Circular transaction cannot be treated as bogus purchases u/s. 68: ITAT Rajkot

Kamlesh Deoraj Jain Vs ITO (ITAT Rajkot)

ITAT Rajkot held that transactions of sale and purchases cannot be treated as cash credit/bogus under section 68 of the Act, if they are circular in nature. Also held that profit margin of 12.50% can never be possible in case of circular trading activities.

Facts- The assessee`s case was reopened under section 148 of the Act, on the issue that assessee could not explain, the purchase of salt of Rs. 43,75,64,479/- from M/s. Ankur Chemfood Ltd.  AO rejected the contention of the assessee and held that assessee is engaged in circular transaction. Accordingly, AO made addition of Rs. 5,44,21,025/- [12.5% of total purchase of Rs. 43,53,68,202/-] as un-explained credit u/s 68 of the Income Tax Act, 1961 r.w.s 115BBE.

CIT(A) confirmed the action of AO. Being aggrieved, the present appeal is filed.

Conclusion- The Hon`ble jurisdictional High Court of Gujarat in the case of KFC Exports Private Limited held that transactions of sale and purchases cannot be treated as cash credit under section 68 of the Act, if they are circular in nature.

Held that in the assessee`s case under consideration, none of the characteristics of bogus purchases are present, as the assessee has furnished extensive documentary evidence comprises of total 1414 pages to substantiate the genuine purchase transactions, including quantitative details, goods movement, further sale transaction and profit thereon, confirmation from seller party, banking payments etc, clearly justifying that actual purchase transactions have been occurred. Further, held that even if the assessing officer’s version of circular trading is accepted, then also there is no case of the assessing officer for making any such huge and abnormal addition of 12.50% of the total purchases. Such kind of profit margin can never be possible in case of Circular Trading Activities, particularly when the assessing officer himself has held the transactions of the assessee are of circular trading.

FULL TEXT OF THE ORDER OF ITAT RAJKOT

Captioned appeal filed by the assessee, pertaining to Assessment Year 2018-19, is directed against the order passed by the National Faceless Appeal centre (NFAC), Delhi /Commissioner of Income Tax (Appeal) [(in short ‘the Ld.CIT(A)’], under section 250 of the Income Tax Act, 1961 (in short ‘the Act’) dated 14.11.2024, which in turn arises out of an order passed by the Assessing Officer, dated 25.03.2023, u/s 147 r.w.s. 144B of the Act.

2. Grounds of appeal raised by the assessee are as follows:

1. The Learned CIT (A) gravely erred in law in not adjudicating total five grounds of appeal taken by the Assessee serially numbered at grounds of appeal number 3 to 8.

2. The Learned CIT (A) erred in law and facts in upholding the action of the Learned assessing officer in making addition u/s 68 as Bogus Purchase despite transactions with Ankur Chemfood Ltd were termed as Circular Transactions by Ld assessing officer himself and upholding the decision of assessing officer despite direct decision of Ahmedabad ITAT on circular transactions in Pradip Overseas Ltd. ITA No. 790/Ahd/2018 Ahmedabad ITAT.

3. The Learned CIT (A) erred in law and facts in upholding the order passed by Learned assessing officer under section 147 of the Act, despite the Assessee furnishing extensive documentary evidence, comprising 1414 pages, substantiating the genuineness of the purchase transactions.

4. The Learned CIT (A) erred in law and facts in upholding the order of the Learned assessing officer without appreciating that the corresponding sale transactions of Ankur Chemfood Ltd were accepted as genuine by another Assessing Officer in the assessment of Ankur Chemfood Ltd. This inconsistency is contrary to the principles of fairness, justice, and the doctrine of estoppel.

5. The Learned CIT (A) erred in law and facts in upholding the order of the Learned assessing officer without appreciating that an affidavit on oath was submitted by Managing Director of Ankur Chemfood Ltd solemnly confirming sales made to the Assessee.

6. The Learned CIT (A) erred in law and facts in upholding the action of Learned assessing officer in rejecting the books of the Assessee under Section 145(3) of the Act without identifying any specific defects or discrepancies in the books and without providing a show cause notice prior to such rejection.

7. The Learned CIT (A) erred in law and facts in upholding the action of Learned assessing officer in making an addition under Section 68 of the Act despite having rejected the books of accounts under Section 145(3) of the Act and overlooking the fact that the estimated addition of 12.5% of purchase value cannot be considered “any sum found credited in Books” of the Assessee,

8. The Learned CIT (A) erred in law and facts in upholding the order of the Learned assessing officer which was passed without taking mandatory directions mentioned under section 144A of the Act, therefore violating principles of Natural Justice and resulting in an arbitrary and unjust assessment order.

