12.5% Bogus Purchase Addition Deleted as Disputed GP Was Higher: ITAT Mumbai

Dwarkaprasad Dhanraj Bharadia Vs ITO (ITAT Mumbai)

Summary: The Mumbai ITAT partly allowed the appeal of Dwarkaprasad Dhanraj Bharadia for AY 2009-10 and directed deletion of an addition of Rs.16,72,877, representing 12.5% of alleged bogus purchases of Rs.1,33,83,012. The assessee, proprietor of M/s Melitha Impex and engaged in import, export and trading of fabrics and fabric pieces, had originally declared income of Rs.2,87,102. Following information arising from Investigation Wing action in the Pravin Kumar Jain group, the assessment was reopened on the allegation that purchases from four concerns—M/s Ansh Merchandise Pvt. Ltd. (New Planet Trading Co. Pvt. Ltd.), M/s Casper Enterprises Pvt. Ltd. (Ostwal Trading (I) Pvt. Ltd.), M/s Mohit International and M/s Natasha Enterprises—represented accommodation entries.

During reassessment, the assessee furnished, among other material, ledger accounts and confirmations, purchase invoices, bank statements, corresponding sale invoices and delivery challans. The Assessing Officer nevertheless relied upon Investigation Wing material and statements attributed to Shri Pravin Kumar Jain and connected persons. Significantly, the AO did not dispute receipt of the material or the corresponding sales. He expressly recorded that receipt of the material was not in doubt having regard to the quantitative details and held that the corresponding sales could not have taken place without purchases. He therefore did not disallow the entire purchases but rejected the books under section 145(3) and estimated the alleged profit element at 12.5%, resulting in the addition of Rs.16,72,877.

The CIT(A) upheld both the reopening and the 12.5% estimation. Before the Tribunal, however, the assessee pointed out that the CIT(A)’s observations regarding absence of delivery challans, quantitative reconciliation, stock records and supplier confirmations were inconsistent with the assessment record itself. The assessee also argued that no independent enquiry was made from the four suppliers under sections 133(6) or 131, the statement of Shri Pravin Kumar Jain was not supplied despite request, cross-examination was not permitted and the statement was stated to have been subsequently retracted. The Tribunal found that the assessment record itself confirmed furnishing of confirmations, purchase invoices, bank statements, sale bills and delivery challans. It also noted that the AO had categorically accepted receipt of the goods and corresponding sales.

The decisive issue was the quantum of profit, if any, embedded in the disputed purchases. On the Tribunal’s direction, the assessee furnished a transaction-wise comparative working. Total purchases of Rs.7,69,62,489 and corresponding sales of Rs.7,79,48,491 yielded GP of Rs.9,86,002 or 1.28%. Disputed purchases of Rs.1,33,83,011 and corresponding sales of Rs.1,38,13,697 yielded GP of Rs.4,30,686 or 3.22%, whereas genuine purchases of Rs.6,35,79,478 and corresponding sales of Rs.6,41,34,794 yielded GP of Rs.5,55,316 or only 0.87%. Thus, the GP rate on disputed purchases was already approximately 2.35 percentage points higher than on genuine purchases. The five-year average GP was also only 1.85%. The Tribunal noted an immaterial difference between the overall GP figures of 1.28% and 1.38% appearing in different workings, but held that this did not affect the relevant comparison between 3.22% and 0.87%.

Applying the Bombay High Court judgment in Principal Commissioner of Income-tax-17 v. Mohommad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bom.), the Tribunal held that where a trader’s corresponding sales are accepted, an arbitrary percentage cannot be added merely because suppliers are alleged to be accommodation-entry providers. The relevant exercise is to compare the actual GP on disputed purchases with the GP on genuine purchases. The Tribunal also followed Shail International v. DCIT, where the Coordinate Bench had applied the same principle and held that no further addition was warranted where profit already disclosed on the disputed transactions exceeded that on genuine transactions. In the present case, the AO’s 12.5% rate had no demonstrated connection with the assessee’s actual trading results or historical margins.

Accordingly, since the assessee had already disclosed GP of 3.22% on the disputed purchases against only 0.87% on genuine purchases, the Tribunal held that no further profit remained to be brought to tax and deleted the entire Rs.16,72,877 addition. The grounds challenging reopening and violation of natural justice were left open as academic after complete relief on merits. Interest under sections 234A, 234B, 234C and 234D was directed to be recomputed consequentially, while the ground against initiation of penalty proceedings under section 271(1)(c) was dismissed as premature. The appeal was therefore partly allowed.

