Case Law Details
Sheetal Parag Dusane Vs ITO (ITAT Mumbai)
The Mumbai ITAT held that where the assessee’s sales, manufacturing activity and audited books were substantially accepted, the entire alleged bogus purchases could not be added u/s 69C merely because the suppliers were identified as hawala dealers by the Sales Tax Department. The Tribunal restricted the addition to 8% of the disputed purchases, holding that only the profit element embedded in such transactions could be taxed.
The reassessment was initiated based on information from the Maharashtra Sales Tax Department alleging that the assessee had obtained accommodation purchase bills aggregating to ₹10.73 lakh from two alleged hawala dealers. The AO treated the entire purchases as unexplained expenditure u/s 69C on the ground that the assessee failed to furnish transport receipts, delivery challans, confirmations and evidence of movement of goods.
Before the Tribunal, the legal heir of the deceased assessee filed an affidavit explaining that the assessee had expired in 2020 and the widow pursuing the litigation was neither connected with the engineering business nor able to trace decade-old records relating to AY 2011-12. It was also pointed out that the assessee had maintained audited books, disclosed corresponding sales, and made payments through banking channels.
The ITAT observed that the Revenue had accepted the sales turnover and manufacturing activity and had not disproved the quantitative results. The Tribunal held that once corresponding sales are accepted, it cannot be presumed that no purchases existed at all. At best, the case suggested procurement from grey market sources with accommodation bills being used to regularise purchases.
Distinguishing the Bombay High Court ruling in Kanak Impex, the Tribunal noted that in the present case the assessee had participated in proceedings, maintained audited books, produced purchase bills and bank payments, and the dispute was confined only to verifiability of source parties. The Tribunal further noted that the assessee had already reversed VAT credit before Sales Tax authorities, thereby neutralising one possible tax advantage arising from grey market purchases.
Considering the peculiar circumstances including the death of the assessee, inability of the legal heir to retrieve old records, accepted sales, banking transactions and reversal of VAT credit, the ITAT held that taxing the entire purchases would lead to distorted computation of business income. Accordingly, the Tribunal directed the AO to restrict the addition to 8% of ₹10.73 lakh and delete the balance addition.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order dated 21.11.2025 passed by the Ld. Addl./JCIT(A), Office of Commissioner of Income Tax (Appeals),Panaji[hereinafter referred to as “CIT(A)”]under section 250 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”]for Assessment Year 2011-12, arising out of the assessment order dated 20.02.2015 passed by the Income Tax Officer, Ward-3(2), Kalyan under section 143(3) r.w.s. 147 of the Act.
2. Brief facts of the case are that the assessee, an individual,
was engaged in the business of manufacturing engineering goods under the proprietary concern styled as “Aircon Pneumatics”. The assessee filed return of income on 29.09.2011 declaring total income at Rs. 7,67,900/-. The return was processed under section 143(1) of the Act on 12.11.2011. Subsequently, information was received from the DGIT (Investigation), Pune vide letter dated 06.02.2013 stating that the Sales Tax Department, Maharashtra had unearthed a racket involving hawala dealers issuing bogus purchase bills without actual supply of goods and that the beneficiaries had availed accommodation entries and bogus tax credits. Based upon such information, the Assessing Officer observed that the assessee was one of the beneficiaries who had allegedly obtained bogus purchase bills from hawala dealers. The Assessing Officer noted that the assessee had shown purchases aggregating to Rs. 10,73,994/- from two parties, namely,
(i) Nimesh Steels Private Limited amounting to Rs. 4,32,935/- and
(ii) Naina Multitrade Private Limited amounting to Rs. 6,41,059/-.
3. According to the Assessing Officer, such purchases represented accommodation entries resulting in suppression of profits. Accordingly, the assessment was reopened by issuance of notice under section 148 dated 07.05.2013.