9. The Assessee craves leave to add, modify, or alter any ground of appeal, if necessary.”

3. The relevant material facts, as culled out from the material on record, are as follows. The assessee filed his Income Tax Return (ITR), on 02.05.2022, in response to notice u/s 148 of the Income Tax Act, 1961, declaring loss of Rs.13,80,245/-. The assessee`s case was reopened under section 148 of the Act, on the issue that assessee could not explain, the purchase of salt of Rs. 43,75,64,479/- from M/s. Ankur Chemfood Ltd, during the financial year 2017-18, relevant to the assessment year 2018-19. During the assessment proceedings, the assessing officer noticed that an inquiry by investigation wing in the case of M/s. Bhagyalaxmi Brinechem Pvt Ltd. (PAN: AAFCB1466R), M/s. Oswal Petrochem (AACFO0223F), M/s. Ankur Chemfood Ltd. (AABCA8203F), and M/s. Smita Enterprises (prop. Shri Kamlesh Deoraj Jain, ADOPJ1769Q), shows some significant observations, as analysis of the bank statement of the A/c no. 10080200001438 held with Bank of Baroda in the name of M/s Bhagyalaxmi Brinechem Pvt Ltd, shows that on 03.08.2017, amount of Rs. 1,50,50,000/- is received in the said bank account from M/s. Ankur Chemfood Ltd and on the same date exact same amount was transferred to the bank account of M/s. Oswal Petrochem. On further perusal of the bank account statement of account no. 10080400000344 held with Bank of Baroda in the name of M/s. Oswal Petrochem, it is noticed that on 03.08.2017, an amount of Rs.1,24,25,000/- was transferred to M/s. Smita Enterprises (prop. Shri Kamlesh Deoraj Jain). To check the nature of transactions undertaken by M/s. Bhagyalaxmi Brinechem Pvt Ltd, with M/s. Ankur Chemfood Ltd and M/s. Oswal Petrochem, and transactions undertaken by M/s. Oswal Petrochem with M/s. Smita Enterprises (prop. Shri Kamlesh Deoraj Jain), the ledgers in the books of these entities (as provided in the submissions) were cross checked. From perusal of the ledger it was noted by the assessing officer that M/s. Bhagyalaxmi Brinechem Pvt Ltd has purchased Salt from M/s. Oswal Petrochem in Blocks (09.06.2017 to 16.06.2017 only purchase) and the same scenario is seen in the payments (payment on a single date i.e. 03.08.2017). From perusal of the ledger, it can clearly be seen that M/s Bhagyalaxmi Brinechem Pvt. Ltd has sold Salt to M/s. Ankur Chemfood Ltd in Blocks (03.06.2017 to 30.06.2017 only sale) and the same scenario is seen in the payments (payment receipts from 20.07.2017 to 04.09.2017). During the verification of ledger of Smita Enterprises in the books of M/s. Ankur Chemfood Ltd (regarding sales), similar transactions in Blocks were seen by the assessing officer. Further during the verification of ledger of M/s. Oswal Petrochem in the books of M/s. Smita Enterprises (regarding sales), similar transactions in Blocks were seen by the assessing officer. The analysis of the pattern of chain of transactions were noticed between M/s. Bhagyalaxmi Brinechem Pvt Ltd, M/s. Ankur Chemfood Ltd, M/s. Oswal Petrochem and M/s. Smita Enterprises (prop. Shri Kamlesh Deoraj Jain). The series of events on sample basis is reproduced by the assessing officer in the assessment order. Therefore, during the assessment proceedings, the assessing officer, issued a show-cause notice to the assessee to explain the purchases.

4. In response to the notice of the assessing officer, the assessee submitted its written submissions along with documentary evidences before the assessing officer. In his reply, the assessee provided justification of CHA, income from M/s Ankur Chemfood Ltd. The Assessee further submitted that in his reply dated 17.02.2023, he has submitted detailed explanation for purchase transaction with M/s Ankur Chemfood Ltd, along with documentary evidence consisting of total 815 pages and request to consider the same. Under the trading business of salt, the assessee purchases salt from vendors and the same salt is further sold to another party without any further modification or further processing of salt. The assessee being engaged in pure trading activity, earn only nominal margin on sale of salt, as per industry average. The assessee further stated that assessee and M/s Ankur Chemfood Ltd, both being located in the same city at a nearby location, actual delivery of goods is done by M/s Ankur Chemfood Ltd on behalf of the assessee directly to the buyer parties of the assessee. The assessee further stated that cost of outward freight incurred by M/s Ankur Chemfood Ltd for actual movement/ delivery of salt on behalf of assessee. The assessee produced extract of financial statement of M/s Ankur Chemfood Ltd, indicating that a local freight outward of Rs. 9,05,08,247/- was incurred by the M/s Ankur Chemfood Ltd. The assessee stated that M/s Ankur Chemfood Ltd. while incurring above local freight outward of Rs.9 crore, has shipped 13,318 deliveries through various vehicles and through various transporters, and the assessee also submitted the ledger. The assessee also submitted that he has made sale of Rs. 45,19,16,190/-, which is made mostly out of purchases made from M/s Ankur Chemfood Ltd. The assessee also stated that these sales would not have been possible at all, had there been no genuine purchases, made from M/s Ankur Chemfood Ltd.