Cases Discussed

• Principal Commissioner of Income-tax-17 v. Mohommad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bom.) – Bombay High Court held that where corresponding sales of a trader are accepted, addition in respect of alleged bogus purchases should be restricted by comparing the GP rate on such purchases with that on genuine purchases; followed by the Tribunal.
• Shail International v. DCIT, ITA Nos.3268 and 4428/Mum/2025, order dated 05.05.2026 (ITAT Mumbai) – Coordinate Bench applied Mohommad Haji Adam & Co. and held that no further addition could be made where GP already disclosed on disputed purchases exceeded GP on regular transactions;

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the assessee is directed against the order dated 30.01.2026 passed by the learned Addl./JCIT(A), Panaji[hereinafter referred to as “the CIT(A)”], under section 250 of the Income-tax Act, 1961[hereinafter referred to as “the Act”], for the assessment year 2009-10. The impugned appellate order arises from the reassessment order dated 25.03.2016 passed by the Income Tax Officer, Ward 18(1)-4, Mumbai[hereinafter referred to as “Assessing Officer”], under section 143(3) read with section 147 of the Act.

2. The assessee has raised the following grounds of appeal:

1. The Ld. CIT(A) has erred in law and in facts in passing the order u/s. 250 of the Act dated 30.01.2026 confirming the order passed by the Ld. AO u/s 143(3) r.w.s 147 of the Act dated 25.03.2016 which is bad and invalid in the eyes of law.

2. The Ld. CIT(A) has erred in law and in facts in not appreciating that the reopening of assessment u/s 148 of the Act and passing the reassessment order u/s 147 of the Act is invalid and bad in the eyes of law.

3. The Ld. CIT(A) has erred in law and in facts in not appreciating that the order passed is in violation of principles of natural justice.

4. The Ld. CIT(A) has erred in law and in facts in confirming the action of the Ld. AO in making an addition of Rs 16,72,877/- being 12.5% of alleged bogus purchases of Rs. 1,33,83,012/- in the hands of the appellant which is bad and invalid in the eyes of law.

5. The Ld. CIT(A) has erred in law and in facts in confirming the action of Ld. AO in charging interest u/s. 234A, 234B, 234C and 234D of the Act which is bad and invalid in the eyes of law.

6. The Ld. CIT(A) has erred in law and in facts in confirming the action of Ld. AO in initiating penalty proceedings u/s. 271(1)(c) of the Act which is invalid and bad in the eyes of law.

The appellant craves leave to add to, alter, amend and / or delete in all the foregoing grounds of appeal.

3. Briefly stated, the assessee is an individual engaged in the business of import, export and trading in fabrics and fabric pieces under the name and style of M/s. Melitha Impex, a proprietary concern. The assessee filed the original return of income on 24.09.2009 declaring a total income of Rs.2,87,102/-. The return was initially processed under section 143(1) of the Act. Thereafter, the case was selected for scrutiny and the assessment was completed under section 143(3) of the Act on 25.11.2011, determining the total income at Rs.3,25,510/-.

4. Subsequently, the Assessing Officer received information from the office of the Director General of Income Tax (Investigation), Mumbai, based upon a search and seizure action conducted by the Investigation Wing in the case of the Pravin Kumar Jain group. As recorded in the reassessment order, the Investigation Wing reported that the concerns controlled and operated by the said group were engaged in providing accommodation entries in the nature of unsecured loans, advances and purchases without carrying on any genuine trading activity. The Assessing Officer recorded that such concerns were operated through dummy directors, proprietors or partners, did not possess physical stock of goods, and were engaged in providing accommodation entries.

5. On the basis of the aforesaid information, the Assessing Officer recorded that the assessee had obtained purchase bills aggregating to Rs.1,33,83,012/- from the following four concerns:

6. Consequently, a notice under section 148 of the Act was issued on 19.03.2015, after obtaining the prior approval of the Principal Commissioner of Income Tax-18, Mumbai, as stated in the reassessment order. In response thereto, the assessee, by letter dated 15.04.2015, requested that the original return of income be treated as the return filed in response to the notice under section 148 of the Act and also sought a copy of the reasons recorded for reopening the assessment. The reasons recorded were furnished to the assessee on 09.02.2016. A notice under section 143(2) dated 09.02.2016 was thereafter issued and served upon the assessee. A notice under section 142(1) was also issued, calling upon the assessee to furnish details and evidence relating to the disputed purchases.

