Bogus Purchase Penalty: What It Costs Your Business

Even if the tax department limits your bogus purchase addition to just 12.5% profit, ITAT Mumbai says the penalty still stands. Business owners and traders: hiding purchases is not worth the risk.

Here's what happened: ITAT Mumbai upheld a penalty on bogus purchases even though the tax addition was restricted to just 12.5% of the purchase value as notional profit.. The tribunal ruled that restricting the quantum of addition does not mean the underlying transaction was genuine or that concealment did not occur.. Penalty under Section 271(1)(c) of the Income Tax Act — which ranges from 100% to 300% of tax on concealed income — was confirmed as valid in this scenario..

What you should do: Audit your business expense records now — ensure every purchase has a valid GST invoice, confirmed supplier, and matching bank payment trail.. Avoid cash-based purchase entries with unregistered or shell vendors, especially in sectors like textiles, construction, and trading where scrutiny is high.. If you have already received a notice for bogus purchases, engage a tax consultant immediately — do not assume a reduced addition means you are penalty-free..

Filing a revised return voluntarily before the tax department issues a notice can significantly reduce your exposure — penalties under Section 271(1)(c) generally do not apply to voluntarily disclosed income.

For readers weighing their credit and loan options, our personal loan guide and CIBIL score resources put this update in context.