Fake Purchases to Be Disallowed as Business Expense, Not Cash Credits: ITAT
The appeals have been filed by a company named Prem Tube Co. Private Limited (Appellant) against the Income Tax Officer (ITO), Ward-20(1), New Delhi (Respondent), in the Income Tax Appellate Tribunal (ITAT) Delhi Bench ‘SMC’, New Delhi, before Sh. Satbeer Singh Godara (Judicial Member). The appeals are related to the assessment years 2018-19 and 2019-20. The case was heard on October 30, 2025, and the final decision was announced on October 20, 2025.
Both the appeals have been filed challenging CIT(A)/NFAC, Delhi’s DIN & order No. ITBA/NFAC/S/250/2025-26/1079370154(1) & 1079370333(1), both dated August 07, 2025. The assessee stated that the reason behind filing these identical twin appeals is that in both cases, the lower authorities were mistaken in law and treated their varying purchases from M/S GS Industries as unexplained cash credits under Section 68 in the assessments in question, as allowed in the lower appellate discussion.
The first initial argument of the assessee was that it had submitted all the required documents as evidence to the purchases in question. However, the records show that the assessee could not get these purchases verified or reconciled during the assessment or the appeal. Therefore, on this argument, the tribunal disagreed with the assessee and endorsed the Revenue that these purchases were correctly treated as fake.
The second argument was about how much the fake purchases should be disallowed; the lower authorities had disallowed the entire amount for both assessment years. The tribunal notes that the assessee’s sales have not been rejected. This means the assessee must have bought the goods from unrecorded sources and taken accommodation entries from M/s GS Industries.
Considering the above findings and to ensure fairness, the tribunal ruled that only 8% of the purchase amount should be disallowed for both the assessment years. However, this decision should not be taken as a precedent for any other case. The final calculation will be done according to the law.
In the final decision, the tribunal ruled that both the lower authorities were wrong in adding the fake purchases in question claimed as unexplained cash credits. The Income Tax Officer (ITO) should not deny that this is an expenditure claim rather than credit entries in the books of account of the assessee, which makes this a matter to be discussed further. Hence, the tribunal has directed the tax authorities to treat the assessee’s fake purchases in question as a business expenditure disallowance under Section 37 of the Act; after that, the tax should be calculated only under the normal provisions.
With the aforesaid directions, the twin appeals ITA Nos. 6004 & 6005/Del/2025 of the assessee have been partially allowed.
Citation: Prem Tube Co. Pvt. Ltd. Vs ITO (ITAT New Delhi); ITA No. 6004/Del/2025 and ITA No. 6005/Del/2025; 30/10/2025; 2018-19 and 2019-20
