Case Law Details
ITO Vs Rakesh Pruthaviraj Jain (ITAT Mumbai)
In this case, the ITAT Mumbai upheld the CIT(A)’s decision to restrict addition on alleged bogus purchases (₹2.46 crore) to 12.5%, rejecting the Assessing Officer’s higher estimation of 25%.
The Tribunal noted that the AO had relied solely on Sales Tax Department information and non-service of notices to suppliers, without conducting any independent enquiry or verification. At the same time, the assessee had furnished complete documentary evidence, including purchase bills, bank payments, VAT records, and stock details, which were not found to be false.
Importantly, the ITAT observed that:
- Sales were accepted and not disputed by the department
- Books were not rejected and quantitative details were intact
- No evidence showed that purchases were entirely bogus
Applying settled law, the Tribunal reiterated that where purchases are doubtful but sales are accepted, only the profit element embedded in such purchases can be taxed, not the entire amount.
The CIT(A)’s estimation of 12.5% was held to be reasonable and balanced, reflecting possible savings from grey market purchases.
Final Outcome:
- Addition restricted to 12.5% of alleged bogus purchases
- Revenue’s appeal dismissed
This ruling reinforces a consistent principle: Bogus purchase cases = tax only the profit element, not gross purchases
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been preferred by the Revenue against the order dated 17.03.2025 passed by the National Faceless Appeal Centre, Delhi, arising out of the reassessment framed under section 147 of the Income Tax Act, 1961 for the assessment year 2009–10. The Revenue, through the grounds raised before us, has essentially assailed the action of the learned Commissioner (Appeals) in restricting the addition on account of alleged bogus purchases to 12.5% as against 25% estimated by the Assessing Officer, thereby granting partial relief to the assessee.
2. The brief facts of the case are that, the assessee is engaged in the business of trading in ferrous and non-ferrous metals and had filed his return of income declaring total income of Rs. 1,93,580/-, which was processed under section 143(1). Subsequently, on the basis of information received from the Investigation Wing, indicating that certain parties from whom purchases were claimed were allegedly engaged in providing accommodation entries, the case of the assessee was reopened under section 148. During the course of reassessment proceedings, the Assessing Officer treated the purchases aggregating to Rs. 2,46,92,230/- from such parties as non-genuine and proceeded to make an ad hoc addition of 25% thereof, primarily on the premise that the said parties were listed as hawala dealers by the Sales Tax Department and that notices issued under section 133(6) could not be served upon them. The Assessing Officer, however, did not undertake any independent enquiry or field verification to substantiate the allegations or to disprove the evidences furnished by the assessee.
3. It is borne out from the record that the assessee had placed before the Assessing Officer a host of documentary evidences in support of the purchases, including copies of purchase bills, ledger accounts, bank statements evidencing payments made through account payee cheques, VAT challans, sales tax returns, stock records and other relevant documents. Despite the availability of these primary evidences, the Assessing Officer chose to rely solely upon the third-party information received from the Sales Tax Department and the factum of non-service of notices under section 133(6), without making any further effort to verify the genuineness of the transactions or to examine the corresponding sales declared by the assessee. The addition, thus, came to be made on an estimated basis, without rejecting the books of account or bringing any cogent material on record to demonstrate that the purchases were entirely fictitious.
4. The learned Commissioner (Appeals), after examining the entire factual matrix in detail and taking into consideration the submissions and evidences placed by the assessee, came to the conclusion that while certain deficiencies in the evidences and non-production of parties could not be ignored, at the same time, the Assessing Officer had also failed to discharge the burden cast upon him to prove that the purchases were wholly bogus or that no goods had actually been received by the assessee. It was further noted that the sales declared by the assessee have not been doubted and there was no material brought on record to suggest inflation of purchases beyond the possible suppression of profit. In this background, the learned Commissioner (Appeals), applying the well-settled principle that in such cases only the profit element embedded in the alleged non-genuine purchases can be brought to tax, restricted the addition to 12.5% of the purchases, which according to him would meet the ends of justice.
5. We have heard the learned Departmental Representative and perused the entire material available on record. None appeared on behalf of the assessee; however, having regard to the fact that sufficient material is available on record and the issue lies in a narrow compass, we proceed to decide the matter ex parte qua the assessee on the basis of the record.
6. Upon a careful consideration of the rival positions and the orders of the authorities below, what emerges is that the Assessing Officer has proceeded to make the addition primarily on the basis of information received from the Sales Tax Department, without undertaking any independent enquiry to verify the correctness of such information. The evidences furnished by the assessee, including documentary proof of purchases and payments through banking channels, have not been found to be false or fabricated. Further, the corresponding sales have been accepted, and no discrepancy has been pointed out in the quantitative details. In such a scenario, it would be wholly unrealistic and contrary to settled principles of taxation to disallow the entire purchases or to sustain an excessive estimation of profit, as it would result in taxation of income which is not real.
7. It is now well-settled through a catena of judicial pronouncements that where the purchases are doubted but the sales are accepted, the addition should be restricted only to the profit element embedded in such purchases. The rationale behind this principle is that even if the assessee has procured goods from the grey market or from unverified parties, the possibility of saving on account of taxes and other incidental costs would result in some extra profit, which alone can be brought to tax. The learned Commissioner (Appeals), in our considered opinion, has correctly appreciated this legal position and has adopted a reasonable and balanced approach in estimating such profit at 12.5%.
8. The estimation made by the learned Commissioner (Appeals) is neither arbitrary nor excessive; rather, it is based on a judicious appreciation of facts and circumstances of the case. The Revenue has not brought any material on record to demonstrate that a higher rate of profit should have been applied or that the estimation made by the learned Commissioner (Appeals) suffers from any perversity. In absence of any such material or infirmity, we see no reason to interfere with the findings of the learned Commissioner (Appeals).
9. Accordingly, we uphold the order of the learned Commissioner (Appeals) and dismiss the grounds raised by the Revenue.
10. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on 20th April, 2026.
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