4. The Assessing Officer recorded that notices issued under sections 148 and 142(1) of the Act remained substantially uncomplied with and thereafter notices under sections 143(2) and 142(1) dated 05.12.2014 were again issued after transfer of jurisdiction. Since there was no proper compliance, the Assessing Officer issued intimation dated 23.01.2015 proposing to complete assessment ex parte under section 144 of the Act. In response thereto, Shri Mahesh Bhiwandikar, Chartered Accountant attended and explained the return filed. The Assessing Officer observed that the assessee had maintained regular books of account and furnished audit report in Form Nos. 3CB and 3CD. The assessee had disclosed sales of Rs. 1,28,72,548/- and purchases of Rs. 77,81,359/- with net profit rate of 7.74%.
5. During the reassessment proceedings, the Assessing Officer called upon the assessee to furnish copies of bills, transportation receipts, octroi receipts and other supporting evidences in respect of purchases made from the aforesaid two parties. The Assessing Officer further required the assessee to explain as to why the purchases amounting to Rs. 10,73,994/- should not be treated as unexplained expenditure under section 69C of the Act. In response, the assessee furnished copies of purchase bills and bank statements evidencing payments through banking channels. It was the contention of the assessee before the Assessing Officer that the purchases were duly recorded in books of account and corresponding payments had been made through account payee cheques.
6. The Assessing Officer, however, was not satisfied with the explanation furnished by the assessee. According to the Assessing Officer, the information received from the Sales Tax Department clearly established that the suppliers were non-genuine hawala dealers issuing accommodation bills without actual supply of goods. The Assessing Officer held that mere production of bills and bank statements was insufficient to prove genuineness of purchases. It was further observed that the assessee failed to furnish transportation receipts, lorry receipts, octroi receipts, delivery challans, confirmation from suppliers, ledger extracts from suppliers’ books or any evidence establishing actual movement and delivery of goods. The Assessing Officer also observed that the assessee had withdrawn VAT credit before the Maharashtra Sales Tax Department and paid VAT on such purchases treated as bogus, which according to the Assessing Officer amounted to admission regarding non-genuineness of purchases. Accordingly, the Assessing Officer rejected the books of account under section 145(3) of the Act and treated the purchases of Rs. 10,73,994/- as unexplained expenditure under section 69C of the Act.
7. Apart from the above, the Assessing Officer further observed that various expenses debited under the heads travelling and conveyance, repairs and maintenance, vehicle expenses, staff welfare, sales promotion and miscellaneous expenses were not fully supported by evidences and involved personal element. Accordingly, an ad hoc disallowance of Rs. 30,000/- was made. Consequently, the assessment was completed under section 143(3) r.w.s. 147 of the Act determining total income at Rs. 18,71,890/- as against returned income of Rs. 7,67,900/-. Penalty proceedings under section 271(1)(c) of the Act were also initiated separately.
8. Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). During the course of appellate proceedings, the assessee through legal heir Mrs. Sheetal Parag Dusane filed written submissions contending that the Assessing Officer had merely relied upon information received from DGIT (Investigation), Pune and the Sales Tax Department without independently verifying the genuineness of such information. It was submitted that despite furnishing documentary evidences such as purchase bills, bank statements and income tax records, the Assessing Officer made addition without properly considering the books of account. The assessee further contended that no opportunity of cross verification or cross examination was granted and no independent enquiry was conducted by the Assessing Officer. Reliance was placed on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Jansampark Advertising and Marketing (P.) Ltd. to contend that the Assessing Officer was duty bound to conduct proper enquiry before drawing adverse inference.
9. The assessee further submitted before the Ld. CIT(A) that the profit percentage disclosed by the assessee over the years was consistent and therefore entire purchases could not have been treated as bogus. Reliance was also placed upon judicial precedents to contend that at best only profit element embedded in such purchases could be brought to tax. It was further contended that challans and Form 26AS supported the genuineness of transactions. With regard to ad hoc disallowance of Rs. 30,000/-, the assessee submitted that the same was made without any rational basis and all expenses were incurred wholly and exclusively for business purposes. Reliance was placed on the decision of the ITAT in the case of Kailash Chand Agrawal vs. DCIT to contend that ad hoc disallowance without cogent basis was unsustainable.
