Sumerlal K Sheth Vs ITO (ITAT Mumbai)
Bogus Purchase Addition Cut from 12.5% to 5%: Mumbai ITAT Follows Trader’s Own Earlier Year
Where purchases are disputed but the corresponding sales are not, the entire purchase value cannot automatically be treated as income. The question becomes what profit element should be estimated from those purchases. In the case of metal trader Sumerlal K. Sheth, the Mumbai Tribunal reduced that estimate from 12.5% to 5%, following its decision in the assessee’s own case for the immediately preceding assessment year.
How the addition arose
The assessee traded in ferrous and non-ferrous metals and filed his return for assessment year 2011–12 declaring income of ₹11,33,921. Information received through the Investigation Wing, based on Sales Tax Department material, suggested that he had obtained accommodation entries in the form of purchases from certain parties. The Assessing Officer reopened the assessment by issuing a notice under section 148 on 8 April 2013.
During reassessment, the Assessing Officer identified purchases of ₹3,84,57,177 from eight parties. Notices issued to them under section 133(6) were returned unserved. He also noted discrepancies in the purchase documents and the absence of a stock register. On that basis, he rejected the books under section 145(3) and treated the purchases as non-genuine.
The Assessing Officer did not add the full ₹3.84 crore. Instead, he estimated the profit element at 12.5%, making an addition of ₹48,07,147. The Joint Commissioner (Appeals) sustained both the rejection of the books and the addition.
The assessee relies on his own earlier appeal
Before the Tribunal, the assessee pointed to its order for assessment year 2010–11, dated 21 May 2026. That appeal had also concerned alleged non-genuine purchases in the same metal trading business.
There was a difference in how the earlier assessment had initially been made: for AY 2010–11, the Assessing Officer had added the entire disputed purchase amount. The first appellate authority restricted it to a profit estimate of 12.5%, and the Tribunal subsequently reduced the rate to 5% after considering the facts, the documentary material and the gross profit disclosed by the assessee. The assessee argued that the same rate should govern the present year.
The Revenue supported the orders of the lower authorities but did not dispute that the Tribunal had decided the comparable issue in the assessee’s own immediately preceding year. It also brought no material before the Bench showing a material change in the facts that would justify a different estimate.
Why the Tribunal adopted 5%
The Tribunal found the two years materially similar. The assessee carried on the same business, and the issue again concerned estimation of profit on purchases treated as non-genuine. It observed that where the corresponding sales were not disputed, the addition had to be confined to the profit embedded in the disputed purchases.
The Bench treated its earlier order as a direct and relevant precedent on the rate appropriate to this assessee’s circumstances. Since the Revenue had identified no distinguishing facts, it reduced the estimate on purchases of ₹3,84,57,177 from 12.5% to 5%. At 5%, the estimated addition works out to approximately ₹19.23 lakh, against the earlier addition of ₹48.07 lakh.
The Tribunal did not grant separate relief on the challenge to rejection of the books under section 145(3). It considered the reduction of the estimated profit element to address the substantive dispute arising from the purchases and dismissed that ground.
The reopening challenge remains undecided
The assessee had also challenged the validity of the reopening, alleging that the notice was issued on Investigation Wing information without independent application of mind by the Assessing Officer. He raised objections concerning the information relied upon and the opportunity to cross-examine persons whose statements were used.
The Tribunal did not decide those jurisdictional objections. Having granted substantial relief by reducing the addition on merits, it expressly left the grounds concerning reopening and the consequential reassessment open and unadjudicated. Interest under sections 234A, 234B, 234C and 234D was treated as consequential and was to be recomputed while giving effect to the order. The appeal was partly allowed.
Author’s comment
The useful point in this decision is the Tribunal’s application of consistency to profit estimation. A 12.5% addition could not be sustained merely because that rate had been used by the Assessing Officer when the Tribunal had already examined the same trader’s comparable purchases in the preceding year and considered 5% appropriate. The Revenue needed a material factual distinction to support a different rate; none was shown.
The 5% figure is a finding tied to this assessee and these facts, rather than a standard rate for every disputed purchase case. Equally, the order cannot be cited as upholding the reopening: the Tribunal expressly declined to decide that challenge. Its operative relief is the reduction of the purchase-related addition, with consequential recomputation of interest.
