliers, a statement recorded from someone your client has never met, and the conclusion that purchases of a stated figure are accommodation entries. The notice asks your client to produce the suppliers.
He cannot. Some of the firms have closed, two have changed hands, and one address turns out to be a residential flat. What he does have is a goods receipt note for every lot, a transporter’s bill, an entry in the stock register, and a sale of the same goods to a customer who is still trading and whose payment came through the bank.
The officer disallows the entire purchase figure. Your client’s accounts now show a gross margin no business in his line has ever earned, because the cost has been removed while the sale has been left standing. That contradiction is the heart of the appeal, and it is a better argument than insisting the suppliers were genuine.
What the provision actually requires
These additions are made in two different ways and the difference matters. The officer may disallow the purchase as expenditure not established to have been incurred, in which case the attack is on the deduction. Or he may treat the payment as unexplained expenditure under section 69C of the Act of 1961 (section 105 of the Act of 2025), in which case the amount is deemed to be income and, by the express terms of that provision, is also not allowed as a deduction under any head.
Pending appeals run on section 69C and on the ordinary provisions governing allowable business expenditure. Current-year assessments run on section 105 of the Act of 2025. Identify the route at the outset, because the unexplained expenditure route carries the double effect of being taxed as income while being denied as a cost.
Where the officer has invoked the unexplained expenditure provision, note what it requires. The Department must first establish that the expenditure was in fact incurred. Only then does the burden pass to the assessee to explain its source. An order that disbelieves the purchase and simultaneously treats the payment for it as unexplained expenditure is arguing both that the transaction did not happen and that money was spent on it.
Unproved is not the same as bogus
This distinction decides more of these appeals than any other. A purchase is bogus if no goods were received and the entry is a fabrication. A purchase is unproved if the goods were plainly received but the identity of the person who supplied them cannot be established.
The two call for entirely different outcomes. If no goods came in, the entire debit falls away and the sale, if any, must be explained some other way. If goods came in but the named supplier did not supply them, the probability is that the goods were bought from someone outside the books, usually in the grey market and usually at a different price. The cost was real. Only the identity of the counterparty is false.
The settled position in that second situation is that the whole purchase cannot be added, because doing so taxes a gross receipt rather than income. Benches have consistently refused to sustain the whole addition where the sales are accepted and the quantitative records reconcile. What survives is the benefit the assessee is taken to have derived from dealing off the books.
Your first task on the file is therefore to establish which case you are in, and to say so plainly. A submission that concedes the supplier cannot be produced but demonstrates the goods were received and sold is a strong submission. One that asserts the suppliers were genuine when the record shows otherwise invites the authority to disbelieve everything else you say.
The movement of goods is the real evidence
Suppliers cannot be produced in these cases. That is the premise, not the problem to be solved. What can be produced is the trail of the goods themselves, and that trail does not depend on anyone’s cooperation.
- The quantitative stock record showing receipt of the specific lot, its consumption or sale, and the closing balance reconciling across the year.
- Goods receipt notes, weighment slips, gate entries, inward registers and quality inspection records carrying dates and quantities.
- Transport documents, lorry receipts, freight bills, octroi or toll receipts and e-way bill records for the inward movement.
- The corresponding sale invoices, with the link from the purchased lot to the sold lot shown item by item where the nature of the goods permits.
- Bank statements showing payment to the supplier through banking channels, and the absence of any cash returning to the assessee.
- The indirect tax record for the same transactions, including returns filed and credit claimed and whether it was ever disturbed.
- Confirmation of the sales from customers who are traceable, and the quantitative tally between units purchased and units sold.
- Comparative gross and net margins for the three preceding years and for the year in question, to show what the officer’s figure implies.
The margin comparison is most often left out, and it is the piece that persuades. When you show that the business has historically earned a margin within a narrow band, and that the disallowance produces a margin several times that band, the addition answers itself.
The rulings on this point sit in the Counselvise Direct Tax library — search bogus purchases gross profit rate and unproved purchases addition to pull the current position for your bench.
How the quantum argument is framed
Once you accept that the goods came in, the question becomes what the appropriate addition is. The accepted approach is to tax the advantage the assessee obtained by buying outside the regular channel, rather than the purchase price itself.
That advantage is ordinarily measured as a rate applied to the value of the impugned purchases. The rate is not fixed anywhere, and no provision prescribes it. It is arrived at on the facts, and the three inputs that drive it are the assessee’s own historical margin in the same line of business, the margin earned by comparable concerns in the trade, and the extent to which the assessee has already declared a margin on those very transactions.
