Bogus Purchase Addition Can’t Be 100% When Sales Are Accepted: ITAT Mumbai

Jagruti Jatin Shah (Deceased) Vs ITO (ITAT Mumbai)

Bogus Purchase Addition Can’t Be 100% When Sales Are Accepted: ITAT Orders GP-Based Estimation

The Mumbai ITAT held that where the Revenue accepts the sales declared by the assessee, it is generally not permissible to disallow the entire amount of alleged bogus purchases. At best, only the profit element embedded in such purchases can be brought to tax. Accordingly, the Tribunal restored the matter to the Assessing Officer for fresh adjudication in line with the Bombay High Court’s decision in Mohommad Haji Adam & Co..

The case involved an addition of ₹36.51 lakh made on account of alleged hawala purchases. The Assessing Officer relied upon information received from the Sales Tax Department and notices issued under Section 133(6) remained unanswered by the suppliers. Though the assessee furnished purchase bills, ledger accounts and demonstrated that payments were made through banking channels, it could not produce the suppliers or furnish transportation details. Consequently, the AO treated the entire purchases as bogus and added the amount under Section 69C.

The Tribunal noted that the books of account had not been rejected and the sales declared by the assessee had been accepted. Therefore, it was possible that the assessee had actually procured the goods from the open market while obtaining accommodation bills from the listed parties. In such circumstances, taxing the entire purchase amount would be unjustified and only the profit embedded in the purchases could be estimated and added.

On the challenge to reopening, the Tribunal rejected the assessee’s argument of “borrowed satisfaction” and upheld the validity of reassessment, observing that the Assessing Officer had tangible information regarding alleged bogus purchases and the assessee failed to substantiate actual delivery of goods.

The matter was therefore remanded to the Assessing Officer to recompute the addition by applying the principles laid down in Mohommad Haji Adam & Co., after granting adequate opportunity to the assessee to furnish evidence regarding gross profit rates and purchase transactions

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This present appeal of assessee is arising against the order of the Commissioner of Income Tax Appeals, ADDL/JCIT(A), Bhubaneswar [in short, “the Ld. CIT(A)”], dated 27.10.2025 for the Assessment Year (AY) 2009-10, resulted from the assessment order under section 143(3) r.w.s 147 of the Income Tax Act, 1961 [in short, “the Act”] dated 25.03.2015, passed by Income Tax Officer Ward-27(1)(5) [in short, “the Ld.A01.The grounds of appeal raised by the assessee, are as under:

“I. Objection against confirming validity of reassessment.

a. On the facts and in the circumstances of the case, the Jt. Commissioner of Income-tax (Appeals), hereinafter referred to as the “JCIT (A)”, has erred in confirming the validity of reassessment in the case of the appellant.

b. Your appellant respectfully submits that the reassessment had been initiated merely on borrowed satisfaction and the same suffers from non-application of mind on the part of the assessing officer. The appellant further submits that the reassessment is initiated merely on conjectures, surmises and suspicions and hence the same deserves to be quashed.

c. Your appellant, therefore, prays that the reassessment in its case may please be quashed.

II. Objection against confirming disallowance of Rs. 36,51,012/- on account of alleged suspicious purchases

a. Without prejudice to Ground – I above, the JCIT (A) has erred in confirming the disallowance of Rs. 36,51,012/- on account of purchases by treating the same as bogus purchases.

b. Your appellant respectfully submits that the impugned disallowance is merely on conjectures, surmises and suspicions and the same is not supported by any evidence against the appellant.

c. The assessing officer has erred in ignoring various documentary evidences furnished by the appellant and making addition for the same u/s. 69C of the Act. The JCIT (A) has erred in disallowing the said amount out of business expenses and thereby confirming the income of the appellant wrongly computed.

d. Without prejudice to the above, both the lower authorities have failed to appreciate that the sales of the appellant has not been disputed and accordingly it is certainly not permissible to make the disallowance of purchases for the entire amount of purchases.

e. The appellant, therefore, prays that the impugned disallowance of Rs. 36,51,012/-may please be deleted or any other relief as deemed fit on the facts of the case may please be allowed to the appellant.”