7. During the reassessment proceedings, the Assessing Officer called upon the assessee to furnish the details of the goods purchased from the aforesaid parties, copies of purchase bills, ledger accounts of the parties, transportation bills, delivery challans, octroi receipts or other evidence of receipt of goods, the stock register, evidence showing the subsequent sale or utilisation of the goods, and details of the payments made against the purchases.

8. In response, the assessee furnished details regarding the nature of the business, a copy of the return of income along with the computation of income, tax audit report, profit and loss account, balance sheet and its enclosures, bank statements, ledger accounts of the four suppliers along with their confirmations, purchase invoices, cash account, and a note explaining the subsequent sale of the goods allegedly purchased from the said parties. Copies of the corresponding sale invoices and delivery challans were also furnished. By a further letter dated 15.03.2016, the assessee contended that the purchases from the four parties were genuine and that the goods so purchased had been sold in the regular course of business. The assessee submitted that corresponding sales could not have been effected without the actual purchase and receipt of the goods. It was accordingly contended that the purchases were supported by invoices, confirmations, banking transactions and corresponding sales and, therefore, no disallowance was warranted.

9. The Assessing Officer did not accept the aforesaid explanation in its entirety. He observed that the supporting documents such as invoices, ledger accounts and payments through account-payee cheques were not, by themselves, sufficient to establish the genuineness of the purchases because such documents were ordinarily maintained by both the accommodation-entry provider and the beneficiary. He further observed that the burden of proving the genuineness of the expenditure claimed rested upon the assessee.

10. The Assessing Officer also observed that the submissions and documents were furnished at the fag end of the time-barring proceedings, thereby preventing cross-verification of the four suppliers by issuing notices under section 133(6) of the Act. Relying upon the information and findings of the Investigation Wing and the statements stated to have been recorded under sections 132(4) and 131 of the Act from Shri Pravin Kumar Jain and the directors or proprietors of the concerns controlled by him, the Assessing Officer concluded that the named concerns were engaged in providing accommodation entries and had not actually supplied the goods to the assessee.

11. At the same time, the Assessing Officer accepted that the purchases, as such, could not be doubted because the corresponding sales had been recorded and the material must have been received by the assessee. He observed that without the receipt of such material, the corresponding sales would not have been possible. He, however, held that the purchase price appearing in the invoices issued by the named parties could not be accepted and that the book results, to the extent of such purchases, were unreliable. The relevant finding of the Assessing Officer reads as under:

“Thus the receipt of material in question is not in doubt having regard to the quantitative details furnished by the assessee. But, the profit offered on these purchases can certainly be unreliable and is required to be estimated.

12. The Assessing Officer, therefore, rejected the books of account under section 145(3) of the Act and estimated the profit element embedded in the purchases of Rs.1,33,83,012/- at 12.5%. Accordingly, an addition of Rs.16,72,877/- was made and the total income was determined at Rs.19,98,387/-, rounded off to Rs.19,98,390/-. The Assessing Officer also initiated penalty proceedings under section 271(1)(c) of the Act.

13. Aggrieved by the reassessment order, the assessee preferred an appeal before the learned CIT(A). On the issue of reopening, the assessee submitted that the original assessment had been completed under section 143(3) of the Act and that the impugned notice under section 148 had been issued beyond four years from the end of the relevant assessment year. It was contended that there had been no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. According to the assessee, the purchases were duly reflected in the return of income, financial statements and books of account, which were available during the original scrutiny assessment.

14. The assessee further contended that the reopening was based upon a mere change of opinion and was not founded upon any fresh tangible material having a live nexus with the formation of belief that income had escaped assessment. It was submitted that the Assessing Officer had merely acted upon information received from the Investigation Wing and had not independently examined the material or applied his mind to the transactions of the assessee. The assessee also contended that copies of the statements and the incriminating material referred to in the reasons recorded and the reassessment order were not furnished to it.

