Bogus Purchase Cases: Only Profit Element Taxable; 4% GP Addition Upheld on ₹5.79 Cr Purchases

Ramayna Ispat Private Limited Vs DCIT (ITAT Delhi)

The Assessing Officer treated purchases of ₹5.79 crore as bogus accommodation entries and added the entire amount under section 69C, also invoking section 115BBE. In appeal, the CIT(A) agreed that the assessee could not fully substantiate the purchases from the named suppliers, indicating procurement from the grey market. However, since the corresponding sales were accepted and quantitative records existed, outright disallowance of the entire purchases was held to distort the true profit.

Relying on multiple High Court and Tribunal precedents, the CIT(A) adopted the settled principle that in such cases only the profit element embedded in the alleged bogus purchases can be taxed. Using the historical gross profit data (shown in the comparative GP chart on page 6), where the highest GP in surrounding years was 2.40%, the CIT(A) applied an enhanced GP rate of 4% (2.40% plus an additional 1.60% to cover possible revenue leakages) on the alleged bogus purchases. This resulted in a sustained addition of ₹23.16 lakh instead of ₹5.79 crore.

Before the Tribunal, neither the assessee nor the Revenue could dislodge this reasoning. The Tribunal found the estimation fair and consistent with judicial principles that once sales are accepted, only the embedded profit in unverifiable purchases should be brought to tax.

Accordingly, the 4% GP addition of ₹23,15,984 on the disputed purchases was upheld, and both the assessee’s and the Revenue’s appeals were dismissed.

FULL TEXT OF THE ORDER OF ITAT DELHI

These cross appeals are filed by the Assessee and Revenue against the order of Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [ld. CIT(A)] dated 11.07.2024 u/s 250 of the Income Tax Act, 1961 (“the Act” in short) for Assessment Year 2018-19.

2. Brief facts of the case are that the assessee is a Private Ltd. Company engaged in the business of manufacturing, processing, forging, casting mixing of various kinds of steel, carbon settle, mild steel, stainless steel, high speed steel and bright steel etc. The return of income was revised on 28.10.2018 at an income of Rs.1,00,96,587/-. The case of the assessee was reopened u/s 148 for the reason that assessee has taken accommodation entries of bogus purchases and after considering the submissions made, AO had made the addition of Rs.5,78,99,593/- u/s 69C of the Act towards unexplained expenditure on account of bogus purchase and further invoked the provisions of section 115BBE of the Act. The AO further made an addition of Rs.3,14,795/- by estimating the net profit declared by the assessee. Besides this further disallowance of Rs.9,37,608/- was made out of Freight Expenses and, accordingly, the total income of the assessee was assessed at Rs.6,87,83,788/-.

3. Against the said order, assessee preferred an appeal before the Ld. CIT(A) who vide impugned order dated 11.07.2024 though hold that the purchases are bogus however, applied GP rate of 4% on such alleged bogus purchases and reduced the addition to Rs.23,15,984/-.

4. Against the said order, both the parties are in appeal before the Tribunal by taking the following grounds of appeal:

Grounds of appeal (by Assessee) in ITA No.4138/Del/2024

“1. On the facts and in law, the order dated 11/07/20/24 passed by the Commissioner of Income Tax (Appeals) NFAC (in short “the Ld. CIT(A) confirming the order dated 16/03/2023 passed by Ld. Assessing Officer, Assessment Unit, Income-tax Department [in short “the Ld. AO”], Delhi, is void ab initio and liable to be quashed.

2. On facts and in law, the Ld. CIT(A) has grossly erred in upholding that the exercise of jurisdiction under section 147 read with section 148 of the Act by the Ld. AO even when inter alia the notice u/s 148 was issued: a. By the Jurisdictional Assessing Officer and not by the Faceless Assessing Officer as envisaged in the Act: b. Without implementation of mind by the Ld. AO and only on the basis of information as received from the Investigation Wing. c. Based upon a mechanical approval from the superior authorities. d. Based upon the documents/information which was un-earth during the course of search of some other entity.

3. On facts and in law, the Ld. CIT(A) has grossly erred in confirming the additions of Rs.23,15.984/-on account of alleged “bogus purchases” even when the Appellant has discharged the duty vested upon him under the law.

4. All the above-mentioned grounds are independent and without prejudice to others, and The appellant has the right to add, alter, amend, and delete the ground(s) of appeal at any time before, during or after the hearing.”