5. However, the assessing officer rejected the above contention of the assessee and held that assessee is engaged in circular transaction, the findings of the assessing officer to the effect is given in para no.4.5, of assessment order. The assessing officer held that the assessee failed to prove the genuineness of the transaction made by the assessee, with M/s Ankur Chemfood Ltd. It is quite evident that there is a circular transaction made by the assessee along with others without actual movement of salt. The assessing officer observed that since the assessee failed to substantiate his claim of purchases, the total purchase of Rs. 43,53,68,202/-, made by assessee, from M/s Ankur Chemfood Ltd. was treated as bogus purchase and books of accounts were rejected by the assessing officer u/s 145(3) of the Income Tax Act, 1961. Further, considering the judgment of the Hon’ble Gujarat High Court in the cases of CIT vs SIMIT P SHETH, tax appeal no. 553 of 2012 and CIT vs Satyanarayana P Rathi, tax appeal no. 607 of 2012, the 12.5% of total purchase of Rs. 43,53,68,202/- which comes to Rs. 5,44,21,025/- was treated as un-explained credit u/s 68 of the Income Tax Act, 1961 r.w.s 115BBE and was added by the assessing officer to the income of assessee.

6. Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the learned CIT(A), who has confirmed, the action of the assessing officer. The ld CIT(A) observed that since, the expenditure has been claimed by the assessee and primary facts are in assessee`s knowledge, it is the primary onus on the assessee to prove that the purchases claimed by it are in his knowledge, it is the primary onus on the assessee to prove that the purchases claimed by it are genuine and are wholly and exclusively for the purpose of business. The ld CIT(A) noticed that the information received from investigation wing clearly explains the modus operandi of the bogus transactions, undertaken by the assessee amongst the group concerns namely, M/s Bhagyalaxmi Brinechem Pvt. Ltd., M/s Oswal Petrochem, and M/s Ankur Chemfood Ltd. The ld CIT(A) also noticed that during the course of assessment proceedings, the assessee, as an alternate plea, has submitted, vide his reply dated 7^thMarch, 2023 (as recorded under para 4.4.3 of the assessment order) that in case of doubt with respect to the genuineness of purchases then the assessee places reliance on the jurisdictional high court wherein a reasonable profit margin is estimated @ 12.5% of bogus purchases. In view of the above facts, the ld. CIT(A) confirmed the addition made by the assessing officer.

7. Aggrieved by the order of the learned CIT(A), the assessee is in further appeal before us.

8. Learned Counsel for the assessee, vehemently argued that circular nature of transactions was duly accepted by the assessing officer, himself in the Assessment Order. The learned Counsel, took us through the various para of the assessment order and stated that assessing officer believed that the assessee is engaged in circular transaction/ circular trading and therefore made addition at the rate of 12.50% of the total circular transactions. The ld. Counsel argued that in case of circular transaction, the net profit margin is very low, as compared to addition at the rate of 12.50% of the total circular transactions made by the assessing officer based on the alternatively plea taken by the assessee, during the assessment proceedings.

9. The ld. Counsel further submitted that in the assessee`s case under consideration, the assessing officer made the addition, at the rate of 12.50% treating the bogus purchases, which is not acceptable. In the assessee`s case none of the characteristics of bogus purchase are present, as the assessee has furnished, before the assessing officer, the extensive documentary evidence comprises of total 1414 pages to substantiate the genuine purchase transaction including quantitative details, goods movement, further sale transaction and profit thereon, confirmation from seller party, banking payments etc, clearly justifying that actual purchase transactions have been occurred. Therefore, in assessee`s case, there is no instances of bogus purchase, considering the documentary evidences submitted by the assessee, during the assessment proceedings, however, the transactions of the assessee fall within the ambit of circular transaction rather than bogus purchases. The ld. Counsel took us through the audited Profit &Loss of the proprietary concern of the assessee, where it can be observed that the assessee has earned net profit from trading of Rs.18,12,319/- on sale of Rs. 45,78,16,189/- which worked out to 0.39% of the turnover. The ld. Counsel stated that the net profit of 0.39% as declared by the assessee, duly takes care of the income from the circular trading activities and same is in line with the various decisions of the Hon’ble High Court of Gujarat and Ahmedabad ITAT wherein in case of circular trading 0.30% profit margin is upheld to be appropriate. For that ld. Counsel relied on the following judgements:

