Bogus Purchases – Only 0.2% Profit Addition Sustainable, Consistency Prevails: ITAT Mumbai

ITO Vs Sundha Steels Pvt. Ltd. (ITAT Mumbai)

ITAT Mumbai: Bogus Purchases – Only 0.2% Profit Addition Sustainable, Consistency Prevails

In this case, the ITAT Mumbai upheld the CIT(A)’s action of restricting addition on alleged bogus purchases (₹27.5 crore) to only 0.2% of the purchase value, rejecting the Revenue’s attempt to apply a higher GP rate of 1.23%.

The Tribunal noted that:

• In the assessee’s own earlier and subsequent years, identical issue had been decided by ITAT by restricting addition to 0.2% (profit element)
• Such decisions had attained finality, as Revenue’s appeals were dismissed by the High Court
• Books were not rejected and quantitative details were not disputed, hence full disallowance or higher GP estimation was unjustified

Applying the rule of consistency and judicial discipline, the Tribunal held that the same rate must be followed in the current year as well.

The Tribunal also acknowledged that the case falls under CBDT Circular No. 5/2024 exception (organized tax evasion cases), making the appeal maintainable despite monetary limits-but still ruled against Revenue on merits.

Final Outcome:

• Addition restricted to 0.2% of bogus purchases (₹5.5 lakh approx.)
• Revenue’s appeal dismissed on merits
• Principle reaffirmed: only profit element-not entire purchase-can be taxed

This ruling strengthens a key position: in bogus purchase cases, estimation must be reasonable and consistent-arbitrary GP additions won’t survive.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the Revenue is directed against order dated 16.12.2025 passed by the Ld. Additional/Joint Commissioner of Income-tax (Appeals) – 2, Ahmadabad [in short ‘the Ld. CIT(A)’] for assessment year 2009-10, raising following grounds:

1. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) is justified in reducing the quantum of profit attributable to total bogus purchases of Rs.27,50,34,816/- from 1.23 percent to 0.2 percent of the purchases which works out to Rs.5,50,070/-.

2. Whether on facts and circumstances of the case the Ld C1T(A) erred in granting relief to the assessee on the profit element embedded in bogus purchases from 1.23 percent to 0.2 percent of Rs.28,32,858/- without considering the fact that the addition is made for accommodation entry is covered by exception mentioned in para 3.1(h) of Circular No. 5/2024 dated 15/03/2024.

3. The appellant prays that the order of the C1T(A) on the grounds be set aside and that of the Assessing Officer be restored

2. Briefly stated the facts of the case are that the assessee company was engaged in the business of trading in ferrous and non-ferrous metals. For the year under consideration, the assessee filed return of income on 30.09.2009 declaring total income at Rs.11,99,682/-. The regular scrutiny assessment u/s 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) was completed on 29.12.2011 wherein total income was assessed at Rs.11,99,682/-i.e. the returned income was accepted. Subsequently, in view of the information from the Investigation Wing, the Assessing Officer recorded reasons to believe that the income escaped assessment and issued notice u/s 148 of the Act on 02.03.2015. In response, the assessee filed return of income on 30.09.2009 and the reassessment u/s 147 of the Act was completed on 21.03.2016, wherein total income was assessed at Rs.45,82,610/-. The Assessing Officer found the assessee to be involved in making bogus purchase from various entities. The Assessing Officer based on the gross profit rate of last four years computed the average gross profit rate at 1.23% and after applying on the total purchase amounting to Rs.21,50,34,816/-, computed total addition towards bogus purchases at Rs.33,82,928/-.

3. On further appeal, the Ld. CIT(A) observed that the issue was squarely covered by the decisions of the Co-ordinate Bench of this Tribunal in the assessee’s own case for AY 2008-09 and AY 2011­12. In those proceedings, it was held that where the quantitative details of sales and purchases are not disputed and the books of accounts are not rejected, the addition should be restricted to the “profit element” embedded in such purchases, quantified at 0.2%. Following the principle of consistency and noting that the Revenue’s challenge to those orders was dismissed by the Hon’ble High Court of Bombay, the Ld. CIT(A) restricted the addition to R5,50,070/ – (0.2% of the disputed purchases). The relevant finding of the Ld. CIT(A) is reproduced as under:

“7.3 During the appeal proceeding, the appellant has submitted that the issue under appeal has been decided in the favour of appellant by Hon’ble jurisdictional ITAT, Mumbai Bench for the AY 2011-12 and A.Y. 2008-09 where in Hon’ble Tribunal has held that the addition on account of alleged bogus purchases should be restricted to the extent of 0.2% of total such purchases. The appellant has further submitted that Revenue went in appeal against the ITAT order before the High Court of Bombay, where the Hon’ble Court dismissed the appeal filed by the revenue. Due to similarity in grounds of appeal involved in the present appeal, the appellant has requested for disposing off the instant pending appeal.