Grounds of appeal (by Revenue) in ITA No.4147/Del/2024

“(i) Whether in facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that the assessee has failed to prove any genuineness of the purchases amounting to Rs.5,78,99,593/- from the bogus paper entities during reassessment proceedings as well as during appellate proceedings, therefore the same was rightly disallowed by the assessing officer being unexplained expenditure u/s 690 of the Act.

(ii) Whether on facts of the case and in law, the Ld. CIT(A) has erred in applying the Gross Profit rate despite the fact that the purchase was found to be bogus by the Ld. CIT(A) as well.

(iii) The appellant craves to be allowed to add any fresh ground(s) of appeal and or deleted or amend any of the ground(s) of appeal.”

5. Heard both the parties at length and perused the material available on record. At the outset, it is seen that Ld. CIT(A) has upheld the action of the AO in treating the purchases of Rs.5,78,99,593/- as unverifiable since, assessee failed to substantiate the purchases made by placing on record the relevant details however, t Ld. CIT(A) by following the judgment of Hon’ble Gujrat High Court in the case of PCIT vs. Deepak Banwarilal Agarwal reported in [2024] 161 taxmann.com601 (Gujrat) and Co-ordinate Bench of ITAT, Delhi in the case of Parnami Pump & Projects Pvt. Ltd. in ITA No.1843/Del/2018, had applied the G.P. rate on such alleged unverifiable of the purchases. The relevant observation as contained in para 9 to 10 of the appellate order are as under:

“9. Ground no. 1 to 5: These grounds have been raised against the assessment framed by the assessing officer wherein addition of Rs. 5.91 crores were made. The appellant has additionally contended that Ld. AO has erred in law and on facts in framing impugned assessment order and that too without assuming jurisdiction as per law and without following the cardinal rules of natural justice.

9.1 With regards to the merits of the case, the appellant further argues that by filing below mentioned documents, his duty has been discharged:

a. Confirmation of transactions (along with audited financials, ITR, etc.)

b. Bank statement

c. Value wise and quantity wise purchases as made from the vendors

d. Stock register

e. Copy of the bills along with and bilti (transport receipt)

f. Cost audit report

g. Statutory audit report

h. Relevant extracts of the GST returns

9.2 With regard to the specific allegation of the AO that the parties still have closing balance as on the last date of the financial year, the appellant has submitted that it was not confronted with this finding during the assessment proceedings. Notwithstanding the same the appellant now submits that all the creditors were paid in the subsequent years.

9.3 I have carefully considered the assessment order and the submissions of the Appellant. The allegations of the AQ and the rebuttal of the Appellant are only focused towards one focal point as to whether the purchases as made by the Appellant were bogus or not. The Ld. AO has drawn few holes in the submissions of the Appellant and the Appellant too has replied to those allegations. As all the additions inter alia focus towards one allegation, all the grounds are being dismissed by common conclusion. From the impugned order and the appellants submissions, there is no denying the following facts:

i. The Ld. AO has himself added the sales (which are said to be bogus) on net profit percentage, and

ii. The Appellant too has proposed that the purchases should be added on gross profit margin, to his returned income.

9.4 In the peculiar circumstances, it is apparent that the Appellant has not made purchases from the above-bogus parties. However, at the same time, since the goods claimed to have been purchased from these bogus parties have been sold, it is clear that the assessee may have purchased goods from some other party whose details are not on record. A question arises as to why the Appellant had made actual purchases from third party but had not booked its bill? The answer could be attributed either to the fact that the third party from whom Appellant has made actual purchases was not issuing bill to the Appellant or that the Appellant had purchased the goods from the third party at a cheaper price. Hence, from the facts of the case it appears that Appellant may have made purchases from grey market. Under these circumstances, it is clear that to the extent of purchases made by the Appellant from the bogus parties and the corresponding sales made out of such purchases, the books of accounts of the Appellant are not clear and do not depict true and correct picture of the accounts of the Appellant.