(i) The judgement of ITAT Ahmedabad in -Jt. Cit (Osd), Circle-3(1)(1) vs M/S. Pradip Overseas Ltd, in ITA No. 790/Ahd/2018.

(ii) Judgement of Hon`ble jurisdictional High Court of Gujarat in the case of PCIT v. KFC Exports (P.) Ltd. [2025] 172 taxmann.com 157 (Gujarat).

10. The ld Counsel for the assessee also submitted before the Bench that decisions, relied on, by the assessing officer, are distinguishable on facts, as well as on law, a chart showing that effect, in brief, is reproduced below:

11. On the other hand, Learned CIT- DR for the revenue, argued that during the assessment proceedings, the assessee, as an alternate plea, has submitted before the assessing officer, that in case of doubt with respect to the genuineness of purchases, then the assessee placed reliance on the judgements of various High Courts, wherein a reasonable profit margin was estimated @ 12.5% of bogus purchases. The case law references given by the assessee, before the assessing officer were: (i) CIT vs. SIMIT P. SHETH, tax appeal no. 553 of 2012, and (ii) CIT vs Satyanarayana P. Rathi, Tax appeal no. 607 of 2012. In both these cases there were bogus purchases and Tribunal restricted the addition to 12.5% of bogus purchases, which was further confirmed by the Hon’ble High Courts. Accordingly, the assessing officer restricted the addition and estimated @ 12.5% of bogus purchases, hence now, there should not be any grievance to the assessee, and therefore estimated addition @ 12.5% of bogus purchases, should be confirmed in the hands of the assessee, as the assessee has himself accepted in his alternatively plea, therefore, further relief should not be given to the assessee.

12. Learned CIT- DR for the revenue, further stated no doubt, these are the circular trading/ circular transactions, however, the facts remain that assessee has failed to prove the genuineness of the transactions, therefore, these transactions are in the category of bogus purchases. The assessing officer, after considering the fact that there was no movement of goods from one businessman to another businessman, had clearly stated that these are the bogus purchases, therefore, addition sustained by the ld. CIT (A) should be upheld.

13. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld. CIT(A) and other materials brought on record. We do not agree with the arguments advanced by ld. CIT-DR for the revenue, to the effect that since the assessing officer restricted the addition and estimated @ 12.5% of bogus purchases, hence now, there should not be any grievance to the assessee, and therefore estimated addition @ 12.5% of bogus purchases, should be confirmed in the hands of the assessee, as the assessee has himself accepted in his alternatively plea, before the assessing officer, therefore, further relief should not be given to the assessee, by this Tribunal.

We note that the assessee can claim before the ld. CIT(A) or before the Tribunal that he wrongly accepted the addition at the rate of 12.5% before the Assessing Officer (AO), and can request that the addition be deleted or reduced. There is no estoppel in Income Tax Proceedings. There is no concept of estoppel against an assessee in tax proceedings, even if the assessee agreed to an addition earlier, before assessing officer, they can later retract and contest the same. The Courts have upheld that concessions or admissions made under a mistaken belief of fact or law and therefore can be retracted. The Hon`ble Supreme Court in the case of CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) held that the appellate authority is duty-bound to ascertain the correct tax liability irrespective of what is conceded or admitted by the assessee before the assessing officer and neither the principle of res judicata nor the rule of estoppel is applicable to assessment proceedings. The Hon`ble Delhi High Court in the case of G.C. Agarwal v. CIT (1994) 209 ITR 500 (Delhi HC), held that the appellate authorities (CIT-A and Tribunal) are empowered to examine the matter on merits, even if, the assessee had conceded earlier or admitted before the assessing officer to tax him at a higher rate. Therefore, we note that such estimated additions are subject to challenge and need to be supported by cogent material and case law. If the assessee, now provides, before the Tribunal, case law, which is favouring to him, or evidence that lower margins or lower additions are justified or no additions are warranted, the Tribunal can accept the same. Hence, the arguments advanced by the ld. CIT-DR for the revenue are here by rejected.