Cases Discussed
- Sumerlal K Sheth — AY 2010-11; ITA No.4787/Mum/2025 and CO No.260/Mum/2025; order dated 21.05.2026 — Coordinate Bench reduced the profit element on alleged non-genuine purchases from 12.50% to 5%, having regard to the factual matrix, documentary evidence and gross profit disclosed by the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order dated 24.03.2026, passed by the learned Joint Commissioner of Income-tax (Appeals) for the assessment year 2011-12. The assessee has raised the following grounds of appeal:
1. “On the facts and circumstances of the case and in law the learned Joint Commissioner of Income tax (Appeals) erred in confirming addition to the extent of Rs.48,07,147/- calculated @ 12.50% of alleged non genuine purchases of Rs.3,84,57,177/- made from parties enumerated in assessment order. Provisions of the Act ought to have been properly construed and regard being had to facts of the case addition to the extent of Rs.48,07,147/- should not have been confirmed. Reasons assigned by him are wrong, vague and insufficient to justify addition of Rs.48,07,147/- to the total income of the appellant.
2. On the facts and circumstances of the case and in law the learned Joint Commissioner of Income tax (Appeals) erred in confirming rejection of Books of Account invoking provision of section 145(3) of the Act.
3. On the facts and circumstances of the case and in law the learned Joint Commissioner of Income tax (Appeals) erred in confirming initiation of proceeding by issuing notice under section 148 of the Act. Said notice is issued on the direction of DGIT(Investigation). No independent application of mind or enquiry by the Assessing Officer. The learned Assessing Officer failed to put on record in reasons so recorded the list of documents, records verified by him before making belief of escapement of income. Notice has been issued solely on the basis of suspicion, assumption, whims and conjectures. There is no tangible material in possession of the Assessing Officer to justify issuance of notice under section 148 of the Act. Notice under section 148 of the Act has been issued to make roving enquiry in the case of the appellant. Notice under section 148 of the Act has been issued on the basis of Reason to suspect and not on the basis of Reason to believe.
4. On the facts and circumstances of the case and in law the learned Joint Commissioner of Income tax (Appeals) erred in confirming order made under section 143(3) r.w.s. 147 of the Act which is without jurisdiction, contrary to the provisions of the Act, illegal, bad in law, without providing reasonable opportunity of hearing to the appellant, against the principle of natural justice, without appreciating submission, documents in proper perspective, without providing opportunity to cross examination of the parties whose statement relied upon, without providing information received from DGIT(Investigation) is liable to be quashed and set aside.
5. On the facts and circumstances of the case and in law the learned Joint Commissioner of Income tax (Appeals) erred in confirming charging of interest under section 234A, 234B, 234C and 234D of the Act.”
2. Briefly stated, the assessee is an individual carrying on the business of trading in ferrous and non-ferrous metals. For the assessment year 2011-12, the assessee filed his return of income on 12.01.2012 declaring total income of Rs.11,33,921/-. Subsequently, information was received from the DGIT (Investigation), Mumbai, on the basis of information received from the Sales Tax Department, indicating that the assessee had obtained accommodation entries in the form of alleged bogus purchases from certain parties. The assessment was accordingly reopened and notice under section 148 of the Act was issued on 08.04.2013. The assessment was thereafter completed under section 143(3) read with section 147 of the Act.
3. During the course of assessment proceedings, the Assessing Officer noted that the assessee had recorded purchases aggregating to Rs.3,84,57,177/- from eight parties. Notices issued under section 133(6) to the concerned parties were returned unserved. The Assessing Officer also noted certain discrepancies in the purchase documentation and observed that the assessee had not maintained a stock register. He accordingly rejected the books of account under section 145(3) of the Act and treated the purchases as non-genuine. However, instead of adding the entire amount of purchases, the Assessing Officer, taking into consideration the profit element involved, made an addition of Rs.48,07,147/- being 12.5% of the alleged non-genuine purchases of Rs.3,84,57,177/-. The total income was accordingly determined at Rs.59,41,068/-.
4. The assessee carried the matter in appeal before the learned Joint Commissioner of Income-tax (Appeals). The learned Joint Commissioner of Income-tax (Appeals), after considering the submissions of the assessee and the assessment order, upheld the rejection of the books of account and also sustained the addition of Rs.48,07,147/- representing 12.5% of the alleged non-genuine purchases of Rs.3,84,57,177/-.
5. Aggrieved by the order of the learned Joint Commissioner of Income-tax (Appeals), the assessee is in appeal before us. During the course of hearing, the learned Authorised Representative (“ld.AR”) submitted that the issue arising in the present appeal is squarely covered by the decision of the Coordinate Bench of this Tribunal in the assessee’s own case for the immediately preceding assessment year, i.e. assessment year 2010-11, in ITA No.4787/Mum/2025 and CO No.260/Mum/2025, order dated 21.05.2026. It was submitted that in the said year also the dispute related to alleged non-genuine purchases and estimation of the profit element embedded therein and that the Coordinate Bench, after considering the factual matrix, submissions and documentary evidence placed on record, had reduced the rate of profit element from 12.50% to 5%. It was accordingly submitted that the same view ought to be followed in the year under consideration.