15. Without prejudice, the assessee contended that since the reassessment was founded upon material allegedly found during the search of a third party, the appropriate proceedings, if otherwise permissible in law, ought to have been initiated under section 153C and not under section 147 of the Act. The assessee further submitted that a copy of the approval obtained under section 151 had not been furnished despite a specific request. It also pointed out an alleged inconsistency regarding the authority stated to have granted approval and requested the learned CIT(A) to direct the Assessing Officer to furnish a copy of such approval.

16. On the merits of the addition, the assessee submitted that it had discharged the primary burden of establishing the purchases by furnishing the ledger accounts and confirmations of the four suppliers, purchase invoices, delivery challans, bank statements evidencing payments through banking channels, corresponding sale invoices, delivery challans pertaining to sales and a chart establishing the nexus between the purchases and the corresponding sales. It was contended that the Assessing Officer had neither disputed the corresponding sales nor brought any material on record to show that the payments made to the suppliers had returned to the assessee in cash.

17. The assessee further submitted that no independent enquiry had been conducted by the Assessing Officer. According to the assessee, the Assessing Officer could have issued notices under section 133(6), summons under section 131, made enquiries through the Investigation Wing or verified the banking transactions of the suppliers. It was contended that the failure of the Assessing Officer to conduct such enquiries could not be used against the assessee. The assessee also sought copies of the third-party statements and an opportunity to cross-examine Shri Pravin Kumar Jain. It was stated that Shri Pravin Kumar Jain had subsequently retracted his statement by way of an affidavit and that an uncorroborated third-party statement could not constitute the sole basis for making the addition.

18. The assessee reiterated that the goods purchased from the four suppliers had been sold and that the corresponding sales were duly recorded in the books and offered to tax. It was contended that there could not be sales without purchases. Consequently, when the corresponding sales and the receipt of goods were accepted, the purchases could not be treated as non-genuine merely because the suppliers were alleged to be accommodation-entry providers.

19. Without prejudice, the assessee submitted that even if the bills were held to have been obtained from parties other than the actual suppliers, only the actual advantage or profit embedded in such purchases could be brought to tax. It was submitted that the profit on the disputed purchase and sale transactions worked out to 3.22%, whereas the overall gross profit disclosed in the audited accounts was 1.38%. The assessee contended that the estimation at 12.5% was excessive and disconnected from its historical profit margins and the margins prevailing in the textile trading business. It was accordingly prayed that the addition be deleted or, alternatively, restricted by comparing the profit earned from the disputed purchases with the profit earned from the regular purchases.

20. The learned CIT(A) rejected the challenge to the validity of the reopening. He held that the reassessment had been initiated on the basis of specific, credible and tangible information received from the Investigation Wing regarding accommodation entries and that such information was not available during the original assessment proceedings. He, therefore, concluded that the reopening could not be regarded as having been made on a mere change of opinion. The learned CIT(A) further recorded that the Assessing Officer had applied his independent mind to the information before recording the reasons and, accordingly, dismissed the ground challenging the reopening.

21. On the merits of the addition, the learned CIT(A) observed that the assessee had relied principally upon purchase invoices, ledger accounts and payments made through account-payee cheques. He held that the assessee had failed to furnish proof of the actual movement and receipt of the goods, transport receipts, freight details, stock register or quantitative reconciliation, and had also failed to produce the suppliers. The learned CIT(A) further observed that the assessee had not requested the Assessing Officer to issue summons under section 131 of the Act and held that the primary burden of establishing the genuineness of the purchases had not been discharged. The learned CIT(A), however, noticed that the Assessing Officer had not disallowed the entire purchases and had confined the addition to the estimated profit element because the corresponding sales had been accepted. The learned CIT(A) concluded that the estimation of profit at 12.5% was fair and reasonable in the facts of the case. He accordingly confirmed the addition of Rs.16,72,877/-, being 12.5% of the disputed purchases of Rs.1,33,83,012/-.

