Case Law Details
ITO Vs Arvind Ratanchand Jain (ITAT Mumbai)
The Mumbai ITAT upheld the restriction of addition to 12.5% of alleged bogus purchases, rejecting the AO’s higher addition of 25%, and reaffirmed the settled principle that only profit element embedded in such purchases can be taxed.
The AO had treated purchases of ₹54.27 crore as non-genuine due to:
- Suppliers having cancelled GST registrations,
- Circular trading patterns,
- Lack of proper transport and documentation,
- Non-commensurate banking transactions.
Accordingly, AO made 25% addition (₹13.56 crore).
However, the CIT(A):
- Noted that sales were accepted, hence purchases cannot be entirely bogus,
- Held that goods must have been procured from grey market,
- Applied judicial precedent (Simit P. Sheth) and restricted addition to 12.5% (₹6.78 crore).
The ITAT upheld this view, observing:
- Acceptance of sales implies existence of purchases,
- Entire disallowance is unjustified; only embedded profit is taxable,
- Estimation of 12.5% is reasonable and consistent with jurisprudence.
The Tribunal emphasized:
- In bogus purchase cases, substance over form applies,
- Estimation depends on facts, nature of business, and margins,
- No uniform rate, but 12.5% is widely accepted benchmark in such cases.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Both the appeals of the revenue filed against the order of the NFAC, Delhi [for brevity the “Ld. CIT(A)”], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for Assessment Year 2020-21 and 2021-22, date of orders 24.11.2025 and 27.11.2025 respectively. The impugned orders emanated from the order of the Assessment Unit Income Tax Department (for brevity the ‘Ld. AO’) order passed under section 143(3) r.w.s. 144B of the Act date of order 26.09.2022 and 19.12.2022 for A.Y. 2020-21 and 2021-22 respectively.
2. When the appeal was called for hearing, no one appeared on behalf of assessee to represent his case. There is no application for seeking adjournment either. In view of the above and considering the nature of dispute, we proceed to dispose the appeal ex-parte qua the assessee after hearing the Ld. DR and on the basis of material available on the record.
3. Both the appeals pertain to the same assessee and arise out from same factual matrix. Both the appeals are taken together and heard together and for convenience disposed of by a common order. ITA No.481/Mum/2026 for A.Y. 2020-21 is taken as lead case and the decision rendered therein should be applicable mutatis mutandis in the other appeal.
ITA No.481/Mum/2026, AY 2020-21
4. The revenue has taken the following grounds:
“1. Whether on the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in restricting the addition @ 12.5% of Rs. 54,27,93,837/-, ie to the extent of Rs. 6,78,49,229/-, whereas the AO has made addition @ 25% of Rs. 54,27,93,837/-, ie. Rs. 13,56,98,459/- without appreciating the detailed findings given by the AO in the assessment order.”
2. “Whether on the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has not appreciated the addition made of Rs. 13,56,98,459/-by the AO on account of non-authentication of business purchase made by the assessee from PrakashkumarVrajšalSoni, having PAN: CKGPS6163N and Ravi PrakashbhaiSoni having PAN: EXYPS3536J.”
3. “The appellant-Revenue craves leave to add to, alter, amend or withdraw any of the above grounds at the time of hearing.”
5. We heard the submission of the Ld. DR and considered the documents available in the record. The Ld. DR argued and fully relied on the order of the assessing authority. The Ld. AR argued and invited our attention in relevant paragraph-3 of the assessment order which is reproduced as below:-
“3. As is clear from the schedule above, up until the detailed response furnished on 12.08.2022, the assessee had not responded with details to any of the notices issued earlier. Upon perusal of the response of the assessee, it was observed that compared to AY 2019-20, the assessee had reported huge increase in purchases as well as sales. Prior to AY 2020-21, the assessee reported that there was no turnover, gross profit earned (as per paragraph K of the answer to Question no. 6 of the response dated 12.08.2022. Upon perusal of the responses of the assessee and the details furnished in the ITR, variation to the income of the assessee for AY 2020-21 has been made on the following ground:
3.1 Addition of 25% of Rs. 54,27,93,837/- (i.e. Rs. 13,56,98,449/-) on account of non-authenticated/bogus business purchases amounting to Rs. 54,27,93,837/-
3.1.2 Notices under section 142 (1) were issued to the assessee on 29.06.2021, 22.11.202108.01.2022, 27.01.2022 and 05.09.2022. The assessee first responded to the SCN issued on 14.03.2022. The assessee submitted the response vide letter dated 12.08.2022. The assessee furnished Tax Audit Report for AY 2019-20. The auditors were Umesh Khese and Company, Ahmedabad. The Form 3CD furnished along with the response contained the quantitative details of closing stock. In the same response, the assessee also stated: “Regarding the second item i.e. Non-furnishing of quantitative details, it is not clarified that where in which submission said quantitative details are not furnished, However, we have noticed that at Clause No. 35 of Form 3CD of the Tax Audit Report the same was required to be furnished by the assessee and which is found blank. The assessee accepted that the Form 3CD that was available for perusal earlier contained no quantitative details.