6. The learned Departmental Representative (“ld.DR”) relied upon the orders of the authorities below. However, he did not dispute the fact that the Coordinate Bench had considered the issue in the assessee’s own case for the immediately preceding assessment year.
7. We have considered the rival submissions and perused the material available on record. Before considering the applicability of the decision relied upon by the ld.AR, it would be appropriate to briefly notice the factual position in the immediately preceding assessment year. In assessment year 2010-11, the Assessing Officer had made an addition of the entire amount of purchases which were alleged to be bogus. In appeal, the learned first appellate authority granted partial relief by restricting the addition to the profit element embedded in the alleged bogus purchases and adopted the rate of 12.50% over and above the gross profit reported by the assessee, treating the same as the suppressed profit element arising from such purchases. The matter thereafter came before the Coordinate Bench in ITA No.4787/Mum/2025 along with CO No.260/Mum/2025. The Coordinate Bench considered the factual matrix of the case, the submissions made by the parties and the documentary evidence placed on record. After considering the material before it and the judicial pronouncements relied upon, the Coordinate Bench found it appropriate to reduce the rate of profit element adopted by the learned first appellate authority from 12.50% to 5%. While doing so, the Coordinate Bench proceeded on the principle that the addition in such circumstances is required to be confined to the profit element embedded in the disputed purchases and, for determining such profit element, regard has to be had to the gross profit disclosed by the assessee.
8. Thus, the decision of the Coordinate Bench in the assessee’s own case for assessment year 2010-11 proceeds on the principle that where the purchases are treated as non-genuine but the corresponding sales have not been disputed, the entire amount of such purchases cannot be treated as income of the assessee and the addition has to be restricted to the profit element embedded in such purchases. The Coordinate Bench, having regard to the facts and material before it, ultimately considered 5% to be the appropriate rate for determining such profit element in the assessee’s case.
9. We find that the controversy before us is materially similar. In the year under consideration, the Assessing Officer has proceeded on the basis of alleged non-genuine purchases from the parties referred to in the assessment order and, after rejecting the books of account, has made an addition by estimating the profit element at 12.50% of the disputed purchases. The learned Joint Commissioner of Income-tax (Appeals) has upheld the said addition. The dispute before us, therefore, is substantially the same as the dispute which came up for consideration before the Coordinate Bench in the assessee’s own case for assessment year 2010-11. The nature of business is also the same, namely, trading in ferrous and non-ferrous metals.
10. In these circumstances, we find no reason to take a different view in the year under consideration. The decision rendered by the Coordinate Bench in the assessee’s own case for the immediately preceding assessment year constitutes a direct and relevant precedent for the issue before us. More particularly, the Coordinate Bench has already considered the question as to the appropriate estimation of profit element in the assessee’s own case in respect of alleged non-genuine purchases and has found 5% to be appropriate in the factual circumstances of that case. The Revenue has not brought any material before us to demonstrate that the facts in the year under consideration are materially different so as to warrant a different rate.
11. Respectfully following the decision of the Coordinate Bench in the assessee’s own case for assessment year 2010-11 in ITA No.4787/Mum/2025 and CO No.260/Mum/2025 dated 21.05.2026, we hold that the same principle is applicable to the year under consideration and accordingly, the percentage of profit element on the disputed purchases of Rs.3,84,57,177/- is reduced from 12.5% to 5%. Ground No.1 is accordingly partly allowed.
12. As regards Ground No.2 challenging rejection of the books of account under section 145(3) of the Act, we find that the estimation of the profit element has been made after considering the nature of the purchases and the surrounding circumstances. Since we have followed the decision of the Coordinate Bench in the assessee’s own case and restricted the addition to the profit element embedded in the disputed purchases, no separate relief is required to be granted on this ground. The ground is accordingly dismissed.
13. Ground Nos. 3 and 4 challenge the validity of the reopening of assessment under section 147 of the Act and the consequential assessment framed under section 143(3) read with section 147 of the Act. Since we have already granted substantial relief to the assessee on the merits of the addition in Ground No. 1 and have restricted the addition in accordance with the decision of the Coordinate Bench in the assessee’s own case for the immediately preceding assessment year, we do not consider it necessary to adjudicate these grounds, which are jurisdictional in nature. These grounds are, accordingly, left open and are not adjudicated upon.
14. Ground No.5 relates to charging of interest under sections 234A, 234B, 234C and 234D of the Act. The charging of interest is consequential and the Assessing Officer shall recompute the same, if any, while giving effect to this order.
15. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 22.09.2026.