22. During the course of hearing before us, the learned Authorised Representative (AR) reiterated the facts and submissions advanced before the authorities below. He submitted that the Assessing Officer had acknowledged the documentary evidence furnished by the assessee and had also accepted the corresponding sales as genuine. The Assessing Officer himself observed that the corresponding sales could not have been effected without purchases and, therefore, neither the actual purchase nor the receipt of goods was doubted. There was also no allegation that any part of the payment made through banking channels had returned to the assessee in cash. The learned AR submitted that, despite these admitted facts, the Assessing Officer did not make any independent enquiry from the four suppliers by issuing notices under section 133(6) of the Act and proceeded solely on the basis of the information received in connection with the search conducted in the case of the Pravin Kumar Jain group. The Assessing Officer merely doubted the identity of the parties from whom the goods were procured and rejected the book results and estimated an alleged profit element at 12.5% of the disputed purchases, resulting in the addition of Rs.16,72,877/-.

23. The learned AR submitted that the observation of the Assessing Officer that the assessee had furnished the details belatedly and had thereby prevented the issuance of notices under section 133(6) was factually incorrect. He referred to paragraphs 2 and 3 of the assessment order and submitted that the notice under section 148 was issued on 19.03.2015, whereas the notice for proceeding with the reassessment, along with the reasons recorded, was furnished only on 09.02.2016, barely one month before the expiry of the limitation period. Immediately thereafter, the assessee commenced collating the requisite particulars and furnished various replies from 16.02.2016 onwards, copies of which were placed at pages 144 to 148 of Paper Book-I. It was contended that there was no delay attributable to the assessee. In any event, the names, addresses and other particulars of the four suppliers were available with the Assessing Officer from the inception of the reassessment proceedings and there was no impediment to the issuance of notices under section 133(6) of the Act.

24. The learned AR further submitted that the search findings relating to Shri Pravin Kumar Jain had no direct bearing upon the transactions undertaken by the assessee because no material or evidence referring adversely to the purchases made by the assessee was found during the search. The statement of Shri Pravin Kumar Jain was merely a third-party statement. Shri Pravin Kumar Jain was neither a proprietor, partner nor director of any of the four suppliers and, therefore, according to the learned AR, he had no authority to comment upon the genuineness of the transactions entered into by those concerns. There was also no evidence to show that the statement of Shri Pravin Kumar Jain had been confronted to the four suppliers or that they had accepted its contents. The learned AR referred to pages 139 to 143 of Paper Book-I and submitted that Shri Pravin Kumar Jain had subsequently retracted the statement and had stated the reasons for such retraction. The retraction was stated to have been filed before the Assessing Officer but was not considered. It was thus contended that a subsequently retracted third-party statement, unsupported by any corroborative material, could not form the basis of the impugned addition.

25. The learned AR further submitted that a copy of the statement of Shri Pravin Kumar Jain was not furnished to the assessee despite specific requests. The assessee had also sought an opportunity to cross-examine him, as evident from page 183 of Paper Book-I, particularly because the name of the assessee did not appear to have been mentioned in the statement. However, neither the statement was supplied nor the opportunity of cross-examination was granted. The learned AR accordingly contended that reliance upon such undisclosed material was in violation of the principles of natural justice and that the addition was liable to be deleted on this ground as well.

26. Adverting to the findings of the learned CIT(A), the learned AR submitted that the impugned order proceeded on factually incorrect premises. The learned CIT(A) observed that the assessee had failed to furnish delivery challans, particulars of lorry numbers, quantitative reconciliation, evidence relating to the movement of goods, stock registers and confirmations from the suppliers and had relied merely upon invoices, ledger accounts and bank statements. The learned AR submitted that purchase as well as sale delivery challans had been furnished before both the Assessing Officer and the learned CIT(A), establishing the movement of goods. As regards lorry numbers, it was explained that the goods were transported through hamali or hathgadi by daily-wage labourers and, therefore, no lorry numbers were available. The Assessing Officer had never doubted the delivery of goods on this account. It was further submitted that the assessee maintained purchase, sale and stock registers and had furnished a party-wise nexus between the disputed purchases and corresponding sales, together with quantitative details and confirmations from the suppliers.

27. The learned AR thus submitted that the assessee had not relied merely upon purchase invoices, ledger accounts and bank statements. The assessee had also furnished delivery challans evidencing movement of goods, confirmations from the suppliers, purchase and sale registers, corresponding sale invoices, stock records and a statement establishing the nexus between the purchases and sales. The Assessing Officer had accepted the corresponding sales and had specifically recognised that such sales could not have been effected without purchases. Therefore, the conclusion of the learned CIT(A) that the assessee had failed to substantiate the purchases was contrary to the material placed on record.

