Bogus Purchases Under Income Tax Act

Bogus Purchases Under Income Tax Act: Assessment, Evidence and Case Law

During income tax scrutiny or reassessment proceedings, the Income Tax Department may question the genuineness of purchases, expenses, loans, investments or other transactions recorded by a taxpayer. Such matters are frequently described as cases involving alleged bogus purchases, fictitious transactions or accommodation entries.

An allegation of a bogus transaction can result in substantial additions to taxable income, disputed tax demands and possible penalty proceedings. However, the applicable legal treatment depends on the facts, the evidence available and the statutory provision invoked by the Assessing Officer.

Not every disputed purchase is automatically an unexplained expenditure under section 69C. Similarly, the entire purchase amount cannot automatically be added to income merely because a supplier is under investigation.

This guide explains bogus purchases under the Income Tax Act, the provisions relating to unexplained expenditure and credits, the documents needed to establish genuine transactions, relevant judicial principles and available assessment and appellate remedies.

For professional support with scrutiny, reassessment and disputed additions, visit our Income Tax Assessment and Litigation Services in India.

What Are Bogus Purchases and Fictitious Transactions?

A purchase may be described as bogus or fictitious when the tax authorities allege that the recorded transaction does not represent an actual purchase of goods or services, or that its commercial genuineness has not been satisfactorily established.

For example, a business may record purchases supported by invoices and bank payments, but the Department may question whether the goods were actually delivered or whether the supplier merely issued invoices without supplying goods.

Common concerns include:

• Invoices allegedly issued without supply of goods or services.
• Suppliers that cannot be independently verified.
• Unexplained or inconsistent movement of goods.
• Purchases from parties identified in investigation reports.
• Unexplained credits or financing arrangements.
• Payments allegedly routed through accommodation-entry providers.
• Transactions inconsistent with stock records or accepted business activity.

The taxpayer and the Department may take different positions on the facts. The legal outcome depends on the evidence and the requirements of the applicable statutory provision.

Why Does the Income Tax Department Question Purchases?

Purchases may be examined during scrutiny, reassessment or other authorised proceedings where information suggests that the reported expenditure or transaction requires verification.

Common reasons include:

• Unusual gross-profit or net-profit margins.
• Large purchases from suppliers with limited business records.
• Unreconciled trade creditors.
• Missing delivery challans, transport records or goods receipt notes.
• Mismatch between purchase quantities and stock movement.
• Information received from the Investigation Wing.
• Statements of alleged accommodation-entry operators.
• Differences between financial accounts and GST records.
• Payments that are inconsistent with the stated transaction.
• Failure to provide reasonable supporting evidence during assessment.

A risk indicator may justify verification, but it is not by itself conclusive proof that a purchase is fictitious.

Income Tax Provisions Applicable to Bogus Transactions

The relevant legal provision depends on the nature of the alleged default. A disputed expense, unexplained credit and unrecorded investment are different issues.

Section 37(1): Business Expenditure

Under the Income-tax Act, 1961, section 37(1) governs the deductibility of certain business expenditure, subject to its statutory conditions.

Where the genuineness or business purpose of an expense is disputed, the Department may examine whether the expenditure was actually incurred and is otherwise allowable.

However, purchases of trading goods may also involve the computation of trading results and cost of goods sold. Their treatment should not automatically be equated with every general expense claimed under section 37(1).

Section 68: Unexplained Cash Credits

Section 68 of the Income-tax Act, 1961 applies to specified unexplained credits appearing in the taxpayer’s books of account.

The Department may examine the nature and source of the credit and the explanation furnished by the taxpayer.

Depending on the transaction and applicable statutory requirements, evidence concerning identity, creditworthiness, genuineness and source of funds may be relevant.

Under the Income-tax Act, 2025, the corresponding provision is section 102, Unexplained credits.

Section 69C: Unexplained Expenditure

Section 69C of the Income-tax Act, 1961 addresses expenditure incurred by a taxpayer where no satisfactory explanation is provided regarding its source.

Where the statutory conditions are satisfied, the unexplained expenditure may be deemed to be income. The provision also restricts deduction of expenditure treated as income under that section.

The corresponding provision under the Income-tax Act, 2025 is section 105, Unexplained expenditure.

It is important to determine whether the actual allegation concerns the genuineness of a purchase, an unexplained source of expenditure or some other statutory issue.

