Bogus Purchase Notice? Your Tax Bill Could Spike 98%

Tax officers sometimes reject business purchase expenses as 'bogus', massively inflating your taxable profit. A landmark tribunal ruling now limits this disallowance to just 2% when your sales are not disputed — protecting small business owners from unfair demands.

Here's what happened: Income Tax Appellate Tribunal ruled that when a business's sales are accepted as genuine, bogus purchase disallowance should be capped at 2% of the purchase value.. Assessing Officers had previously disallowed 100% of purchases flagged as suspicious, even without independently verifying facts with suppliers.. This ruling protects traders and small business owners whose goods clearly moved (sales proved) but whose suppliers appear on 'hawala' or suspicious-party lists..

What you should do: Keep proof of sales: maintain GST invoices, bank receipts, and delivery records so your sales cannot be disputed during scrutiny.. Respond to any bogus purchase notice citing this ITAT precedent — ask your CA to reference rulings where sales are accepted and disallowance is capped at 2%.. Audit your supplier list annually: avoid cash-only or unregistered vendors whose GST numbers could land you on a department watch list..

If you receive a scrutiny notice for bogus purchases, the department must first disprove your sales. If sales stand, demand the 2% cap — full disallowance is now legally challengeable.