28. As regards the observation of the learned CIT(A) that the assessee had neither produced the suppliers nor requested the Assessing Officer to issue notices under sections 133(6) or 131 of the Act, the learned AR submitted that the assessee was never directed by the Assessing Officer to produce the suppliers. Hence, there was no failure on the part of the assessee to comply with any such requirement. It was further submitted that the exercise of the statutory powers of enquiry under sections 133(6) and 131 was within the domain of the Assessing Officer and the assessee could not be expected to request the Assessing Officer to exercise those powers. It was an undisputed fact that no notices under section 133(6) were issued and no independent enquiry was undertaken. The learned AR, therefore, submitted that the adverse observations recorded by the learned CIT(A) were unsustainable.

29. Without prejudice, the learned AR relied upon the decision of the Hon’ble Bombay High Court in Pr. CIT v. Mohammad Haji Adam & Co. [103 taxmann.com 459] and submitted that even where purchases are treated as non-genuine, an ad hoc addition at 12.5% is not permissible. According to the learned AR, the profit element has to be determined by bringing the profit rate on the disputed purchases at par with the profit rate earned on the genuine purchases. The learned AR referred to the comparative working placed at pages 72 and 74 to 77 of Paper Book-I and submitted that the overall gross profit rate was 1.28%, the gross profit rate on the disputed purchases was 3.22%, and the gross profit rate on the genuine purchases was 0.87%. Thus, the gross profit rate of 3.22% earned on the disputed purchases was already higher than the gross profit rate of 0.87% earned on the genuine purchases. According to the learned AR, the comparative working demonstrated that no profit had been suppressed and, consequently, no further addition was warranted.

30. The learned AR also placed reliance upon the orders of the Co-ordinate Bench in Shail International v. DCIT, ITA No.3268/Mum/2025, dated 05.05.2026. It was submitted that, in similar circumstances and after applying the principle enunciated in Mohammad Haji Adam & Co. (supra), the additions had been deleted. The learned AR accordingly prayed that the addition of Rs.16,72,877/- made by the Assessing Officer and confirmed by the learned CIT(A) be deleted.

31. Per contra, the learned Departmental Representative relied upon the orders of the authorities below and supported the addition made by the Assessing Officer and confirmed by the learned CIT(A).

32. We have considered the rival submissions and perused the material available on record. The dispute on merits relates to the addition of Rs.16,72,877/-, being 12.5% of the purchases aggregating to Rs.1,33,83,012/- made from four concerns alleged to be accommodation-entry providers controlled by the Pravin Kumar Jain group. The Assessing Officer did not disallow the entire purchases. He accepted that the goods had been received and that the corresponding sales could not have been effected without such purchases. However, proceeding on the premise that the invoices had been obtained from parties other than the actual suppliers, he rejected the book results under section 145(3) of the Act and estimated the profit element at 12.5% of the disputed purchases. The learned CIT(A) confirmed the estimation.

33. At the outset, we find that certain material observations recorded by the learned CIT(A) are not in conformity with the assessment record. The learned CIT(A) proceeded on the basis that the assessee had not furnished delivery challans, quantitative reconciliation, stock records or confirmations from the suppliers and had relied merely upon purchase invoices, ledger accounts and bank statements. However, paragraph 11 of the assessment order itself records that the assessee furnished, inter alia, copies of the ledger accounts of the four suppliers along with confirmations, purchase invoices, bank statements, a note explaining the subsequent sale of the goods and copies of the corresponding sale bills and delivery challans. In paragraph 15, the Assessing Officer further recorded that the assessee had furnished purchase invoices and delivery challans and had claimed that the disputed purchases were followed by corresponding sales.

34. More significantly, in paragraph 16 of the assessment order, the Assessing Officer recorded the following categorical finding:

“Thus, the receipt of material in question is not in doubt having regard to the quantitative details furnished by the assessee.”

35. The Assessing Officer also observed that the material must have been received because the corresponding sales would otherwise not have been possible. Thus, this is not a case where the receipt of goods or the corresponding sales was rejected. The doubt entertained by the Assessing Officer was confined to the identity of the suppliers named in the purchase invoices and the purchase price recorded therein.