Other Unexplained-Income Provisions

Sections 69, 69A, 69B and 69D of the Income-tax Act, 1961 deal with specific categories of unexplained investments, money or valuable articles, excess investments and transactions involving hundis.

These provisions should be applied according to their statutory requirements rather than treating every disputed transaction as falling under one common section.

Income-tax Act, 1961 vs Income-tax Act, 2025

The Income-tax Act, 2025 came into force on 1 April 2026. Earlier tax periods remain subject to the applicable transitional and savings provisions, including section 536 of the new Act.

These are broad statutory correspondences and do not imply that every procedural condition is identical under both Acts.

For the official statutory wording, refer to the Income Tax Department’s section 68, section 69C, section 102 of the Income-tax Act, 2025 and section 105 of the Income-tax Act, 2025.

Can the Entire Amount of Bogus Purchases Be Added to Income?

There is no universal rule requiring either full disallowance or taxation of a fixed percentage of alleged bogus purchases.

The treatment depends on the underlying facts and the legal provision invoked.

Where Purchases and Delivery Are Established

Where invoices, delivery evidence, stock records, payments and subsequent sales support actual purchases, those records are relevant in establishing the transaction’s genuineness.

However, the evidence must be considered as a whole. Bank payments or GST invoices alone do not conclusively establish that goods were actually supplied.

Where Sales Are Accepted but Purchase Suppliers Are Disputed

In some judicial decisions, where the corresponding sales and business activity were accepted but the identified suppliers remained doubtful, the addition was restricted to an estimated profit element or amount supported by the facts.

This approach is not automatic. The correct treatment depends on the records and applicable legal principles.

Where Transactions Are Found to Be Entirely Non-Genuine

Where evidence establishes that no genuine purchase occurred, or where the relevant statutory conditions for deemed income are satisfied, a different treatment may be justified.

Therefore, taxpayers should avoid assuming that every alleged bogus purchase will result in only a small percentage addition.

Judicial Decisions on Bogus Purchases and Section 69C

Indian appellate authorities have considered numerous disputes involving alleged accommodation entries, non-genuine purchases and unexplained expenditure.

Anuj Sharma v. ITO — ITAT Delhi, September 2026

In this case concerning Assessment Year 2020-21, the Tribunal considered an addition involving disputed purchases of approximately Rs. 60.14 lakh.

On the particular facts, the Tribunal restricted the addition to Rs. 6 lakh rather than sustaining the entire amount. The decision expressly indicated that the adopted percentage was not to be treated as a precedent.

The case illustrates why accepted sales, available evidence and unresolved supplier concerns must be evaluated together.

Vayam Technologies Ltd. v. DCIT — ITAT Delhi, 2026

This case involved purchases recorded in the accounts and payments through disclosed banking channels.

The Tribunal examined whether the conditions for an addition under section 69C were established. The decision demonstrates the importance of distinguishing a dispute over supplier genuineness from unexplained expenditure.

Harish Narang v. PCIT — ITAT Delhi, December 2025

The Tribunal considered the treatment of alleged non-genuine transactions, the applicable unexplained-expenditure provisions and the correctness of the assessment in revision proceedings.

The case highlights the importance of identifying the correct statutory provision and the potential consequences of treating transactions under an incorrect provision.

Ramayna Ispat Pvt. Ltd. v. DCIT — ITAT Delhi, 2026

The Tribunal considered substantial disputed purchases and the possible application of an estimated profit element.

The decision illustrates that the nature of the business, accepted sales, evidence and specific findings influence the amount of an addition.

Important: Tribunal decisions are fact-specific. They should not be interpreted as establishing a universal profit percentage, guaranteed tax relief or an automatic bar against additions under section 69C.

What Documents Are Required to Prove Genuine Purchases?

A taxpayer facing allegations concerning purchases should prepare a transaction-wise evidence file.

No single document necessarily proves every element of a disputed purchase. A consistent commercial and accounting trail is generally more useful than a collection of unrelated records.

Practical Example: Reconciling Alleged Bogus Purchases

Assume a trading company records purchases of Rs. 30 lakh from a supplier during the relevant financial year.

The Income Tax Department questions the purchases because the supplier’s business operations could not be independently verified.