10. The Ld. CIT(A), however, was not convinced with the submissions advanced by the assessee. The Ld. CIT(A) observed that the Assessing Officer had made the addition on the basis of specific information received from the Maharashtra Sales Tax Department wherein the suppliers were identified as hawala dealers and bogus bill providers. The Ld. CIT(A) further observed that despite opportunities during assessment as well as appellate proceedings, the assessee failed to furnish delivery challans, transport documents, lorry receipts, purchase confirmations, evidence regarding movement of goods, stock consumption records or any third-party verification to establish genuineness of purchases. The Ld. CIT(A) held that mere entries in books of account and payments through banking channels were insufficient to establish genuineness of purchases when the suppliers themselves were identified as bogus dealers.
11. The Ld. CIT(A) further held that the burden to substantiate purchases lay entirely upon the assessee and referred to the decisions in the cases of K. Proteins Ltd. (SC), CIT vs. La Medica (Delhi High Court), Simit P. Sheth (Gujarat High Court) and Bholanath Polyfab (Gujarat High Court) to hold that where purchases remain unverifiable and the assessee fails to establish actual delivery of goods, the addition is justified. The Ld. CIT(A) thus confirmed the addition of Rs. 10,73,994/- made under section 69C of the Act by holding that the assessee had utterly failed to establish genuineness of purchases or actual movement of goods. The Ld. CIT(A) further observed that information received from Government Department constituted valid material and reliance was placed on the judgments of the Hon’ble Supreme Court in Raymond Woollen Mills and Rajesh Jhaveri Stock Brokers. Accordingly, the appeal of the assessee came to be dismissed.
12. Aggrieved by the aforesaid order of the Ld. CIT(A), the assessee is now in appeal before us raising the following grounds of appeal:
1. Ground No. 1 – No independent verification of information done by AO
1.1. On the facts and in the circumstances of the case and in law, Hon’ble Commissioner of Income-tax (Appeals) has incorrectly affirmed the order of Learned Assessing Officer (‘Learned AO’) without considering the fact that the he has failed to verify the information received from the Sales Tax Department.
1.2. The Learned AO has neither given the Appellant an opportunity to cross-verify the information received by his goodself nor himself conducted any enquiry. Hence, the order affirmed by CIT(A) is misplaced and hence warrants deletion.
2. Ground No. 2 – Incorrect facts determined
2.1. On the facts and in the circumstances of the case and in law, the Learned AO has arrived on conclusion therein based on incorrect factual understanding and therefore, the said impugned order, being bad in law is liable to be quashed or alternatively set aside.
3. Ground No. 3 – Incorrect levy of interest
3.1. On the facts and in the circumstances of the case and in law, CIT(A) has incorrectly confirmed the levy of interest under section 234A and 234B of the Act. Thus, the said addition of interest being unjustified, ought to be deleted.
4. Ground No. 4 – Initiation of the penalty proceedings
4.1. On the facts and in the circumstances of the case and in law, CIT(A) has incorrectly confirmed the initiation of penalty proceedings.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable your goodself to decide this appeal according to law.
13. At the time of hearing before us, the Ld. Authorised Representative (AR) appearing on behalf of the assessee invited our attention to the affidavit sworn by Mrs. Sheetal Parag Dusane, wife and legal heir of late Shri Parag Laxman Dusane, wherein it was affirmed that late Shri Parag Laxman Dusane had expired on 27.06.2020 and thereafter the deponent, being the legal heir, took over the business affairs and pursued the present appellate proceedings. The deponent stated that she was not aware and familiar with the engineering equipment business earlier carried on by her late husband and was also unaware of the pending income tax proceedings pertaining to Assessment Year 2011-12. It was further stated in the affidavit that the issue involved purchases aggregating to Rs. 10,73,994/- in respect of which the Sales Tax Department had retrospectively cancelled VAT registration of the sellers and treated them as bogus dealers and the matter was thereafter forwarded to DGIT (Investigation), Pune. The deponent further affirmed that the representative who attended before the Assessing Officer had accepted the ad hoc disallowance of Rs. 30,000/- out of expenses but had denied the addition relating to alleged bogus purchases. It was also stated that after the demise of the assessee, the papers pertaining to the old assessment year were not traceable and the books of account and supporting documents could not be located. The deponent therefore requested that the peculiar facts, the long lapse of time and the demise of the assessee be considered while adjudicating the appeal.
