Bogus Purchases and Accommodation Entries: Burden of Proof and Commission-Rate Additions

When is the whole invoice taxed, and when only the profit hidden inside it? Consider a small trader in dyes and chemicals. His books show a year of steady buying and selling: he purchased goods worth a crore, sold finished stock worth a little more, and paid every supplier by cheque. Two years later a notice arrives. The Sales Tax Department, it says, has published a list of ‘hawala’ dealers who issue invoices without delivering any goods, and three of the trader’s suppliers are on that list. The Assessing Officer proposes to treat the entire crore of purchases from those parties as bogus – invoices bought to inflate expenses – and to add the whole amount to his income. The trader protests that the goods plainly existed, because he could not have sold what he never had. Who is right, and how much is actually taxable, are the questions this article examines. The scenario is deliberately ordinary, because disputes over bogus purchases under income-tax law and accommodation entries – the two labels the Department uses for transactions that do not reflect a genuine supply – are among the recurring issues in Indian income-tax litigation. The law on bogus purchases and accommodation entries is not a single rule but a contest between two lines of authority, and the outcome usually turns on one deceptively simple fact: whether the sales are believed. What follows sets out the framework neutrally, giving both the Revenue’s and the taxpayer’s case its due.

The Vocabulary: Bogus Purchases, Hawala Bills and Accommodation Entries

A bogus purchase is a claimed expense supported by an invoice that the Department says does not represent a genuine acquisition of goods from the named seller. Two very different situations hide under that one label, and separating them is the whole game. In the first, no goods moved at all: the invoice is a pure paper entry used to suppress profit or launder cash. In the second, the goods were real and were used or sold, but they were bought from someone in the grey market and ‘billed’ through a complying party – often called a hawala or entry operator – so that the purchase would appear on the books with a tax invoice. The first is a fictitious expense; the second is a real expense wearing a false name.

An accommodation entry is the mirror image seen from the operator’s side. An accommodation-entry provider is a person whose business is to issue invoices, or to route cheques and cash, so that a beneficiary can show a purchase, a loan, or share capital that never truly occurred. The provider keeps a small commission and returns the balance. Recognising which side of a transaction one is looking at matters, because – as we shall see – the taxable figure for a beneficiary (the profit concealed in a purchase) is computed quite differently from the taxable figure for the operator (the commission earned on turnover he merely lent his name to).

Where the Burden of Proof Lies

Two provisions do most of the work in bogus purchase cases. Section 37(1) of the Income-tax Act, 1961 allows a deduction only for expenditure ‘laid out or expended wholly and exclusively for the purposes of the business’; a purchase that never happened fails that test at the threshold. Section 69C, inserted with effect from assessment year 1976-77 and fitted with a proviso by the Finance (No. 2) Act, 1998, deems ‘unexplained expenditure’ – expenditure whose source the assessee cannot satisfactorily explain – to be income, and the proviso bars it from being allowed as a deduction under any head. The characterisation an Assessing Officer chooses (disallowed business expense versus deemed unexplained expenditure under s.69C) carries large downstream consequences, discussed later.

On the burden of proof, the position is settled in outline and contested at the margins. The Department carries the initial burden of showing that something is amiss – typically discharged by material from the Investigation Wing or the Sales Tax authorities identifying the supplier as a known accommodation-entry provider. Once such prima facie material exists, the burden of proof shifts to the assessee to establish the genuineness of the purchase: not merely to produce an invoice and a bank statement, but to demonstrate the movement and consumption of goods – delivery challans, transport records, a stock and quantitative tally, and consistency with the sales actually recorded. The Supreme Court’s insistence in Sumati Dayal v. CIT [1995] 214 ITR 801 (SC) that the taxing authority is entitled to look through the ‘apparent’ to the ‘real’, judging a transaction against the ordinary course of human probabilities, is the doctrinal anchor for placing this weight on the taxpayer. The parallel three-fold onus articulated for cash credits in PCIT v. NRA Iron & Steel (P.) Ltd. [2019] 412 ITR 161 (SC) – identity, creditworthiness and genuineness – is frequently invoked by analogy, though it strictly governs section 68 rather than purchases.

The taxpayer’s answer, equally settled, is that suspicion is not proof. A banking trail, confirmed ledgers and a delivered-and-sold stock position cannot be brushed aside merely because the counter-party has since disappeared or been blacklisted; the assessee cannot be made to guarantee the tax conduct of his supplier. Where the books are rejected under section 145(3), the resulting assessment is a best-judgment exercise, and the Supreme Court reminded in Kachwala Gems v. JCIT [2006] 288 ITR 10 (SC) that although some guess-work is inevitable in a best-judgment assessment, the estimate must be honest and not arbitrary or vindictive. That single sentence is the pivot on which most of these appeals turn: the fight is rarely about whether an addition is permissible, but about how large an honest estimate may be.