7.4 From the perusal of the assessment order, it is seen that assessment proceeding for the year under dispute was re-opened on the basis of receipt of certain information from the Investigation Wing. As per the information shared in this case, the assessee was found to be involved in making bogus purchases from various entities. In A.Y. 2009-10, based on the GP ratio of last 4 years, average has been worked out at 1.23% and after applying the same to total purchases amounting to Rs. 27,50,34,816/-, total addition of Rs. 33,82,928/ – was made to the total income against which the instant proceeding is pending.

7.5 During the appellate proceedings, the appellant has submitted the order of ADDL/JCIT (A)-2 SILIGURI dated 20.01.2025 allowing the appeal in favour of the appellant. The relevant as under: ­portion of said order is reproduced as ur COME TAY DEPARTMENT

“In the instant case, the appellant company company has has appealed a against the order passed by the Ld. Assessing officer u/ s 143(3) r.w.s 147 dated 30.03.2016. In the present case, the Ld. Assessing Officer has added Rs. 3,53,418/- on the basis of bogus purchase i.e. 1.31% of the purchase value of Rs. 2,69,78,490/-During the appeal proceeding, the appellant has submitted the order of ITAT, Mumbai Bench for the AY 2011-12 in which Hon’ble Tribunal has held that the addition on account of alleged bogus purchases should be restricted to the extent of 0.2% of total such purchases. Revenue went in appeal against the ITAT order before the High Court of Bombay, where the Hon’ble Court dismissed the appeal filed by the revenue. Due to similarity in grounds of appeal involved in both the years, the appellant has requested for disposing off the instant pending appeal. From the perusal of the assessment order, it is ascertained that assessment proceeding for the year under dispute was re-opened on the basis of receipt of certain information from the Investigation Wing. As per the information shared in this case, the assessee was found to be involved in making bogus purchases from Hawala dealers. Total such purchases amounted to Rs. 2,69,78,490/- in the name of Navratna Impex and New Steel India. AO came to notice that while examining similar Page 5 of 7 AAICS1816M- SHREE SUNDHA STEELS PRIVATE LIMITED A.Y. 2008- 09 ITBA/ APL/ S/ 250/ 2024­25/ 1072336848(1) information about bogus purchases from Hawala dealers, scrutiny assessment was finalized for AY 2011-12 and 2012-13 after making addition in accordance with the GP Rate declared for the two years. In similar vein, GP Rate of the year under dispute Le.1.31% was applied to the quantum of net bogus purchases resulting in total addition of Rs. 3,53,418/- against which the instant proceeding is pending.

As discussed above, when addition was made at par with GP Rate applied for the year for AY 2011-12, appeal was filed before Ld. crr (Appeal)-10, Mumbai. First appellate order was passed on 25.07.2016 vide which income of the assessee was further enhanced and the quantum of addition was increased to 12.5% of such bogus purchases. The basis for the same was found in the case of Simit P Seth, 2013 (356 ITR 451) pronounced by Hon’ble High Court of Gujarat. The appellant challenged the order u/s 250 and filed further appeal before the Hon’ble ITAT, Mumbai. In its order dated 31.07.2018 and subsequent corrigendum issued on 06.08.2018, Hon’ble ITAT distinguished the facts and circumstances of the present case from those of the case of Simit P Seth and observed that AO has not rejected the books of account. In addition, GP corresponding to genuine purchases is quite less than the GP attributable to non-genuine purchases. Hon’ble ITAT also held that quantitative statement of purchases and sales was not under dispute and therefore, it directed to quantify taxable profit @ 0.2% of total bogus purchases. The appellant has affirmed that the order of the ITAT has attained finality because Hon’ble Bombay High Court has rejected the appeal filed in this regard by the department. Stating thus, the appellant has sought relief on account of the addition made during scrutiny assessment u/s 143(3)/ 147 of the IT Act.