2. Brief facts of the case are that the ITR for AY 2009-10 was filed by the assessee on 12.05.2010 declaring total income at Rs.7,02,290/-. Subsequently, the case of assessee was re-opened u/s 147 and accordingly, a notice u/s 148 was issued on 30.07.2014. In response, the assessee vide letter dated 15.04.2014 stated that the RI filed on 12.05.2010 may be treated as return filed in response to addition u/s 148.

3. The assessment proceedings thereafter were continued; the Authorized Representative of assessee attended the Assessing Officer’s Office and filed details/submissions. During the course of assessment proceedings, the Ld. AO doubted the transaction of purchased made by the assessee, accordingly, had issued notice u/s 133(6) of the Act calling for necessary information from the alleged hawala parties. The notice u/s 133(6) were not responded by the concerned entities, therefore, the assessee was show-caused that since the parties have not responded and it appears that such parties are involved in providing accommodation entries as published by Sales Tax Department on its website. Therefore, it is clear that the assessee is one of the parties who have taken accommodation/bogus purchase bills from such parties. In response to such show-cause, the assessee furnished ledger extract of the alleged parties stating that the payments to the parties have been made through account pay cheques only. Copies of bills were also produced before the Ld. AO but the assessee was unable to produce the said party before the Ld. AO. The Ld. AO accordingly concluded that the amount shown as paid to the bogus parties has come back to the assessee as no purchase was made by the assessee from them.

4. Accordingly, the cash so received back was treated as unexplained bogus expenditure u/s 69C of the Act and added back to the income of the assessee to the tune of Rs.36,51,012/-. The taxable income of the assessee, thereby has been recomputed by the Ld. AO.

5. Being aggrieved with the aforesaid addition, assessee preferred an appeal before the Ld. CIT(A) wherein the assessee challenged the validity of re-opening assessment as well as the issue of alleged bogus purchases on merits. The Ld. CIT(A) in his order observed that, while the assessee was provided with opportunity to represent its case on various dates almost five times but the assessee has not made any submission or written explanation. Therefore, the Ld. CIT(A) confirmed the addition made by Ld. AO, however, has noted that section 69C is wrongly invoked by the Ld. AO and the expenses are booked in the books hence the addition is confirmed but under the business income as the same has been debited against the businesses.

6. Regarding assessee’s contention challenging the validity of assessment, Ld. CIT(A) had noted that the Ld. AO was in possession of information regarding bogus purchase, which was provided by the Sales Tax Department hence, it cannot be treated as mere change of opinion and the re-opening is held as good in law. The appeal of assessee thereby has been partly allowed by the Ld. CIT(A).

7. Since the contentions raised by the assessee regarding validity of assessment as well as addition on merits were not found good by the Ld. CIT(A) and had dismissed such contentions, the assessee is in appeal before us in the present case.

8. At the outset, Ld. AR of the assessee submitted that the re-opening was done only on the basis of certain information received from the Sales Tax Department, which is apparent from the reasons for re-opening recorded by the Ld. AO, wherein it is categorically mentioned that as per information received from the Office of DDIT, Mumbai, the Sales Tax Department has exercised due diligence which revealed that the assessee Smt. Jagruti Jatin Shah, who is proprietor of M/s. Jasmine Electronics & Electricals is involved in taking accommodation entries of bogus purchase during the financial year 2008-09. It is submitted that as per decision of Hon’ble Bombay High Court in the case of CIT vs. Shodiman Investments Pvt.Ltd. 424 ITR 337 (Bom.), where the Assessing Officer has initiated a re-assessment on the basis of information from DDIT about a particular entity entering into suspicious transactions, which was clearly in breach of settled position in law that re-opening notice has to be issued by Assessing Officer on his own satisfaction and not on borrowed satisfaction.