The Heart of the Dispute: The Whole Invoice or Only the Profit?

Two lines of authority sit in apparent tension, and understanding that they are reconciled by their facts – not genuinely at war – is the key to the whole subject.

100% Addition on Bogus Purchases: When Can the Entire Amount Be Taxed?

Where the transaction is found to be wholly fictitious – no goods, no delivery, an invoice manufactured purely to reduce profit – the courts have sustained addition of the entire amount. In N.K. Industries Ltd. v. Dy. CIT [2016] 72 taxmann.com 289 (Guj), the Gujarat High Court rejected the Tribunal’s approach of taxing only a percentage and restored the addition of the whole of the bogus purchases, holding that where the purchases are entirely non-genuine the full amount represents the assessee’s own money reintroduced through sham bills. The Supreme Court declined to interfere, dismissing the special leave petition in the connected N.K. Proteins Ltd. v. DCIT [2017] 250 Taxman 22 (SC). More recently, in PCIT v. Kanak Impex (India) Ltd. [2025] 474 ITR 175 (Bom) – where the assessee had failed altogether to discharge the burden of proving genuineness or to explain the source of the outgo – the Bombay High Court restored a 100% addition under section 69C, and the Supreme Court dismissed the ensuing special leave petition in 2025. The Revenue’s argument in these cases is straightforward: if the purchase is a fiction, there is no ‘cost’ to net off, and taxing only a notional margin would reward the fabrication.

The Profit-Element Line

Where, by contrast, the sales are accepted and the quantitative tally holds – so the goods must have come from somewhere even if not from the billed party – the courts have confined the addition to the profit embedded in the tainted purchases. The Gujarat High Court in CIT v. Bholanath Poly Fab (P.) Ltd. [2013] 355 ITR 290 (Guj) reasoned that the purchases themselves were not bogus but were made from parties other than those shown in the books; since the entire stock was sold, only the profit element could be added. In CIT v. Simit P. Sheth [2013] 356 ITR 451 (Guj) the same court upheld an estimate pegged at 12.5% of the disputed purchases. The Bombay High Court crystallised the principle in PCIT v. Mohommad Haji Adam & Co. (ITA No. 1004 of 2016, decided 11 February 2019), holding that in a trader’s case purchases cannot be rejected without disturbing the corresponding sales, and that the addition must be restricted to bringing the gross-profit rate on the disputed purchases up to the rate earned on the genuine ones. The taxpayer’s case here is one of arithmetic and logic: to tax the whole purchase while accepting the whole of the sale is to tax a sum the assessee never retained.

The reconciling principle is the acceptance of sales. If the sales and the stock reconciliation are believed, the goods existed, and only the inflation in cost – the profit siphoned through the grey-market route – is real income; Bholanath, Simit Sheth and Mohommad Haji Adam apply. If the transaction is a pure paper fabrication with no demonstrable movement of goods, or the assessee simply fails to engage with the enquiry, there is nothing to net off and N.K. Industries and Kanak Impex apply. The percentage chosen within the profit-element approach – whether 5%, 12.5%, or a figure fixed to the trade’s normal margin – is a question of fact for the Tribunal, and, following Kachwala Gems, will stand so long as it is a reasoned, honest estimate rather than an arbitrary one.

Commission on Accommodation Entries: Taxing the Entry Operator

The commission-rate approach answers a different question and must not be confused with the profit-element debate above. It applies when the assessee under scrutiny is found to be not the beneficiary of a bogus purchase but the accommodation-entry provider himself – the person issuing the invoices. For such a person the crores that pass through his bank account are not his income at all; they belong to the beneficiaries and are returned to them. What he actually earns, and what is therefore taxable in his hands, is the thin commission on accommodation entries he charges for lending his name and his banking channel – a figure the Department and the Tribunals commonly estimate in a narrow band, often between half a per cent and two per cent of the accommodation turnover, calibrated to the evidence and the trade practice proved on the record.

The distinction is easy to state and easy to get wrong. To tax an entry operator on the whole of the turnover routed through him would be to tax money that is admittedly not his; to tax a genuine beneficiary on only a commission would be to let a fabricated deduction pass almost untouched. The correct figure therefore depends on correctly identifying the role each party played – a determination that is, once again, factual, and that the appellate authorities decide on the material gathered in search, survey or investigation.

