ITAT Mumbai Restricts Bogus Purchase Addition to 7.87% of profit element

Marvell Nutex Pvt. Ltd. Vs ITO (ITAT Mumbai)

The assessee, engaged in the business of manufacturing and trading in yarn and grey fabric, filed its return of income for Assessment Year 2011-12. Subsequently, reassessment proceedings were initiated based on information received from the Directorate General of Income Tax (Investigation), Mumbai, which relied upon findings of the Maharashtra Sales Tax Department. According to the information, the assessee had allegedly obtained accommodation purchase bills from three entities identified as hawala dealers, involving purchases aggregating to ₹44.40 lakh.

During the assessment proceedings, the Assessing Officer (AO) sought various details, including delivery challans, transport receipts, stock registers, purchase invoices, bank statements, quantitative details of raw materials and finished goods, and corresponding sales records. The assessee furnished the requested documents, including invoices, receipts, ledger accounts, bank statements, sales invoices, stock registers, and delivery challans relating to the disputed purchases.

The AO issued notices under Section 133(6) to the suppliers, but the notices were returned unserved. The assessee was unable to produce the suppliers for verification. Although the assessee contended that the purchased material had been consumed in manufacturing activities and that the resulting sales had been duly recorded, the AO concluded that the purchases were non-genuine. Relying on information from the Sales Tax Department and other enquiries, the AO disallowed the entire purchase amount of ₹44.40 lakh.

The Commissioner of Income Tax (Appeals) upheld the disallowance. The appellate authority observed that there was no sufficient evidence of transportation, delivery, or actual physical movement of goods beyond the assessee’s internal records and relied upon the findings of the Maharashtra VAT authorities.

Before the Tribunal, the assessee argued that all documentary evidence sought by the AO had been furnished and that no defects had been pointed out in any of the records. It was also highlighted that the AO himself had acknowledged receipt of delivery challans and other supporting documents. The assessee further emphasized that its sales had never been questioned and that the books of account had not been rejected. It furnished details of gross profit (GP) and net profit (NP) ratios for preceding and succeeding years to demonstrate consistency in business operations. The assessee relied upon judicial precedents supporting the proposition that only the profit element embedded in alleged non-genuine purchases should be brought to tax.

The Revenue argued that the suppliers could not be produced and that notices issued under Section 133(6) remained uncomplied with. It relied on judicial precedents where additions had been sustained when assessees failed to establish the genuineness of purchases.

After considering the material on record, the Tribunal observed that the assessee had furnished all documents called for during the assessment proceedings and that this fact had been acknowledged by the AO. The Tribunal noted that delivery challans had been submitted and that neither the books of account nor the sales recorded by the assessee had been rejected. It also found that no discrepancies had been identified in the documentary evidence produced by the assessee.

The Tribunal further observed that the AO’s conclusions were primarily based on general information received from the Maharashtra Sales Tax Department. There was no material on record showing the nature of enquiries conducted by the Sales Tax Department or providing the assessee an opportunity to cross-examine or verify such findings. The Tribunal distinguished the decisions relied upon by the Revenue on the ground that those cases involved non-participation by the assessee or failure to furnish supporting evidence, whereas in the present case the assessee had actively participated and submitted all required documents.

The Tribunal referred to various Bombay High Court decisions which held that documentary evidence cannot be discarded solely on the basis of general information from the Sales Tax Department unless specific material establishes that the transactions in question were bogus. It noted that a supplier may have engaged in non-genuine transactions with some parties but not necessarily with all parties, making transaction-specific verification necessary.

Considering the overall facts and judicial precedents, the Tribunal held that complete disallowance of the purchases was not justified. It followed the principle laid down by the Bombay High Court that only the profit element embedded in alleged non-genuine purchases can be brought to tax. Accordingly, the Tribunal directed the AO to compute the difference, if any, between the gross profit rate relating to genuine purchases and that relating to the disputed purchases and restrict the addition to such profit element. The appeal was partly allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal filed by the assessee is against the order of ld. Commissioner of Income Tax (Appeal) vide DIN: ITBA/APL/S/250/2025-26/1079587758(1) dated 13.08.2025passed against the assessment order bythe Assessment Unit of the Income-tax Department u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 22.12.2017 for the Assessment Year 2011-12.