9. Further, the Ld. AR relied on the decision of CIT vs. Nikunj Eximp Enterprises Pvt. Ltd.12013135 com 384 (Bombay.)wherein the Hon’ble Bombay High Court has held that where sales supported purchases and payment were made through banks, merely because purchasers had not appeared before AO, purchase could not be rejected as bogus. Ld. AR also relied on the decision of PCIT vs. Mohommad Haji Adam & Co. 120191 103 taxmann.com 459 (Bombay) wherein the Hon’ble Bombay High Court has held that where there was no discrepancy between purchase shown by assessee and sales declared, no question of law or on from Tribunal order restricting addition made by AO on account of bogus purchases by bringing gross profit rate on purchases at the same rate as applied in other genuine purchases. It was the submission that the order passed by Ld. CIT(A) was an ex parte order, wherein it is alleged that the assessee could not represent its case, was a wrong perception and a finding contrary to the facts on record, as the assessee had furnished a response before the Ld. CIT(A), copy of acknowledgment is furnished before us at page no.59 of the assessee’s paper book, according to which the assessee has furnished a response along with annexures on 26.09.2023 before the Ld. CIT(A). However, such response was not taken into cognizance by the Ld. CIT(A), therefore the findings of Ld. CIT(A) are not in accordance with the facts on record. It was the submission that the order of Ld. CIT(A) is liable to be set aside and the addition made by Ld. AO be deleted.

10. Further, alternatively the Ld. AR had submitted that, in case the Bench is not convinced with the assessee’s submission regarding validity of assessment or on merits, since the sales of the assessee are not disputed by the Ld. AO, at the most an estimation of profit embedded in the alleged bogus purchase can be added to the income of assessee.

11. Per contra, Ld. DR submitted that the Ld. AO has tried at his best to make necessary effort to find out the actual nature of the transaction by way of issuing notices u/s 133(6), since the parties are bogus and accommodation entry providers, they chose not to appear before the Ld. AO. The assessee has only furnished a copy of ledger account and copy of bills, however, the details of transportation for bulky supply of material could not be furnished by the assessee, which shows that the entries of purchase are accommodation transactions only and there was no actual purchase. Therefore, the Ld. AO has rightly made addition which is upheld by the Ld. CIT(A). Under such circumstances, orders of both the Revenue Authorities deserve to be upheld.

12. We have considered the rival submissions, perused the material available on record and the case laws relied upon by the assessee. Admittedly, in the present case, the assessee had furnished the ledger copy of the accounts of the alleged bogus parties in assessee’s paper books also certain bills were produced, however, the nature of transactions could not be conclusively decided by the Ld. AO, in absence of appearance of the parties alleged and also the information regarding transportation of such goods could not be furnished by the assessee. It is also a fact that the Ld. AO had not rejected the books of the assessee and had taken the business income of the assessee, as declared by the assessee in his ITR. Therefore, there was no denial of the quantities being purchased by the assessee; however, it might be the case that the accommodation bills are obtained by the assessee from the alleged parties, however, corresponding quantities are purchased from some other sources / open market.

13. Under such circumstances, the applicability of decision of Hon’ble Bombay High Court in the case of Mohommad Haji Adam (supra)shall come into play.

14. In backdrop of such facts and circumstances, we have two options, one to set aside the matter back to the file of Ld. CIT(A) for fresh adjudication considering the submissions made by the assessee or alternatively direct the Revenue Authorities to decide the case of assessee in accordance with the ratio of law laid down by Hon’ble Bombay High Court in the case of Mohommad Haji Adam (supra). Since, the Ld. AR of the assessee had alternatively requested to decide the issue by estimating the gross profit on the alleged bogus sales following the ratio of analogy drawn by Hon’ble Bombay High Court in the case of Mohommad Haji Adam (supra), in the interest of justice, we deem it appropriate to set aside this matter to the file of Ld. AO to adjudicate afresh following the decision of Mohommad Haji Adam (supra)after affording reasonable opportunity of being heard to the assessee.

15. Ld. AR has produced a chart showing GP ratios of previous 3 AY’s and for the year under consideration, which is subject to factual verification, so the assessee is directed to produce necessary details / corroborative evidence regarding GP ratios, on genuine as well as bogus purchases to assist the Ld. AO in set aside assessment proceedings so as to arrive at a logical conclusion.

16. Regarding legal contentions raised by the Ld. AR, we do not find any substance, as there was a fresh information before the Ld. AO toinvoke the reopening provisions. Regarding 133(6), the alleged parties could not be traced, also the assessee was failed in submitting the details to substantiate the actual delivery of goods purchased. We thus reject such grounds.

17. In result, the appeal of assessee is allowed for statistical purposes in above terms.

Order pronounced in the open court on 08-06-2026.