That last input is routinely missed. If your client has already shown a margin on the sales corresponding to these purchases, the only amount that can properly be added is the difference between the rate the authority considers appropriate and the margin already declared. Adding the full rate over and above the declared margin taxes part of the same income twice, and that point should be made with the working attached.
Frame it as an express alternative ground. The primary ground is that the purchases are genuine, or at least that the goods were received, so no addition arises. The alternative is that if any addition is to be sustained, it must be restricted to a reasonable rate on the impugned purchases after giving credit for the margin already offered. Without that second ground the appellate authority has no room to reduce, and these appeals are very often reduction cases rather than deletion cases.
What moves the figure
Certain features of a file consistently pull the sustained amount down. Accepted sales, a reconciling stock register, payment through banking channels, an unbroken transport trail, a trade with thin and verifiable margins, and an officer who did not formally disturb the books before rejecting the purchases.
Other features pull it up. Cash payments, a stock record that does not tally or does not exist, sales that were themselves estimated, payments that trace back to the assessee or his associates, and an unretracted statement admitting the arrangement.
Where the Department relies on a third party’s statement, insist on the procedure. A statement recorded behind the assessee’s back cannot be used against him unless a copy is supplied and cross-examination is offered. That ground is available independently of the merits, and it sometimes disposes of the addition without the quantum question being reached at all.
What usually decides it
The first determinant is whether the sales were accepted. If they were, the Department is in the position of taxing a receipt while denying its cost, and that contradiction is the strongest single argument on the file. If the sales were also disturbed, the matter becomes an estimation case and the argument shifts to the reasonableness of the estimate.
The second is the stock record. A quantitative reconciliation that holds across the year is close to decisive on whether the goods existed. Its absence is close to decisive the other way.
The third is whether an alternative plea on quantum was taken, and taken with a working. Appeals pleaded only on genuineness are decided only on genuineness, and when genuineness fails the entire addition stands.
The fourth is the route the officer chose. Where the addition is made under the unexplained expenditure provision rather than as a simple disallowance, test whether the Department discharged its own threshold burden of establishing that the expenditure was incurred, and whether the ingredients for the special rate are present. Both are frequently assumed rather than found.
Where to look next
Search the Direct Tax library for bogus purchases gross profit rate and read the results for the reasoning that produced the rate rather than for the rate itself. The useful orders explain what the bench looked at, usually the assessee’s own history and the trade norm, and that reasoning is what you reproduce with your client’s figures in it.
Then search unproved purchases addition to separate the cases where goods were accepted as received from those where they were not, because the two lines lead to different outcomes and get cited interchangeably. Filter to your own Tribunal bench and to your client’s trade, since margins differ sharply between lines of business. Briefcase will summarise what each order treated as the basis for the rate and whether credit was given for the margin already declared.
Frequently asked questions
Can the entire purchase be disallowed where the supplier cannot be produced?
Where the goods were demonstrably received and the corresponding sales are accepted, benches have consistently declined to sustain the whole amount, because that taxes a gross receipt rather than income. The inability to produce a supplier goes to the identity of the counterparty, not to the existence of the goods.
What is the difference between bogus purchases and unproved purchases?
A bogus purchase means no goods were received and the entry is fabricated. An unproved purchase means the goods came in but the named supplier cannot be established as their source. The second ordinarily attracts an addition measured by a rate on the purchase value rather than the whole figure.
Which section applies to bogus purchases in the Income-tax Act, 2025?
Where the addition is framed as unexplained expenditure, section 105 of the Act of 2025 replaces section 69C of the Act of 1961. Pending appeals continue under section 69C. Where the officer simply disallows the deduction, the ordinary provisions on allowable business expenditure apply.
Should credit be given for the gross profit already declared on those sales?
Yes, and the point should be pleaded with a working. Where a margin has already been offered to tax on the sales corresponding to the impugned purchases, adding the full rate on top of it taxes part of the same income twice, and the addition should be confined to the difference.
Can a third party’s statement be used without cross-examination?
Not fairly. Where the Department relies on a statement recorded behind the assessee’s back, the settled position is that a copy must be supplied and an opportunity to cross-examine offered. Ask for both in writing at the assessment stage so the refusal is on the record.
Before you settle the alternative ground, search bogus purchases gross profit rate on the Counselvise Direct Tax library and ask Briefcase how the benches in your jurisdiction arrived at the rate and whether they allowed credit for the declared margin.
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