2. Assessee has raised the following grounds of appeal:

i. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the addition of Rs. 44,40,398/- on account of alleged bogus purchases. The addition is arbitrary, unjustified, and bad in law as it is based solely on third-party information from the Sales Tax Department without any independent verification. The learned CIT(A) further erred in not considering the documentary evidence furnished by the Appellant, including invoices, bank statements, stock registers, and delivery challans, which substantiate the genuineness of the purchases.

ii. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating the purchases as bogus merely because the alleged suppliers could not be traced or did not appear in response to notices issued u/s 133(6). The Appellant had no control over their whereabouts and had furnished ample documentary evidence. Hence, mere non-appearance cannot justify disallowance, and the addition is arbitrary and contrary to law.

iii. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in relying upon judgments such as N.K. Proteins Ltd. and CIT vs. La Medica, which are factually distinguishable. In those cases, incriminating material and fraudulent practices were found, which are entirely absent in the present case. Hence, the reliance on such cases is therefore misplaced, and therefore the additions made based on them is unsustainable.

iv. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming addition of the entire purchase value instead of limiting it to the profit element. It is settled in law, as supported by judgments including Paramshakti Distributors, Mohammad Haji Adam & Co. and S.V. Jiwani, that only the profit element embedded in non-genuine purchases should be taxed. Therefore, the full addition is excessive, arbitrary, and unsustainable.

2.1. The sole issue arising from the above stated grounds of appeal is for addition made towards alleged bogus purchases and sustained by ld. CIT(A).

3. Brief facts in this regard are that assessee is engaged in business of manufacturing and trading in yarn, grey fabrichaving its manufacturing facilities at Bhiwandi, Thane. Return of income was filed on 30.09.2011, reporting total income at Rs. 3,54,060/-.Case of the assessee was taken up for reassessment proceedings, initiated by issuing notice under section 148 dated 30.03.2017 based on information received from the office of DGIT(Investigation), Mumbai which inturn was based on enquiries conducted by the Sales Tax Department of Maharashtra in respect of certain defaulters of VAT on account of bogus billing undertaken by them. Based on this information, ld. AO observed that assessee has obtained accommodation bills towards purchases from three parties, details of which are tabulated below:

3.1. Ld. AO noted by giving reference to the website of Maharashtra Sales Tax Department that these parties have been declared as hawala dealers and their TIN have been cancelled. Statutory notice under section 142(1) was issued along with noting made in order sheets on various dates whereby details and explanation were called for in respect of purchases made by the assessee from these three parties. The details called for included the following:

i. Delivery Challans.

ii. Transport receipts.

iii. Quantitative details such as opening stock, purchases, consumptions and closing stock of each raw material and production of each of the finished goods.

iv. Name, address, TIN and PAN of each party from whom purchases are made.

v. Details of corresponding sales made.

vi. Copies of purchases bills.

vii. Copy of stock register.

viii. Copies of bank statements.

3.2. Ld. AO in para 5 acknowledged the attendance of the authorized representative of the assessee and furnishing of details and documents as called for. He further records in para 6.1 about the fact of submissions made by the assessee which includes copies of invoices, copies of receipts, ledger account, copies of bank statement, copies of sales invoices, copies of stock register, copies of delivery challans in respect of purchases made from the alleged three parties. He issued notice under section 133(6) to the three parties on the addresses provided by the assessee which were returned back as un-served. Assessee was asked to produce these parties for verification but could not produce the same. Ld. AO show caused the assessee for holding the said purchase as non-genuine for which it furnished reply stating that these parties are active on the website of Maharashtra Sales Tax Department. It was also submitted that material purchased from these parties has been used for manufacturing of yarn products which has been subsequently sold to various parties. These sales have been duly accounted for and reported in its financial statements, income of which forms part of the return filed by the assessee.

3.3. After considered the submissions made by the assessee, ld. AO took an adverse view, since assessee had failed to produce the three parties. According to him, assessee has not given any evidence which leads to the conclusion that there were actual purchases. He placed reliance on certain judicial precedents for his adverse view. He concluded based on the findings of the Sales Tax Authorities, Investigation Directorate of the Income-tax Department and enquiry carried out during the course of assessment that the purchases made by the assessee from the three parties is non-genuine and thus, disallowed the relevant purchases amounting to Rs. 44,40,398/-.He further mentioned in this regard that assessee is a manufacturer and it is difficult to establish the matching aspect of number of units purchased with number of units sold and cost sales category thereon.

4. In the first appeal, ld. CIT(A) confirmed the disallowance so made by the ld. AO. In this respect,ld. CIT(A) observed in para 6.3 that there is no evidence of transportation, delivery challans or proof of actual physical movement of goods beyond internal records. He also relied upon the findings of Maharashtra VAT Authorities, confirming the disallowance made by the ld. AO and dismissed the appeal. Aggrieved, assessee is in appeal before the Tribunal.