14. The Ld. AR further submitted that copies of bank statements and invoices were not presently available with the legal heir, though the same formed part of assessment records before the Assessing Officer. It was contended that the assessee had disclosed corresponding sales, maintained audited books of account and payments for purchases had been made through banking channels. The Ld. AR submitted that the Assessing Officer had proceeded solely on the basis of information received from the Sales Tax Department without conducting any independent inquiry or verification and without granting opportunity of cross examination of the alleged hawala dealers.
15. The Ld. AR further placed reliance upon various judicial precedents compiled in the paper book, the index of which was furnished during the course of hearing, namely:
(i) Ramelex Private Ltd. vs. ITO in ITA No. 14 of 2022;
(ii) Ankit Gems (P.) Ltd. vs. Income Tax Officer reported in [2025] 178 com454 (Mumbai – Trib.); and
(iii) Shri Ravindra P. Jadhav vs. ITO in ITA Nos. 5581, 5582 & 5583/Mum/2018.
16. Relying upon the aforesaid judicial precedents, the Ld. AR submitted that where corresponding sales are accepted and purchases are supported by books of account and banking transactions, the entire purchases cannot be added under section 69C of the Act merely on the basis of third-party information from the Sales Tax Department. It was further submitted that in such cases, at best only profit element embedded in the disputed purchases could be brought to tax.
17. On the other hand, the Ld. Departmental Representative (DR) strongly relied upon the orders of the Assessing Officer as well as the Ld. CIT(A). The Ld. DR submitted that the assessee had failed to discharge the primary onus cast upon him to establish genuineness of the purchases by producing supporting evidences such as transportation documents, delivery challans, confirmations from suppliers and evidence regarding actual movement of goods. It was further submitted that despite repeated opportunities, the assessee failed to substantiate the purchases before the Assessing Officer and therefore the addition made under section 69C of the Act was fully justified.
18. The Ld. DR further placed heavy reliance upon the recent judgment of the Hon’ble jurisdictional Bombay High Court in the case of Principal Commissioner of Income-tax v. Kanak Impex (India) Ltd. reported in [2025] 172 com283 (Bom.) and submitted that the Hon’ble High Court has categorically held that where the assessee fails to prove genuineness of purchases and source of expenditure in reassessment proceedings relating to hawala purchases, the entire amount of bogus purchases is liable to be added under section 69C of the Act and not merely the profit element embedded therein.
19. We have heard rival submissions and perused the material available on record including the orders of the lower authorities, affidavit filed by the legal heir of the assessee and judicial precedents relied upon by both the parties. The solitary issue requiring adjudication is whether the entire purchases of Rs. 10,73,994/- treated by the Assessing Officer as non-genuine are liable to be added under section 69C of the Act or whether only profit element embedded in such purchases is liable to be brought to tax.
20. From perusal of the assessment order, it is evident that the addition has been made solely on the basis of information received from the Sales Tax Department through DGIT (Investigation), Pune alleging that certain parties were engaged in providing accommodation bills without actual supply of goods. The Assessing Officer has doubted the genuineness of purchases primarily for the reason that the assessee failed to produce transportation receipts, delivery challans, octroi receipts and confirmations from the suppliers. However, at the same time, it is an undisputed position emerging from the assessment records that the sales declared by the assessee have not been doubted by the Revenue authorities. The Assessing Officer has neither disturbed the turnover disclosed by the assessee nor rejected the quantitative results reflected in the audited financial statements. It is further noticed that though the Assessing Officer observed that the purchases were not fully verifiable, no categorical rejection of books of account under section 145(3) has been effectively carried to its logical conclusion by determination of profits on best judgment basis. The trading results as such have substantially been accepted except to the extent of disputed purchases.
21. We further note that the assessee was engaged in manufacturing activity and had disclosed corresponding sales arising from such business operations. In absence of purchases, the declared sales could not have been effected. There are various judicial precedents where it is held that when sales are accepted, entire purchases cannot be added and only profit element embedded therein can be subjected to tax. The coordinate bench in the case of Shri Ravindra P. Jadhav v. ITO (ITA No. , dealing with identical issue arising from Sales Tax Department information, held that without disturbing sales, entire purchases cannot be added and directed estimation of gross profit on disputed purchases at the same rate as disclosed on genuine purchases.
