Income Tax Assessment for Bogus Transactions and Fictitious Purchases

Income tax assessments may involve examination of purchases, expenses and other transactions recorded in the books of account. In some cases, the Income Tax Department may question whether a purchase or transaction is genuine, particularly where the supporting documents, supplier details, movement of goods or payment trail appear inconsistent.

Such transactions are commonly referred to as alleged bogus purchases or fictitious transactions. Whether a transaction is genuine or otherwise ultimately depends on the facts, documentary evidence and circumstances of each case.

There may be  many reasons for getting notice from Income Tax Department and one such reasons is to get notice for tax assessment for bogus transactions or purchases.

Where a taxpayer receives a notice concerning alleged bogus purchases, it is important to establish the commercial substance of the transaction through invoices, payment records, stock records, transportation documents and other available evidence.

For professional assistance with scrutiny proceedings involving disputed purchases or transactions, refer to our Income Tax Assessment and Litigation Services in India.

What is a Bogus Transaction or Fictitious Purchase?

A purchase may be questioned as bogus or fictitious where the tax authorities believe that the transaction recorded in the books does not represent an actual purchase of goods or services, or where the available evidence does not satisfactorily establish its genuineness.

Questions may arise where, for example:

• the supplier cannot be traced or independently verified;
• invoices are available but evidence of actual delivery is insufficient;
• transportation or movement-of-goods records are missing;
• payments or supplier accounts contain unusual features;
• purchase quantities do not reconcile with stock or subsequent sales;
• information available with the Department is inconsistent with the taxpayer’s records; or
• the supplier is alleged to be engaged in issuing accommodation or non-genuine invoices.

However, the tax treatment depends on the evidence and facts of the particular case. The taxpayer should therefore respond to the specific allegation raised by the Assessing Officer rather than treating every disputed purchase in the same manner.

This is more balanced and much more useful to someone actually facing an assessment.

When Can Purchases Be Questioned During Income Tax Assessment?

• Significant variation between turnover and reported gross-profit margins
• Unusual or long-outstanding trade creditors
• Suppliers who cannot be independently verified
• Large cash purchases or an unclear payment trail
• Purchases that do not reconcile with stock records
• Missing transportation, delivery or e-way bill records, where applicable
• Incomplete or inconsistent purchase invoices
• Differences between books of account, GST records and other information available with the Department
• Supplier information received through investigation or verification proceedings
• Failure to establish actual receipt and subsequent use or sale of the goods

How Should a Taxpayer Respond to an Allegation of Bogus Purchases?

Where purchases are questioned during tax assessment, the taxpayer should review the specific allegation and prepare a transaction-wise documentary trail wherever possible.

Important supporting documents may include:

• Purchase invoices
• Supplier ledger accounts
• Bank statements and payment evidence
• Purchase orders and correspondence
• Goods receipt notes and delivery challans
• Transport receipts, lorry receipts or other movement records
• E-way bills, where applicable
• Stock registers and inventory records
• GST returns and relevant reconciliations
• Evidence of subsequent sale or consumption of the goods
• Supplier confirmations and available registration details

The response should also reconcile the purchases with the books of account, financial statements and tax records and address each factual issue raised in the notice.

Applicable law: For tax years beginning before 1 April 2026, Income Tax assessment and related proceedings continue to be governed by the Income-tax Act, 1961 under the transitional provisions of section 536 of the Income-tax Act, 2025. For tax years beginning on or after 1 April 2026, the Income-tax Act, 2025 applies.

For earlier years, section 69C of the Income-tax Act, 1961 specifically deals with unexplained expenditure where the source of expenditure is not satisfactorily explained, although the precise provision applicable to a disputed or alleged bogus purchase depends on the facts of the case

Last Updated: August 2026