5. Ld. Counsel for the assessee reiterated the above factual matrix in respect of detailed submissions made before the authorities below to justify the purchases made by it and consumed in the manufacturing process which were subsequently sold. It was strongly asserted by her that the sales made by the assessee have not been doubted. Also, all the documentary evidences as called for by the ld. AO were furnished. It has been duly acknowledged by the ld. AO in the assessment order itself. She referred to the paper book containing various submissions made by the assessee before the authorities below, containing 169 pages which also includes various judgments for the contentions raised by her.

5.1. In respect of the documentary evidences placed on record, details of which is already listed above, it is strongly contended that no deficiency has been pointed out by the authorities below to disprove the same. Assessee has furnished quantitative details as well as bank statement to establish the movement of goods and payment be made through proper banking channel. Most importantly, both the ld. AO and ld. CIT(A) very categorically observed that no evidences of transportation, delivery challans or proof of actual physical movement of goods has been furnished for which ld. Counsel for the assessee referred to para 6.1 of the impugned assessment order wherein ld. AO himself has taken note of submission of the assessee which includes copies of delivery challans in respect of purchases made from the alleged hawal dealers. Thus, according to her, such a bald allegation is contrary to the factual observations made in para 6.1 by the ld. AO himself.

5.2. Details in respect of GP ratio and NP ratio for preceding and subsequent two assessment years is also furnished which is extracted below for ready reference to demonstrate the profitability of the assessee in the line of business in which it is engaged:

5.3. From the above table, it was pointed out that in the year under consideration, assessee had reported GP ratio of 7.87% which has gone higher in the subsequent assessment year at 12.16%. The net profit ratio reported by the assessee is at 0.77% in the year under consideration.

5.4. She referred to the decision of Hon’ble jurisdictional High Court of Bombay in the case of PCIT v. Mohammad Haji Adam and Company (2019) 203 taxmann.com 459 (Bom), wherein it was held that disallowance ought to be restricted to the positive difference if any, between gross profit element in the undisputed purchases and that on the alleged bogus purchases.

6. Per-contra, ld. Sr. DR contended that assessee failed to produce the three parties as required by the ld. AO for which notice under section 133(6) were issued and remained non-complied. He also placed reliance on the decision on Hon’ble jurisdictional High Court of Bombay in the case of PCIT v. Drisha Impex (P) Ltd. (2025) 173 com571 (Bom), wherein it was held that where assessee failed to prove genuineness of purchases and expressed its inability to furnish purchase confirmation and address of suppliers, Assessing Officer was justified in making additions to the income of the assessee on account of disallowance of peak purchases made from the said parties.

7. We heard both the parties and perused the material on record. Admittedly, it is undisputed fact about the assessee furnishing all the required details and documents as called for by the ld. AO in the course of assessment proceedings as duly recorded in the impugned assessment order in para 5 and 6.1 by the ld. AO himself. We find that assessee has furnished copies of delivery challans which was a very specific requirement by both, ld. AO and ld. CIT(A) to demonstrate actual supply by way of physical movement of the goods. It is also noted that books of accounts of the assessee have not been rejected by the ld. AO nor the sales made by the assessee have been doubted. We also find that no discrepancies have been pointed out in the corroborative documentary evidences placed on record by the assessee so as to disprove them.

7.1. In respect of reliance placed by the ld. AO on the information of Maharashtra Sales Tax Department on the enquiries undertaken by them, there is nothing on record from where it can be inferred as to what enquiries were undertaken so as to provide an opportunity of cross verification/examination before taking an adverse view for the assessee.

7.2. Reliance placed by the ld. Sr. DR on the decision of Drisha Impex (supra) is distinguishable as assessee failed to prove the genuineness of purchases by expressing its inability to furnish purchase confirmation and other details of the suppliers because of which additions were made. In the present case before us, ld. AO himself has acknowledged about furnishing of all the details by the assessee as called for by him.

7.3. Further,we take note of the decision of Hon’ble jurisdictional High Court of Bombay in the case of PCIT v. Kanak Impex (India) Ltd. (2025) 172 taxmann.com 283 (Bom.) from where we observe that in para 4, Hon’ble Court noted the factual position that assessee did not appear before the ld.AO during the course ofassessment proceedings and failed to prove the genuineness of the purchase. The said assessment was completed ex-parte u/s 144 r.w.s 147 of the Act. Hon’ble Court also observed in para 17 about the non-appearance of assessee before the Ld.AO for which there is no justification. Again, it noted in para 29 that the assessee chose not to attend the reassessment proceedings even though the notices were sent by post, email and affixture. Accordingly, in para 13, Hon’ble Court concluded that assessee having not joined the reassessment proceedings, the contention raised by the assessee are to be rejected. Observation of the Hon’ble Court while rejecting the contention of the assessee are:

“30. We fail to understand that the respondent-assessee having consciously and intentionally decided not to join the investigation, cannot now contend that the appellant-revenue should have given them all the details before making the addition. In our view, such a conduct of the respondent-assessee cannot be accepted. It was incumbent upon the respondent-assessee to have joined the re-assessment proceedings, discharge the initial onus of proving the purchases and seek details, if any.”