22. We also find substantial force in the peculiar factual circumstances highlighted before us by the Ld. AR. The original assessee, Shri Parag Laxman Dusane, expired on 27.06.2020 and the present appeal is being pursued by his widow and legal heir Mrs. Sheetal Parag Dusane. In the affidavit placed on record, the legal heir has categorically stated that she was not involved in the business activities of her late husband, that the records pertaining to Assessment Year 2011-12 are not traceable due to lapse of considerable time and that she is unable to produce documentary evidences relating to the disputed purchases. The affidavit further states that the proceedings pertain to transactions more than a decade old and the books of account and papers are no longer available. In our considered opinion, these peculiar circumstances cannot be brushed aside while evaluating the assessee’s inability to furnish further documentary evidence at this distant point of time.
23. At the same time, we are unable to completely accept the contention of the assessee that no addition at all is warranted. The information received from the Sales Tax Department identifying the suppliers as suspicious dealers cannot be ignored altogether. The assessee could not produce the suppliers before the Assessing Officer nor furnish independent evidence regarding actual movement of goods. Therefore, possibility of inflation of purchase price or suppression of profits through accommodation bills cannot be ruled out. In such circumstances, judicial precedents have consistently recognised that estimation of reasonable profit element would meet the ends of justice.
24. The Ld. Departmental Representative has strongly relied upon the recent judgment of the Hon’ble jurisdictional Bombay High Court in the case of Principal Commissioner of Income-tax v. Kanak Impex (India) Ltd.(supra) to contend that the entire bogus purchases are liable to be added under section 69C of the Act. We have carefully gone through the said judgment. In our considered view, the facts of the present case stand materially distinguishable from the facts before the Hon’ble High Court in Kanak Impex. In that case, the assessee had admittedly not participated in reassessment proceedings at all and had completely failed to discharge the initial onus of proving purchases. The Hon’ble High Court also recorded categorical finding that the assessee failed to offer any explanation regarding source of expenditure incurred on such purchases and that the appellate authorities had already confirmed the assessee’s involvement in accommodation entries. Further, the issue before the Hon’ble High Court specifically arose in the context of applicability of section 69C where no explanation whatsoever regarding source of purchases was furnished.
25. In the present case, however, the factual matrix is materially different. Here, the assessee had participated in assessment proceedings through authorised representative and furnished purchase bills and bank statements evidencing payments through banking channels. The assessee’s books of account were audited and corresponding sales have been accepted by the Revenue. The Assessing Officer has not brought any material on record to establish that the sales declared by the assessee were bogus or that the entire purchase amount had flown back to the assessee in cash. It is also not the case of the Revenue that purchases were completely absent from the business cycle. The dispute essentially pertains to verifiability of source parties and possible inflation through accommodation bills. Further, the present matter is also influenced by the supervening circumstance of death of the assessee and inability of legal heir to retrieve decade-old records. Therefore, the ratio laid down in Kanak Impex, rendered in the peculiar facts where the assessee had completely failed to participate and discharge initial burden, cannot be mechanically applied to the present case.
26. On the contrary, the present case is closer to the ratio laid down by the Hon’ble Bombay High Court in Ramelex Private Ltd. v. Pr. Commissioner of Income Tax-3 Pune wherein the Hon’ble Court upheld restriction of addition to gross profit percentage on alleged bogus purchases after noticing that the assessee had furnished purchase bills, ledger accounts and proof of bank payments and that corresponding sales were not doubted. The Hon’ble High Court observed that unless there exists cogent and specific material conclusively proving bogus nature of purchases, wholesale addition of entire purchases would not be justified and only profit element embedded therein could be brought to tax.