9.5 In light of the above, the two options available with this office hence are limited to: First, to disallow the entire bogus purchases and at the same time reduce the corresponding sales and thereafter re-cast the profit and loss account of the Appellant with reduced sales and reduced purchases: or second, to estimate the additional profit margin embodied while making bogus purchases. Hence, I am of the firm opinion that the additions should only be restricted to the GP rate on the bogus purchases. Reliance is also placed on the following judgements which allude towards a similar stand to be judiciously taken in such cases:

1) Principal Commissioner of Income-tax vs. Deepak Banwarilal Agarwal reported at [2024] 161 taxmann.com 601 (Gujarat)

Where AO received information from Investigation Wing that assessee had obtained non-genuine purchase bills from a group which was engaged in business of issuing non-genuine purchase bills, unsecured loans and accommodation entries. disallowance was to be made at 6% of bogus purchases.

ii) PCIT Vs. Jagdish H Patel [ITA No. 410/412 of 2017] High Court of Gujarat If entire purchases to be treated as bogus, then GP would be higher than the total turnover and would give completely distorted figure – When additions are made on the basis of GP rate, limited amount of estimation and gross work is always inbuilt.

iii) PCIT vs. Rishabhdev Technocable Ltd (Bombay High Court)

Though the assessee has not proved the genuineness of the purchases and sales, yet if the AO has accepted the sales, the entire purchases cannot be disallowed. Only the profit element embedded in purchases would be subjected to tax and not the entire amount.

iv) PCIT vs. Pinaki D. Panani (Bombay High Court)

Even if the purchases made by the assessee are to be treated as bogus, it does not mean that the entire amount can be disallowed. As the AO did not dispute the consumption of the raw materials and completion of work, only a percentage of net profit on total turnover can be estimated.

v) Deputy Commissioner of Income-tax v. Rajeev G. Kalathil [2014] 51 com514/ [2015] 67 SOT 0052 (Mumbai)

Sales were accepted Held that only profit element embedded as per previous history of assessee i.e. 5% to 8% in the purchases could be added and not the entire purchase amount deleted the balance addition. High Court in revenue’s appeal declined to interfere in the order of the ITAT and upheld the attribution of 5% profit on such alleged bogus purchase

vi) Pooja Paper Trading Co (P.) Ltd. [264 Taxman 260] High Court of Bombay Assessee failed to produce evidence of genuineness of purchase Disallowance could only be of the Income/profit attributable to the bogus purchases.

vii) Geolife Organics Vs. ACIT [58 ITR(T) 297]-ITAT Mumbai

Information received from sale tax department that assessee is beneficiary of bogus billing-AO added profit ratio embedded in purchases disallowance due to non-appearance of the suppliers No efforts by AO to make further investigation to substantiate his allegation Purchases supported by sufficient documentary evidences Sales not doubted, quantitative tally available, payment through account payee cheque, GP rate reasonable and satisfactory in comparison to the previous years AD not brought on record any material Information from sale tax or non production of party could not treat the purchases as bogus.

viii) Parnami Pump & Projects Pvt. Ltd. (ITAT Delhi) reported as I.T.A. No.1843/DEL/2018.

In case the purchases are proven to be bogus, only GP can be added.

ix) ITO VS. Deepak Khusaldas Mehta [83 com63]-ITAT Mumbai

Opportunity of cross examination not given – Assessee was never asked to provide whereabouts of parties did not consider the quantitative reconciliation and the one to one identification of sale and purchase whereby the stock was reconciled – Books of accounts were not rejected-sales accepted – Only profit embedded can be added.

10. Based on the above discussion and respectfully following the Judicial precedents, the appeal is decided as follows. In the case of the Appellant, the details of GP rates for the immediately preceding year and succeeding years were provided to this office by the Appellant. Based upon the same this office finds the following as the most appropriate method to make additions at the GP rate as under:

11. Based upon the same the additions to the tune of Rs.23,15,984/- are confirmed and the appeal of the Appellant is partly allowed. And all the above grounds should be accordingly considered as dismissed. Since the appellant has got relief as per its own alternate plea on the substantive grounds, the technical grounds raised become academic and are not separately adjudicated upon.”

6. On careful consideration of the observations made by Ld. CIT(A) and considering the arguments put forth by both the parties before us, we fins that both the parties have not been able to controvert the findings given by Ld. CIT(A) which are reasonable looking to the facts of the case and, accordingly, we are not inclined to interfere with the order of Ld. CIT(A) and the same is hereby upheld. All the grounds of appeal taken by the assessee as well as by Revenue are dismissed.

7. In the result, the appeal of the assessee and Revenue are dismissed.

Order pronounced in the open court on 27.11. 2025.