36. The learned AR explained before us that the movement of goods was supported by the purchase and sale delivery challans. As regards the absence of lorry numbers, it was submitted that the goods were transported locally through hamali or hathgadi by daily-wage labourers. Be that as it may, once the Assessing Officer himself accepted the receipt of goods, the quantitative particulars and the corresponding sales, the absence of lorry numbers cannot, by itself, justify an ad hoc estimation of profit at 12.5%.

37. We also find that the Assessing Officer did not conduct any independent enquiry from the four suppliers. No notice under section 133(6) or summons under section 131 of the Act was issued. The Assessing Officer attributed this omission to the alleged delay on the part of the assessee in furnishing the details. The record, however, shows that although the notice under section 148 was issued on 19.03.2015, the reasons recorded for reopening were furnished only on 09.02.2016 (paper book page No. 3-4). The assessee thereafter commenced furnishing the details from 16.02.2016 onwards, as stated to be evident from pages 144 to 148 of Paper Book-I. In any event, the particulars of the four suppliers were available in the information received by the Assessing Officer and no statutory impediment to making an enquiry from them has been demonstrated.

38. The addition was also founded upon the information gathered during the search in the case of the Pravin Kumar Jain group and the statement attributed to Shri Pravin Kumar Jain. The assessee specifically contended that a copy of the statement was not supplied despite request and that the opportunity sought to cross-examine Shri Pravin Kumar Jain was not granted. It was further submitted that Shri Pravin Kumar Jain was neither a proprietor, partner nor director of any of the four suppliers and that his statement was subsequently retracted. Since the issue can be decided on the admitted facts and the binding principle governing the computation of the profit element, it is not necessary for us to record any conclusive finding regarding the evidentiary value of the said statement. Nevertheless, an untested third-party statement cannot substitute the determination of the actual profit, if any, embedded in the disputed purchases.

39. During the course of hearing, the learned AR was specifically called upon to place on record the gross-profit margins disclosed by the assessee for the earlier and subsequent assessment years, as also a comparative working of the profit earned on the disputed purchases and the genuine purchases. In compliance, the assessee furnished the requisite chart. The transaction-wise working furnished by the assessee is summarised as under:

40. The working shows that the assessee earned a gross-profit rate of 3.22% on the sales corresponding to the disputed purchases, whereas the gross-profit rate on the sales corresponding to the genuine purchases was only 0.87%. Thus, the profit rate disclosed on the disputed purchases was higher by approximately 2.35 percentage points than the profit rate earned on the genuine purchases. Although the chart records the difference as 2.34%, the minor variation is evidently attributable to rounding and has no bearing upon the conclusion.

41. The year-wise gross-profit margins furnished pursuant to our direction are as under:

42. The assessee explained that the relatively higher margin of 4.35% for the assessment year 2010-11 was attributable to foreign-exchange fluctuation. Even after including that year, the average gross-profit rate for the five assessment years was 1.85%, which remained substantially below the gross-profit rate of 3.22% earned on the disputed purchases in the year under consideration.

43. We notice that the transaction-wise working records the overall gross-profit rate for the year under consideration at 1.28%, whereas the year-wise chart records it at 1.38%. However, this difference does not affect the determination of the present controversy. On either figure, the overall gross-profit rate was lower than the gross-profit rate of 3.22% earned on the disputed purchases. More importantly, for applying the comparative test, the relevant comparison is between the profit rate of 3.22% on the disputed purchases and the profit rate of 0.87% on the genuine purchases. The basic figures underlying that comparison have not been controverted by the Revenue.

44. The controversy is squarely governed by the judgment of the Hon’ble jurisdictional High Court in Principal Commissioner of Income-tax-17 v. Mohommad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bom.). In that case also, the assessee was a trader in fabrics, the suppliers were alleged to be accommodation-entry providers and the corresponding sales were accepted. In paragraph 8, the Hon’ble High Court held as under:

“The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee’s sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases.”

45. The principle emerging from the aforesaid judgment is that where the assessee is a trader and the corresponding sales have been accepted, an arbitrary percentage of the disputed purchases cannot be added merely because the suppliers are alleged to be accommodation-entry providers. The taxable amount, if any, is confined to the difference between the gross-profit rate earned on the disputed purchases and the gross-profit rate earned on the genuine purchases. This requires a comparison of the actual profit rates and not the application of an ad hoc percentage divorced from the assessee’s trading results.