27. Considering the entirety of facts and circumstances of the case, we are unable to sustain the addition made by the Assessing Officer in respect of entire disputed purchases. It is an undisputed position emerging from record that the assessee was engaged in manufacturing activity and the corresponding sales disclosed by the assessee have been accepted by the Revenue without pointing out any suppression in turnover or discrepancy in quantitative results. The Assessing Officer has also not disturbed the production activity carried on by the assessee nor rejected the books of account in entirety. The books of account were duly audited and the purchases were recorded in regular books while payments against such purchases were admittedly made through banking channels. Therefore, once the manufacturing activity and corresponding sales have been accepted, complete disallowance of purchases would result in distorted computation of business income since raw material consumption necessarily forms part of manufacturing and production process.
28. At the same time, we find that the assessee failed to conclusively establish genuineness of the source parties by producing transportation evidences, delivery challans, confirmations and other supporting documents before the Assessing Officer. Therefore, the possibility that the assessee might have procured material from grey market and obtained accommodation bills from listed dealers to regularise purchases in books cannot be ruled out. However, in such circumstances, what can be brought to tax is not the entire purchase value itself but only possible suppression of profit embedded in such transactions arising on account of inflation of purchase price or procurement through unaccounted channels at lower rates.
29. We further find that the Assessing Officer himself has specifically recorded that the assessee had reversed the VAT credit claimed in respect of the disputed purchases before the Sales Tax authorities. Therefore, one of the major possible benefits ordinarily attributable to grey market purchases, namely VAT savings, already stands substantially neutralized in the present case. This factual aspect assumes significance while estimating the profit element embedded in the disputed purchases.
30. We also find considerable merit in the peculiar circumstances brought on record through the affidavit filed by the legal heir. The original assessee expired on 27.06.2020 and the present proceedings are being pursued by his widow and legal heir, who has categorically affirmed that she was neither connected with the business affairs of the deceased assessee nor in possession of the old business records relating to Assessment Year 2011-12. It has further been stated that due to substantial lapse of time, the supporting documents and records pertaining to the disputed purchases are no longer traceable. In our considered opinion, these peculiar circumstances cannot be ignored while appreciating the inability of the legal heir to furnish further documentary evidences at this distant point of time.
31. More importantly, the assessee has already disclosed corresponding sales and offered gross profit arising from manufacturing activity to tax. Therefore, sustaining the entire addition under section 69C of the Act would effectively result in taxing the entire purchase value despite accepted sales and already declared gross profit, which would lead to wholly unrealistic and distorted computation of business income. In the peculiar facts of the present case, only the possible suppression of profit embedded in the disputed purchases requires to be brought to tax.
32. The reliance placed by the Ld. DR on the judgment of the Hon’ble Bombay High Court in Principal Commissioner of Income-tax v. Kanak Impex (India) Ltd. (supra), in our considered view, is distinguishable on facts. In the said case, the assessee had failed to discharge the primary onus of proving purchases and the matter arose in the context where the Revenue authorities had found complete absence of satisfactory explanation regarding source and genuineness of expenditure. In the present case, however, the manufacturing activity, corresponding sales and books of account have substantially been accepted by the Revenue and the dispute is confined only to unverifiable source parties and possible inflation in purchase price. Therefore, the ratio laid down in Kanak Impex cannot be mechanically applied to the peculiar facts of the present case.
33. At the same time, we are equally unable to accept the contention of the assessee that no addition whatsoever is warranted. The information received from the Sales Tax Department identifying the suppliers as suspicious dealers, coupled with failure of the assessee to conclusively establish genuineness of source parties, justifies reasonable estimation of additional profit embedded in such purchases.
34. Accordingly, considering the totality of facts and circumstances, nature of manufacturing business carried on by the assessee, accepted sales and production results, already declared gross profit, reversal of VAT credit, payments through banking channels, and peculiar circumstances arising on account of death of the assessee and consequent inability of legal heir to retrieve decade-old records, we deem it fit and proper to estimate the additional profit attributable to the disputed purchases at 8% of Rs. 10,73,994/-. The Assessing Officer is directed to restrict the addition accordingly and delete the balance addition. Thus, the grounds raised by the assessee are partly allowed in above terms.
35. In the result the appeal of the assessee is partly allowed.
Order pronounced in the open court on 22.05.2026.
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