In the response received on 12.08.2022, the assessee also furnished ledger of each of the sellers from whom business purchases were made.
3.1.2 The assessee, vide the aforementioned response also furnished GSTR 2A for AY 2020-21 and the Purchase ledger for AY 2020-21. As per the GSTR 2A furnished by the assesseee, the GST license registration of Prakashkumar Vrajlal Soni (PAN: CKGPS6163N) had been cancelled in financial year 2017-18 and that of Ravi Prakashbhai Soni (PAN: EXYPS3536J) had been cancelled in financial year 2021-22. Upon perusal of the ITR of both the persons, it was observed that the address details and email details of both the parties were the same. Further, both parties had furnished a common mobile number in the ITR, There was found to be a business connection between both the parties from whom purchases were made by the assessee.
3.1.3 Vide response received on 17.09.2022, the assessee furnished daily item-wise stock register. The assessee furnished item-wise day-wise stock register for purchases for Gold 995 and Silver 995. With regard to the purchases made from PrakashkumarVrajlalSonm (PAN: CKGPS6163N) and Ravi Prakashbhai Soni (PAN EXYPS3536J) cumulatively amounting to Rs. 54.27.93,837/-, the assessee also furnished bank account statements of the bank accounts used for business purposes in the financial year 2019-20.
3.1.4 Upon perusal of the bank account statements, it was observed that the payments made and received through the banking channels were not commensurate with the purchases and sales being made with both the parties. Further, upon perusal of the bank account statements, it was found that settlements regarding the transactions in bullion were not happening on gross basis. The ledger maintained with respect to both the parties confirmed the same. In light of the fact that the settlements through banking channels were not happening on gross basis and were not commensurate with the volume of trade happening with both the parties, the trading activities by the assessee with these two parties both of whom have their GST license registration cancelled, had characteristics of circular trading.
3.1.5 Upon perusal of the bills of transportation furnished by the assessee vide response received on 19.09.2022, it was observed that none of the bills carried any details about the item of transport (description of what the item is, details of the vehicle the item will be transported in, details of confirmation of delivery). For such precious items being traded in such high volume, a usual business practice would be to furnish detailed description on bills of transport. However, the bills furnished carried no such details regarding the item of trade. The invoices furnished by the assessee had no details of the payment/settlement with regard to the item being purchased, Further, the invoices furnished carried no details of transportation vehicle.
3.1.6 Purchases of such high value were not accompanied with any related insurance, hypothecation documents for the purpose. As stated earlier, upon perusal of the ledgers of both the parties, it was seen that trade settlements were majorly not out of bank accounts. Mostly, the assessee was buying from and selling to the same parties. Transactions in the bank related to a transaction were neither of the same quantum nor were happening on the day of inward/outward stock movement of the commodity being bought/sold
3.1.8 Upon perusal of the screenshot furnished by the assessee in the response to the show cause notice, it was observed that the proprietor of Kabir Enterprise (Ravi Prakashbhai Soni) was neither Aadhaar authenticated nor e-KYC verified.
3.1.9 Without prejudice to the conclusions being drawn from the details furnished above, it is also observed that the details furnished by the assessee in the initial 3CD report had no details of closing stock and complete details were furnished vide the 3CD report received on 12.08.2022, there is reason to doubt the genuineness of purchases. It was observed that the 3CD report furnished on 12.08.2022 had the same date on 3CB report as on the initial 3CB report. It is incomprehensible as to why the assessee would upload the 3CD report with incomplete details when both were prepared on the same day.
3.1.10 All the circumstances and facts detailed above point to the fact that the assessee did not substantiate the genuineness of the purchases made. In light of the cancellation of the GST licenses of the two suppliers (Prakashkumar Vrajlal Soni having PAN CKGPS6163N and Ravi Prakashbhai Soni having PAN EXYPS3536J), and after perusal of the response furnished by the assessee, it is held that the purchases were not found to be genuine.”
6. The relevant observations of the Ld. CIT(A) contended in the relevant paragraphs is reproduced as below:-
“7. Based on the above I find that while there are discrepancies and concernsraised by the AO regarding the genuineness of the purchases, although the appellant has provided documentary evidences but the same were not substantiate the transactions. Thus, it is clear that some of the suppliers may not have been fully compliant with tax regulations.
7.1 The bogus transactions may be done in any one the following ways:-
-
- There may be no purchases but in the books of account the entries may be made in respect of the bogus purchases.
- The actual purchases may be substituted with any purchases made from the local or grey or black market.
