ITO Vs Sahen Enterprises (ITAT Mumbai)
Bogus Purchases: Only Profit Element Taxable – ITAT Reworks Addition Based on Industry Margins
The ITAT Mumbai held that in cases of alleged bogus purchases, entire purchases cannot be added as income when corresponding sales are accepted, and only the profit element embedded in such purchases is taxable.
In this case, the assessee (diamond trader/exporter) was alleged to have made bogus purchases of ₹84.48 lakh from entities linked to the Bhanwarlal Jain group. The AO added 100% of purchases, while CIT(A) restricted it to 6%.
The Tribunal observed:
- Assessee provided full documentation—purchase bills, bank payments, stock register, and export invoices
- One-to-one correlation between purchases and export sales was established
- Sales were not doubted by the AO, making full disallowance illogical
It reiterated settled law that where purchases are from grey market:
- Goods are actually procured (though not from stated parties)
- Only extra profit/margin saved (tax evasion benefit) can be taxed
However, the Tribunal went a step further:
- Noted that diamond industry margins are typically very low (1–3%)
- Assessee already declared high GP (14.86%), higher than normal benchmarks
- Therefore, even 6% addition by CIT(A) would artificially inflate profits to 20%+, which is unrealistic
Accordingly, ITAT:
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