The company may prepare the following illustrative reconciliation:

The taxpayer should explain the transaction flow from order placement and delivery to accounting, payment and sale or consumption of the goods.

The outstanding amount should reconcile with the supplier ledger, and the movement of goods should be supported by available records.

The Assessing Officer may still examine inconsistencies or evidence questioning the transaction’s genuineness.

This example is hypothetical and does not relate to any actual client, proceeding or case result.

Role of GST Records and E-Way Bills in Income Tax Assessment

GST records can provide useful corroborative evidence in disputes concerning purchases.

Relevant records may include purchase invoices, GSTR-2A or GSTR-2B information, GST returns, e-way bills and relevant reconciliations.

However, the Income-tax Act and GST law contain separate statutory requirements.

Consequently:

• An invoice appearing in GSTR-2B does not automatically establish the genuineness of a purchase for income-tax purposes.
• A missing GST entry does not, by itself, conclusively establish that the commercial transaction never occurred.
• Transportation and inventory records may be relevant where physical movement of goods is disputed.
• GST registration of a supplier is useful information but not conclusive proof of every transaction.

Each discrepancy should be examined according to the applicable facts and legal requirements.

Who Has the Burden of Proving a Transaction?

The initial burden of substantiating a deduction or explaining a relevant credit generally depends on the specific statutory provision and facts.

For a claimed business expense, the taxpayer should maintain evidence demonstrating that the transaction occurred and meets the conditions for deduction.

For a credit falling within section 68, the taxpayer must address the statutory requirements concerning its nature and source.

For an addition under section 69C, the statutory focus is on the source of expenditure and the explanation provided.

Where the Department relies on investigation material, statements or third-party information, the relevance and reliability of that material should be examined, together with the taxpayer’s procedural rights.

There is no single evidentiary rule that applies identically to every purchase, loan, share-capital receipt or other transaction.

How to Respond to an Income Tax Notice for Bogus Purchases

A response should address the actual allegations, statutory provisions and evidence sought by the Department.

1. Read the complete notice: Identify the transaction, supplier, period, amount and legal provision mentioned.
2. Verify the accounting records: Reconcile the purchase ledger, invoices and financial statements.
3. Establish the commercial trail: Collect supporting documents for supply, delivery, stock and payment.
4. Explain discrepancies: Address differences in supplier details, GST information, quantities or transport records.
5. Review third-party material: Examine the information relied upon by the Department and request relevant supporting material where legally appropriate.
6. Prepare written submissions: Respond issue-wise with documentary references and applicable legal arguments.
7. File within time: Submit the response through the prescribed facility and preserve acknowledgements.

For general electronic response instructions, see How to Respond to an Income Tax Notice in India.

For the wider scrutiny procedure, refer to Income Tax Scrutiny Assessment in India.

Can Income Tax Assessments Be Reopened for Alleged Bogus Transactions?

Information relating to alleged accommodation entries or non-genuine purchases may become relevant in reassessment proceedings where statutory conditions are satisfied.

For earlier assessment years governed by the Income-tax Act, 1961, the relevant framework may involve sections 147, 148, 148A and related provisions.

For tax years governed by the Income-tax Act, 2025, the reassessment framework is contained in sections 279 to 286.

The taxpayer should examine the information relied upon, applicable limitation, statutory approvals, procedural requirements and the underlying allegation.

A reassessment notice should not be assumed valid or invalid merely because an investigation report exists. The actual statutory requirements must be assessed.

Tax Rate, Section 115BBE and Penalty Exposure

Where the Department makes an addition, the tax consequences depend on the nature of the addition and the governing law.

Section 115BBE of the Income-tax Act, 1961 prescribes a special tax framework for income covered by specified unexplained-income provisions.

Where applicable, the resulting tax liability can be materially higher than the liability arising from an ordinary trading-profit adjustment.

However, an ordinary business-expense disallowance, an estimated trading-profit addition and income deemed under section 69C should not automatically be treated as identical for tax-rate purposes.

Potential penalty consequences should also be separately examined under the relevant provisions, including those relating to specified unexplained income, under-reporting or misreporting, as applicable.

Important: A tax addition does not necessarily mean that every proposed penalty must automatically be imposed. The relevant statutory conditions and procedure must be examined independently.

What if the Assessing Officer Makes an Addition?