- Some supplier are in are in practice of selling of goods and items but not entering the transaction register in the books of accounts or sales
When the allegations are made against the assessee for bogus purchase it is the obligation of the assessee to prove before the Authorities that the transactions are genuine. The assessee may prove the genuineness of the transactions by means of direct evidences such as delivery challans, lorry receipts invoices, stock register, lab report etc. The indirect evidences are comparison of the gross profit, comparison with other products, valuation report etc.
7.2.1 In Commissioner of Income Tax I v. Simit P. Seth’ 2013 (10) TMI 1028 Gujarat High Court, the assessee is engaged in the business of trading in steel on wholesale basis. For the assessment year 2006-07, the assessee filed a return of income declaring total income of 1,95,500. The assessment was reopened by issuing notice under section 148 of the Income-tax Act on March 28, 2008. During the course of the reassessment proceedings, the Assessing Officer noticed that some of the alleged suppliers of steel to the assessee had made their statements on oath to the effect that they had not supplied the steel to the assessee but had only provided sale bills. In turn, they were receiving a small commission. The Assessing Officer, therefore, concluded that the total purchases of 41,04,903 cumulatively made from the said three parties were bogus and added the entire amount of 41,04,903 to the gross profit of the assessee.
7.2.2 The assessee thereupon preferred appeal an before the Commissioner (Appeals). The Commissioner (Appeals) held that the purchases were not made by the said three parties, but believed that the appellant-assessee had made the purchases from other parties in the open market. The Commissioner (Appeals) retained 30% of the purchase cost as the probable profit of the assessee. The Commissioner (Appeals) reduced the additions from 41,04,903 to 28,73,432. On the appeal the Tribunal was of the opinion that 12.5% of the disputed purchases should be retained in the hands of the assessee as business profit. Against this order the assessee filed appeal before High Court. 12.31,471 and deleted the balance28,73,432. On the appeal the Tribunal was of the opinion that 12.5% of the disputed purchases should be retained in the hands of the assessee as business profit. Against this order the assessee filed appeal High Court.
7.2.3 The High Court held that the only question that survives is what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The Commissioner adopted the ratio of 30% of such total sales. The Tribunal, however, scaled down to 12.5%. The High Court noticed that in the immediately preceding year to the assessment year under consideration the assessee had declared the gross profit at 3.56% of the total turnover. If the yardstick of 30% as adopted by the Commissioner (Appeals) is accepted the gross profit rate will be much higher. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. No question of law in such estimation would arise. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick can be adopted. The High Court dismissed the appeal filed by the assessee.
7.3 The Assessing Officer (AO) had accepted the assessee’s reported sales. Since a specific quantity of stock was sold, an equivalent quantity must have been purchased. This indicated the purchases were not entirely fictitious, but merely made from unrecorded sources. Thus, in view of the facts of the case, legal precedents and the principles laid downby the courts, the addition made by the AO of Rs. 13,56,98,459/- which is 25% of the entire purchase of Rs. 54,27,93,837/-from Prakashkumar Vrajlal Soni and Ravi Prakash bhai Soni as the trading activities by the assessee with these two parties, both of whom have their GST license registration cancelled, had characteristics of circular trading cannot be justified. Therefore, considering the above addition restricted to 12.5% of Rs. 54,27,93,837/- i.e. addition to the extent of Rs.6,78,49,229/- is confirmed.”
7. The core issue involved in the present appeal pertains to the estimation of profit element on alleged non-genuine purchases. It is an undisputed fact that the Ld. AO has accepted the sales declared by the assessee. Once the sales are accepted, the corresponding purchases cannot be held to be entirely bogus, though the genuineness of the parties from whom such purchases were claimed remains doubtful. The Ld. AO, based on various discrepancies such as cancellation of GST registrations of suppliers, absence of proper transportation details, non-commensurate banking transactions, and indications of circular trading, treated the purchases as non-genuine and estimated profit at 25% of such purchases.
On the other hand, the Ld. CIT(A), after duly considering the factual matrix and judicial precedents, particularly the ratio laid down by the Hon’ble Gujarat High Court in the case of Simit P. Sheth (supra), has rightly observed that in cases of alleged bogus purchases, only the profit element embedded in such purchases is liable to be taxed. The Ld. CIT(A) further noted that the existence of sales necessarily implies corresponding purchases, albeit from grey market or unverified sources, and therefore, entire disallowance is not justified. The Ld. CIT(A), applying a reasonable and judicially accepted estimation, restricted the addition to 12.5% of the impugned purchases, which in our considered view, is fair, reasonable, and in consonance with the settled legal position. The revenue has not brought any distinguishing facts or contrary judicial precedent to justify deviation from such estimation.
Accordingly, we find no infirmity in the well-reasoned order of the Ld. CIT(A) in restricting the addition to 12.5% of the alleged non-genuine purchases.
Hence, the appeal of the revenue is dismissed.
8. In the result, the appeal of the revenue bearing ITA No.481 & 482/Mum/2025 are dismissed
Order pronounced in the open court on 16th day of April 2026.
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