Briefly stated, sole ingredient of addition made in the case of the appellant remains its transaction with Hawala dealers for making bogus purchases. Since, jurisdiction ITAT has already given its verdict in the matter holding that total profit embedded in such bogus purchases may be computed @ 0.2% of such purchases and the order has attained finality, applying the ratio of the same judgment would serve the interest of justice in the instant case because facts and circumstances of both the years are almost identical. Even otherwise, if the quantum of GP of 1.31% which was applied for making addition during scrutiny assessment is left alone, it would give rise to double calculation of GP on the quantum of bogus purchases. It is therefore found quite rational to follow the spirit of the judgment given by Hon’ble ITAT in the appellant’s own case and hold that the quantum of profit attributable to total bogus purchases of Rs. 2,69,78,490/- may be calculated @ 0.2% of the same. Since, 0.2% of Rs. 2,69,78,490/ – works out at Rs. 53,957/-only, the appellant is held eligible for getting relief of Rs. 2,99,461/ -. Accordingly, the appeal stands partly allowed and the addition stands confirmed to the extent of Rs. 53,957/ – only.”

7.6 The appellant has further submitted that against the said order of AddI/Jt.CIT(Appeal)- 2, Siliguri dated 20.01.2025, revenue filed further appeal before ITAT Mumbai and the appeal of the revenue was dismissed by Hon’ble ITAT Mumbai vide order dated 21.04.2025 in ITA No.1756/ Mum/ 2024 (Assessment year: 2008­09). Since, the issue has been decided in favour of appellant, respectfully following the decision of jurisdiction ITAT, Mumbai, it is held that total profit embedded in such bogus purchases may be computed @ 0.2% of such purchases. Since, the issue has attained finality; applying the ratio of the same judgment would serve the interest of justice in the instant case because facts and circumstances of both the years are almost identical. Even otherwise, if the quantum of GP of 1.31% which was applied for making addition during scrutiny assessment is left alone, it would give rise to double calculation of GP on the quantum of bogus purchases. It is therefore found quite rational to follow the spirit of the judgment given by Hon’ble ITAT in the appellant’s own case and hold that the quantum of profit attributable to total bogus purchases of Rs. 27,50,34,816/- may be calculated @ 0.2% of the same. Since, 0.2% of Rs. 27,50,34,816/- works out at Rs. 5,50,070/- only, the appellant is held eligible for getting relief of Rs. 28,32,858/ -. Accordingly, the appeal stands partly allowed and the addition stands confirmed to the extent of Rs. 5,50,070/- only. Therefore, ground no. 1 & 3 are partly allowed.”

4. Before us, the Ld. counsel for the assessee also filed a copy of the decision of the Co-ordinate Bench in the case of the assessee for assessment year 2008-09 in ITA No. 1756/Mum/2024.

5. We have heard rival submissions of the parties and perused the relevant materials on record. The Revenue has primarily assailed the Ld. CIT(A)’s decision to reduce the profit attribution on alleged bogus purchases from 1.23% to 0.2%.

5.1 The Revenue contends that this appeal is maintainable notwithstanding the monetary limits prescribed by the CBDT, as it falls under the exception provided in Para 3.1(h) of Circular No. 5/2024 dated 15/03/2024. This clause pertains to cases involving organized tax evasion activities based on external intelligence. 5.2 Considering the nature of the information received from the Investigation Wing regarding accommodation entries, we find merit in the Revenue’s contention that the matter falls within the specified exception. Accordingly, the appeal is admitted for adjudication on merits. The ground No. 2 of the appeal of the Revenue is accordingly allowed.

5.2 Turning to the quantum of addition, the core controversy lies in the estimation of the profit rate. We observe that the Ld. CIT(A) has relied upon the settled position in the assessee’s own case for preceding and succeeding years. In the present case, the Co­ordinate Bench has consistently held that a profit rate of 0.2% is reasonable to neutralize any tax benefit derived from such transactions. This finding has attained finality following the dismissal of the Revenue’s appeal by the Hon’ble High Court. The Rule of Consistency demands that where facts and circumstances remain identical across assessment years, the Revenue must adopt a uniform approach unless there is a material change in the legal or factual landscape. Finding no such departure in the present year, we hold that the Ld. CIT(A) was justified in following the judicial discipline of the Jurisdictional Tribunal. We find no infirmity or perversity in the impugned order and accordingly, we uphold the same. The ground No. 1 of appeal of the Revenue is accordingly dismissed.

6. In the result, the appeal filed by the Revenue is partly allowed as to maintainability but dismissed on the substantive merits of the addition.

Order pronounced in the open Court on 20/04/2026.