46. The aforesaid principle has recently been applied by the Co-ordinate Bench in Shail International v. DCIT, ITA Nos.3268 and 4428/Mum/2025, order dated 05.05.2026, for the assessment years 2009-10 and 2011-12. In that case, the Assessing Officer estimated the profit element in the disputed purchases at 5%, which was enhanced by the learned CIT(A) to 6%. The corresponding sales were not disturbed. The assessee demonstrated that the gross-profit rate on the disputed purchases was higher than the gross-profit rate on the regular transactions. Following the judgment of the Hon’ble jurisdictional High Court in Mohommad Haji Adam & Co. (supra), the Co-ordinate Bench held that no further addition could be made where the profit already disclosed on the disputed purchases was higher than that earned on the genuine purchases.

47. In paragraph 13 of the aforesaid order, the Co-ordinate Bench stated the applicable principle in the following terms:

“Consequently, if the profit already shown on the transaction earmarked as bogus is higher than the normal/genuine transactions, no further addition is made, but in a case inverse the difference of GP% between normal and bogus transactions would be the estimated addition on the amount of bogus purchases.”

48. The factual principle applied in Shail International is directly relevant to the present case. In both cases, the corresponding sales were accepted and the addition was made by applying an estimated percentage to the purchases alleged to have been made through accommodation-entry providers. In both cases, the assessee placed on record a comparative working showing that the gross-profit rate on the disputed purchases was higher than the gross-profit rate on the genuine purchases. The difference in the nature of the goods traded does not affect the applicable principle because the comparison is to be made with the assessee’s own profit margins on the genuine and disputed transactions.

49. In the present case, the comparative working shows that the assessee disclosed a gross-profit rate of 3.22% on the sales corresponding to the disputed purchases, as against the gross-profit rate of 0.87% on the sales corresponding to the genuine purchases. Thus, the gross-profit rate on the disputed purchases was already higher by approximately 2.35 percentage points. The year-wise chart also shows that the average gross-profit rate for the five assessment years was 1.85%, which was again lower than the rate of 3.22% disclosed on the disputed purchases.

50. The Assessing Officer applied the rate of 12.5% without comparing the actual profit earned on the disputed purchases with the profit earned on the genuine purchases. Neither the assessment order nor the order of the learned CIT(A) identifies any material demonstrating that the assessee earned an additional profit of 12.5% from the disputed transactions. The historical gross-profit margins also do not support such an estimation. The estimation is, therefore, ad hoc and disconnected from the assessee’s actual trading results.

51. The comparative working was furnished pursuant to the specific direction issued during the hearing and was supported by the purchase and corresponding sales figures placed on record. The learned DR did not furnish any contrary computation or point out any defect in the working. Except for the immaterial difference of Rs.1/- in the figure of the disputed purchases and the stated variation between the overall gross-profit rates of 1.28% and 1.38%, neither of which affects the comparison between 3.22% and 0.87%, the underlying computation remains uncontroverted.

52. Respectfully following the binding judgment of the Hon’ble jurisdictional High Court in Mohommad Haji Adam & Co. (supra) and the consistent application thereof by the Co-ordinate Bench in Shail International (supra), we hold that no further profit remains to be brought to tax. Since the gross-profit rate of 3.22% disclosed on the disputed purchases is higher than the gross-profit rate of 0.87% earned on the genuine purchases, an additional estimation at 12.5% would result in taxation of a hypothetical profit unsupported by the material on record.

53. Consequently, the addition of Rs.16,72,877/- made by the Assessing Officer and confirmed by the learned CIT(A) is directed to be deleted. Ground No.4 raised by the assessee is allowed.

54. In view of the complete relief granted to the assessee on the merits of the addition, adjudication of Ground Nos.1 to 3, challenging the validity of the reassessment proceedings and alleging violation of the principles of natural justice, would be academic. These grounds are therefore left open.

55. Ground No.5, relating to the charging of interest under sections 234A, 234B, 234C and 234D of the Act, is consequential in nature. The Assessing Officer shall recompute the interest, if any, in accordance with law while giving effect to this order.

56. Ground No.6, challenging the initiation of penalty proceedings under section 271(1)(c) of the Act, is premature and is accordingly dismissed.

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

Order pronounced in the open court on 21.08.2026.