Where the Assessing Officer makes an adverse addition, the taxpayer should examine the assessment order carefully.

Important matters include:

• The statutory provision under which the addition was made.
• The transaction amount and computation.
• Whether the relevant evidence was considered.
• Whether the taxpayer received the prescribed opportunity to respond.
• Whether the addition concerns expenditure, credits or trading profit.
• The treatment of related sales and stock records.
• The resulting tax demand and any separate penalty proceedings.

Depending on the circumstances, the taxpayer may consider rectification, appeal, stay of demand or other available remedies.

For the first appellate procedure, see Income Tax Appeal Against Assessment Order.

For recovery relief, see Stay of Income Tax Demand After Assessment Order.

Common Mistakes in Bogus Purchase Assessment Cases

• Relying only on invoices: Consider delivery, stock and commercial evidence.
• Assuming bank payment proves everything: Banking records are important but must be considered with the wider facts.
• Ignoring inconsistencies: Reconcile ledgers, GST records and physical quantities.
• Using a standard profit percentage: Judicial decisions are fact-specific.
• Confusing section 69C with every business disallowance: Identify the actual statutory conditions.
• Failing to preserve notices and acknowledgements: Maintain complete assessment records.
• Making unsupported admissions: Verify the evidence and legal position before responding.
• Ignoring penalty exposure: Examine the legal consequences separately.
• Missing appeal deadlines: Review limitation promptly after receiving an adverse order.

Frequently Asked Questions About Bogus Purchases

What is a bogus purchase under the Income Tax Act?

It generally refers to a purchase alleged to be non-genuine or not supported by sufficient evidence of actual supply, commercial substance or transaction authenticity. The legal treatment depends on the circumstances.

Can the entire purchase amount be disallowed?

Depending on the facts and applicable legal provision, an addition may involve the entire amount or another amount supported by the evidence. There is no universal rule requiring full disallowance or a fixed percentage addition.

Does section 69C apply to every bogus purchase?

No. Section 69C specifically deals with unexplained expenditure. Its statutory conditions must be satisfied. A dispute over purchase genuineness may raise different legal issues.

What is the corresponding section of 69C under the Income-tax Act, 2025?

Section 105 of the Income-tax Act, 2025 deals with unexplained expenditure.

What replaced section 68 under the Income-tax Act, 2025?

Section 102 of the Income-tax Act, 2025 deals with unexplained credits.

Are GST invoices sufficient to prove genuine purchases?

GST invoices may provide important supporting evidence, but transaction genuineness may also require examination of delivery records, banking trail, stock movement and other relevant information.

Can purchases be genuine if the supplier cannot be traced?

The inability to trace a supplier may raise an evidentiary issue, but the transaction must be examined in light of all relevant facts. Other independent evidence may be relevant.

Can a taxpayer appeal against a bogus purchase addition?

Where an appealable assessment order has been passed, the taxpayer may seek relief through the applicable appellate process, subject to statutory requirements and deadlines.

Can a Chartered Accountant assist with bogus purchase assessment cases?

Yes. Subject to the applicable authorisation requirements, a Chartered Accountant may assist with reconciliations, documentary submissions, assessment representation, appeals and related tax disputes.

How EzyBiz India Can Assist With Bogus Purchase Assessments

EzyBiz India Consulting LLP provides professional assistance to businesses, companies, individuals and other taxpayers facing income-tax scrutiny, reassessment, disputed additions and appellate proceedings.

Our services may include:

• Review of notices alleging bogus purchases or fictitious transactions.
• Analysis of applicable statutory provisions.
• Supplier and transaction-wise reconciliations.
• Review of invoices, GST records, stock and payment trails.
• Preparation of detailed assessment submissions.
• Examination of investigation material and procedural issues.
• Assistance with faceless scrutiny and reassessment proceedings.
• Preparation of Grounds of Appeal and written submissions.
• Representation in applicable income-tax appellate proceedings.
• Assistance with stay of disputed tax demand.

Related Income Tax Services and Resources

• Income Tax Assessment and Litigation Services in India
• Income Tax Scrutiny Assessment
• How to Respond to an Income Tax Notice
• Income Tax Appeal Against Assessment Order
• Stay of Income Tax Demand
• Faceless Assessment Procedure
• Faceless Income Tax Appeals
• Direct Tax Advisory Services