7.4. Hon’ble Court while referring to the decision of Mohammad Haji Adam & Co. [2019] 203 taxmann.com 459 (Bom), noted that in this case, assessee had participated in the assessment proceedings, ld. CIT(A) compared the purchases and sales statement and there was afinding that purchases cannot be rejected since there was correlation between the purchases and sales.

7.5. Based on the above observations and conclusion drawn by the Hon’ble Court in Kanak Impex (supra), the present facts of the case do not warrant its application as it is evidently demonstrated that assessee has diligently participated in the assessment proceedings as well as at the first appellate stage.

8. On the stated similar factual position as in the present case before us, we take note of the observations and findings of the Hon’ble jurisdictional High Court of Bombay in the case of SVD Resins and Plastics Pvt. Ltd. (supra). In Para-11, Hon’ble Court noted that-

“It is an admitted position that during the assessment proceedings, the E assessee filed all necessary documents in support of the returns on which the ledger accounts were prepared, including confirmation of the supplies by the suppliers, purchase bills, delivery bank statements etc, to justify the genuineness of the purchases, however, such documents were doubted by the AO on the basis of general information received by the AO from the Sales Tax Department. In our opinion, to wholly reject these documents merely on a general information received from the Sales Tax Department, would not be a proper approach on the part of the AO, in the absence of strong documentary evidence, including a statement of the Sales Tax Department that qua the actual purchases as undertaken by the assessee from such suppliers the transactions are bogus. Such information, if available, was required to be supplied to the assessee to invite the response on the same and thereafter take an appropriate decision. Unless such specific information was available on record, it is difficult to accept that the AO was correct in his approach to question such purchases, on such general information as may be available from the Sales Tax Department, in making the impugned additions. This for the reason that the same supplier could have acted differently so as to generate bogus purchases qua some parties, whereas this may not be the position qua the others. Thus, unless there is a case to case verification, it would be difficult to paint all transactions of such supplier to all the parties as bogus transactions.”

8.1. From the above, it is worth noting that similar factual position exists in the present case before us. Ld. Assessing Officer has proceeded on the basis of general information received by him from the sales tax department against which assessee has filed all the necessary documents wherein no defect or deficiency has been pointed out. Assessee has furnished delivery challans to demonstrate the actual movement of goods.

8.2. On the above stated observations, Hon’ble Court thus, opined that full addition could be made only on the basis of proper proof of bogus purchases available before the ld. Assessing Officer, as the law would recognize the same and would unequivocally indicate the transactions are wholly bogus. According to the Hon’ble Court, by no stretch of imagination, it cannot be concluded that the entire expenditure claimed by the assessee is to be taxed.

8.3. An important observation has been made by the Hon’ble Court in para-13 of this judgment whereby it opined that “wherever relevant, any confusion in regard to the transaction being bogus, needs to be aligned only after the Assessing Officer consults the sales tax department and a thorough enquiry in regard to such specific transactions being bogus, is also conclusion of the sales tax department.” Thus, the Hon’ble Court held that in absence of such a cohesive and coordinated approach of the Assessing Officer with the sales tax authorities, it would be difficult to come to a concrete conclusion with regard to such purchases/sales transaction being bogus, merely on the basis of general information, so as to discard such expenditure and make the addition thereof.

9. This above stated judgment was subsequently followed by the same Court in the case of Ashok Kumar Rungta vs. ITO [2024] 167 com429 (Bom) and also in the case of PCIT vs. Ramelex Pvt. Ltd. [2025] 179 taxmann.com 374 (Bom).

10. Taking into account the factual matrix, detailed submissions and documentary evidences placed on recordas well as jurisprudence analyzed and discussed in the above paragraphs, we find it appropriate to restrict the addition for gross profit element embedded in the alleged non-genuine purchase from the three parties by taking in to consideration the judicial pronouncement in the case of Mohammed Haji Adam and Company (supra) wherein it was held that the disallowance ought to be restricted to the positive reference, if any, between the gross profit element in the undisputed purchase and that on the alleged non-genuine purchases. We direct the ld. AO to compute such a difference and make the addition, if any, accordingly. In this regard, details of GP ratio and NP ratio are already tabulated above. Grounds raised by the assessee in this regard are partly allowed.

11. In the result, appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 01.06.2026