Why the Characterisation Matters: Section 69C and Section 115BBE

Whether an addition is made as a disallowed business expense or as unexplained expenditure under section 69C is not a matter of mere labelling; since assessment year 2013-14 it can change the tax dramatically. Section 115BBE, introduced by the Finance Act, 2012, subjects income of the kind described in sections 68 to 69D to a flat rate with no deduction and no set-off. Originally that rate was 30%. The Taxation Laws (Second Amendment) Act, 2016 raised it, with effect from assessment year 2017-18, to 60% plus a 25% surcharge and cess – an effective burden of roughly 77% – and section 271AAC adds a further penalty of 10% of the tax so computed. The table below sets out the position by period.

The practical significance is considerable. If a disputed purchase is treated as a suppressed-profit item taxable as business income, it is taxed at ordinary rates and a taxpayer with brought-forward losses may find little or nothing left to pay. If the very same sum is characterised as unexplained expenditure under section 69C for a recent year, section 115BBE strips away every deduction and set-off and taxes it at a punitive flat rate. Much of the modern litigation over bogus purchases is, in truth, a fight over this characterisation, and the taxpayer’s contention that a genuinely-delivered but mis-billed purchase cannot be ‘unexplained expenditure’ at all is a recurring and substantial one.

Conclusion: Bogus Purchases and Accommodation Entries under Income Tax Law

The tax treatment of bogus purchases and accommodation entries ultimately depends on the nature of the transaction, the role played by the assessee and the evidence establishing whether the underlying movement of goods or funds was genuine. For the trader in our opening illustration, the law offers no automatic answer but a clear method. If he can produce delivery evidence and a stock reconciliation showing that the goods on those three invoices were in fact received and sold, the weight of authority – Bholanath, Simit Sheth and Mohommad Haji Adam – confines any addition to the profit concealed in the grey-market sourcing, not the whole crore. If he cannot, and the record shows only invoices and cheques with no proof that anything ever moved, N.K. Industries and Kanak Impex leave him exposed to the full amount, potentially a 100% addition on bogus purchases under the severe section 69C / 115BBE regime. Both outcomes flow from the same principle in Kachwala Gems and Sumati Dayal: the assessment must reflect the real substance of the transaction, tested honestly against the evidence and the probabilities, and neither side is served by a figure plucked from the air.

Frequently Asked Questions

Sources & Citations

• Income-tax Act, 1961 – sections 37(1), 69C (proviso inserted by the Finance (No. 2) Act, 1998), 115BBE (inserted by the Finance Act, 2012; rate amended by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. AY 2017-18), 145(3) and 271AAC.
• Sumati Dayal v. CIT, [1995] 214 ITR 801 (SC) – apparent versus real; test of human probabilities.
• Kachwala Gems v. JCIT, [2006] 288 ITR 10 (SC) – best-judgment estimation must be honest, not arbitrary.
• PCIT v. NRA Iron & Steel (P.) Ltd., [2019] 412 ITR 161 (SC) – three-fold onus (identity, creditworthiness, genuineness) under s.68, cited by analogy.
• N.K. Industries Ltd. v. Dy. CIT, [2016] 72 taxmann.com 289 (Gujarat) – full addition of wholly bogus purchases.
• N.K. Proteins Ltd. v. DCIT, [2017] 250 Taxman 22 (SC) – special leave petition dismissed, affirming the full-addition approach on those facts.
• PCIT v. Kanak Impex (India) Ltd., [2025] 474 ITR 175 / 172 taxmann.com 283 (Bombay); SLP dismissed by the Supreme Court (2025) – 100% addition under s.69C on failure to discharge burden.
• CIT v. Bholanath Poly Fab (P.) Ltd., [2013] 355 ITR 290 (Gujarat) – only the profit element taxable where goods were sold.
• CIT v. Simit P. Sheth, [2013] 356 ITR 451 (Gujarat) – addition upheld at 12.5% of disputed purchases.
• PCIT v. Mohommad Haji Adam & Co., Bombay High Court, ITA No. 1004 of 2016, decided 11 February 2019 – addition restricted to the gross-profit differential where sales are accepted.

Related Reading

• Unexplained Cash Credits under Section 68: Identity, Genuineness and Creditworthiness
• On-Money in Real Estate: Whole Receipt or Only the Profit Element?
• Peak Credit and Telescoping: When Arithmetic Limits an Addition under Sections 68 and 69