By CA Surekha S Ahuja
The Principle of Evidence Over Suspicion
In income-tax assessments, Assessing Officers often question purchases, demanding vendor bank statements or income-tax returns, even when the assessee has produced tax invoices and paid through banking channels. Such demands go beyond the statutory framework.
The law, as repeatedly held in judicial decisions, prioritizes primary evidence under the control of the assessee. Suspicion or conjecture cannot substitute proof. As the Supreme Court held in ITO v. Lakhmani Mewal Das [1960] 37 ITR 37 (SC):
“The conclusions of the Assessing Officer must have a rational connection with the material on record and not be based on mere suspicion, gossip or conjecture.”
This principle forms the cornerstone of purchase verification.
Section 68: Limited Scope
Section 68 applies to unexplained credits. Purchases, being expenditure entries, do not create credit in favor of the assessee. Judicially, it has been held that an expenditure supported by invoices and bank payments cannot be recharacterized as cash credit merely because the supplier’s credentials are questioned.
Interpretation: Section 68 is irrelevant to genuine purchase transactions, and additions on this basis are jurisdictionally flawed.
Section 69C: Explaining the Source of Payment
Section 69C allows disallowance only where the source of expenditure remains unexplained.
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Payment via disclosed bank accounts, recorded in books of account, fully satisfies the provision.
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The Act does not require the assessee to establish the financial compliance of vendors or their banking operations.
Judicial support: Tribunals have consistently held that vendor ITRs or bank statements are not required. Only when AO can independently establish accommodation entries does Section 69C become relevant.
Primary Evidence and Burden of Proof
The assessee’s obligation is confined to producing:
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Tax invoices
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Bank payment proofs (RTGS/NEFT/cheques)
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Books of account and stock registers
Once submitted, the burden shifts to the Assessing Officer to establish non-genuineness. Courts, including in CIT v. Paval D. Pereira, have held that the assessee cannot be required to prove facts beyond their knowledge or control.
Vendor Records Are Beyond Assessee’s Control
Vendor bank statements and ITRs belong to third parties. There is no statutory requirement for the assessee to obtain or produce them. Adverse inferences cannot be drawn for their absence.
Judicial support:
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N.D. Radha Kishan & Co. (ITAT Delhi) – AO cannot disallow purchases for non-production of vendor documents.
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PCIT v. Kanak Impex (Bombay HC) – AO must independently verify suppliers; the assessee is under no obligation to produce vendor records.
Independent Inquiry Is the AO’s Duty
Where doubts arise, the AO must:
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Conduct independent verification, including issuing notices under Section 133(6)
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Collect affirmative evidence of accommodation entries
Suspicion alone cannot sustain additions. As the Supreme Court emphasized in Lakhmani Mewal Das:
“Additions must have a rational nexus with the material on record; suspicion or conjecture is legally insufficient.”
Acceptance of Stock, Sales, and Gross Profit
Courts have repeatedly held that when:
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Sales are accepted
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Stock registers reconcile
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Quantitative tallies match
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Gross profit aligns with historical norms
Full disallowance of purchases is impermissible. At most, estimation of the profit element may be considered.
Judicial support: PCIT v. Akshay Developers (Gujarat HC) – Wholesale rejection of purchases is legally untenable when stock and trading results are accepted.
Positive Evidence Required for Alleging Bogus Purchases
Allegations of bogus purchases must be supported by tangible evidence, such as:
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Identification of entry operators
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Circular fund movement
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Cash backflow or non-existent stock
In the absence of such material, any addition is purely conjectural and unsustainable.
Best Professional Practices for Assessees
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Maintain complete invoices for every purchase.
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Ensure payments via banking channels with clear records.
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Maintain stock registers and quantitative reconciliations.
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Retain GST compliance evidence, including e-way bills and GSTR reconciliation.
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Respond to notices with primary evidence first, and if AO doubts remain, request independent verification of suppliers.
These steps are legally sufficient, reduce dispute risk, and align with judicial standards.
Settled Legal Position
The consolidated legal position from statutory interpretation and judicial precedents is:
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Section 68 does not apply to purchases.
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Section 69C is satisfied once source of payment is explained.
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Invoices + bank payments fully discharge the assessee’s onus.
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Vendor statements/ITRs are not required.
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AO must conduct independent inquiry.
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Acceptance of stock and sales precludes full disallowance.
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Positive evidence is mandatory to sustain any allegation of bogus purchases.
Judicial anchor: ITO v. Lakhmani Mewal Das [1960] 37 ITR 37 (SC)
“The conclusions of the Assessing Officer must have a rational connection with the material on record and not be based on mere suspicion, gossip or conjecture.”
Once invoices, banking payments, and books are produced, any addition based solely on non-furnishing of vendor records is legally unsustainable.
