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by sayum
04 April 2026 12:07 PM
“Reopening of assessment on the basis of unverified third-party information without granting opportunity of cross-examination is a breach of natural justice” — Bombay High Court firmly rejected the Income Tax Department’s attempt to impose a 100% addition on alleged bogus purchases amounting to over ₹2 crore, solely on the basis of a list of so-called “hawala dealers” received from the Sales Tax Department. The Court held that in the absence of a proper inquiry, documentary evidence, and without offering the assessee a chance to cross-examine the listed parties, such additions violate fundamental legal principles.
Dismissing the Revenue’s appeal under Section 260A of the Income Tax Act, 1961, the Court affirmed the findings of the CIT(A) and ITAT, which had both restricted the addition to 15% of the reduced purchase amount, based on the Simit P. Sheth principle of taxing only the profit embedded in suspicious purchases.
“Entire Purchases Cannot Be Treated as Bogus Without Proof That Goods Were Not Received or Transactions Were Fictitious”
The bench comprising Justice G.S. Kulkarni and Justice Aarti Sathe emphasized that the Assessing Officer (AO) had failed to conduct any independent verification beyond the general list of alleged hawala dealers. Importantly, the Court observed that the reopening under Section 147 was mechanically triggered:
“This information on the basis of which the addition of bogus purchases was to be made in the hands of the Respondent-Assessee was never furnished by the Assessing Officer… nor was there anything on record to indicate that the Respondent-Assessee had accepted such material or the investigation.”
The Court pointedly held that even if the information was received from an investigative agency, it could not substitute for the Assessing Officer’s statutory obligation to conduct a fair and reasoned inquiry:
“Merely relying on the information of the Sales Tax Department without granting an opportunity to the Respondent-Assessee to even cross-examine the hawala purchasers… violates the basic facets of law emanating from fairness and breach of principles of natural justice.”
"Where Purchases Are Supported by Bills, Ledger Entries, and Bank Payments, Onus Shifts to Revenue to Disprove Genuineness"
The case concerned the assessment for AY 2009–10, wherein Ramelex Pvt Ltd, a company operating in the power transmission sector, was accused of having made bogus purchases totaling ₹2.05 crore from 12 entities named by the Sales Tax Department, including M/s. Entech Enterprises. The reopening was initiated solely on the basis of a letter from the DG Investigation, Pune, naming these vendors as non-genuine.
However, the assessee filed detailed submissions, including purchase bills, ledger accounts, proof of payments made by account payee cheques, and a VAT auditor’s certificate that corrected a clerical error showing actual purchases from Entech Enterprises were ₹11.63 lakh, not ₹1.16 crore. The assessee also highlighted that its sales were to State entities, and its gross and net profits were consistent with prior years.
The Court took note of the factual findings of both the CIT(A) and the ITAT, which had independently found that:
“The material was actually consumed by the assessee. It would, therefore, imply that the appellant had actually purchased the material in cash from the open market and only bill was taken from the aforesaid party.”
The Court quoted the CIT(A)’s observation in applying the Simit P. Sheth ratio:
“What the appellant had actually earned in hawala transactions could not have exceeded 20% inclusive of various taxes and profits on cash transactions… Relying upon the decision of Hon'ble Gujarat High Court in Simit P. Sheth (356 ITR 451), I direct the Assessing Officer to restrict the addition to 15% of ₹1,00,84,750.”
“Mechanical Application of Hawala Lists Without Specific Inquiry Is Unlawful”: High Court Refuses to Interfere with Concurrent Findings
The Revenue, in its appeal, argued that the purchases were wholly non-genuine and thus the entire value should be disallowed. It cited the Gujarat High Court ruling in N.K. Industries Ltd., where 100% of such purchases had been disallowed and upheld by the Supreme Court. However, the Bombay High Court rejected this analogy, observing:
“The facts in N.K. Industries involved clear findings of fabrication and deception, which are absent here. The Respondent-Assessee, on the other hand, submitted all supporting documents and no defect was pointed out in any invoice.”
Citing its own earlier decision in Principal CIT v. SVD Resins & Plastics Pvt. Ltd., the Court reaffirmed that:
“To wholly reject documents merely on a general information received from the Sales Tax Department would not be a proper approach… Such investigation must be case-specific and not sweeping.”
The Court concluded that the Revenue’s case lacked any element of legal perversity or significant legal controversy:
“All these issues are findings of fact, which do not give rise to any substantial question of law which requires interference… Revenue’s Appeal is accordingly dismissed.”
“If Revenue Fails to Rebut Documentary Evidence, It Cannot Resort to Arbitrary Additions”: No Substantial Question of Law Found Under Section 260A
The High Court’s judgment underlines a consistent judicial principle — when an assessee provides documentary proof of purchases and the Revenue fails to independently investigate or challenge such proof, arbitrary additions based on hearsay or departmental lists are not permissible under law.
As the Court succinctly held:
“A full addition could be made only on the basis of proper proof of bogus purchases being available as the law would recognise… In the absence of such proof, by no stretch of imagination could the entire expenditure be added to the income.”
The decision reflects judicial reluctance to allow mechanical reopening of assessments, especially when such reopenings are founded on external departmental inputs rather than rigorous statutory inquiry.
Date of Decision: 13 October 2025