14. We note that assessing officer has himself accepted that assessee is in Circular Transactions. Therefore, we find that Ld. CIT(A) has erred in law and facts in upholding the action of the assessing officer, in making addition u/s 68 of the Act, as Bogus Purchase, despite transactions with Ankur Chemfood Ltd, were termed as, Circular Transactions, by assessing officer himself and upholding the decision of assessing officer despite direct decision of Jurisdictional Tribunal, Ahmedabad, on circular transactions in Pradip Overseas Ltd, vide, ITA No. 790/Ahd/2018. We note that Circular nature of transaction, has been duly accepted by the assessing officer, himself in the assessment order, the relevant para and finding reference of the assessment order, is reproduced below:

Moreover, the assessing officer rejected the contention of the assessee for bogus purchases and held that assessee is engaged in circular transaction, the findings of the assessing officer to this effect in para no.4.5, of assessment order, is reproduced below:

“…In view of above, assessee failed to prove the genuineness of the transaction made by the assessee with M/s Ankur Chemfood Ltd. It is quite evident that there is a circular transaction made by the assessee along with others without actual movement of salt…….”

15. We find that assessing officer has given several examples in the assessment order for circular trading. The Circular Trading examples given by the assessing officer are as follows:

16. The Profit earned from sale made by the assessee out of purchase transactions with Ankur Chemfood Ltd, there is clear cut and one to one nexus available on record. Below is the summary of the sales made out of the purchases from Ankur Chemfood Ltd. (the relevant evidences are of Page nos. 53-54 of Paper Book):

Having explained the above examples and figures, the ld. Counsel for the assessee pleaded that assessee has shown profit to the tune of Rs.82,55,614/-noted in above table, which is 0.39% of Sales, and which is more than the addition sustained by the Hon`ble jurisdictional High Court of Gujarat, in the case of KFC Exports Private Limited, 172 taxmann.com 157(Guj), at the rate of 0.02% of sale, therefore, addition may be sustained in the hands of the assessee to the extent of 0.02% of sale. The Hon`ble jurisdictional High Court of Gujarat in the case of KFC Exports Private Limited (Supra) held that transactions of sale and purchases cannot be treated as cash credit under section 68 of the Act, if they are circular in nature.

17. The ld. Counsel for the assessee, also explained the Bench that there are lot of differences between bogus purchase and circular trading/ circular transaction, which is the facts of present case of the assessee under consideration. The table below, submitted by the ld. Counsel explains the difference between bogus purchases and circular trading/ circular transaction:

Characteristics of Bogus vis a vis facts of present case:

We find that in the assessee`s case under consideration, none of the characteristics of bogus purchases are present, as the assessee has furnished extensive documentary evidence comprises of total 1414 pages to substantiate the genuine purchase transactions, including quantitative details, goods movement, further sale transaction and profit thereon, confirmation from seller party, banking payments etc, clearly justifying that actual purchase transactions have been occurred.

18. In the assessee`s case under consideration, it is evident from the audited Profit &Loss account of the proprietary concern of the assessee, the assessee has earned net profit from trading of Rs. 18,12,319/-, on sale of Rs. 45,78,16,189/- which works out to 0.39% of the turnover. The net profit of 0.39% as declared by the assessee, duly takes care of the income from the circular trading activities and same is in line with the various decisions of the Hon’ble Ahmedabad ITAT wherein in case of circular trading 0.30% profit margin is upheld to be appropriate. Accordingly, even if the assessing officer’s version of circular trading is accepted, then also there is no case of the assessing officer for making any such huge and abnormal addition of 12.50% of the total purchases. Such kind of profit margin can never be possible in case of Circular Trading Activities, particularly when the assessing officer himself has held the transactions of the assessee are of circular trading, for that reliance can be placed on the judgement of jurisdictional ITAT Ahmedabad, in the case of Jt. Cit (Osd), Circle-3(1)(1) vs M/S. Pradip Overseas Ltd, in ITA No. 790/Ahd/2018. The findings of the Tribunal are reproduced below:

“Heard both the sides and perused the material on record. During the course of assessment, the assessee has admitted that it was engaged in circular trading wherein the bills/invoices changed hands without movement of physical goods. The Assessing Officer has treated such purchase of Rs.283,77,87,618/-as not reliable and disallowed 5%of such purchases which worked out to Rs.14,18,89,380/- and added to the total income of the assessee. During the course of assessment and appellate proceedings the assessee explained the complete modus operandi of circular trading transaction which was carried out to show better turnover. Without reiterating the facts as elaborated in this order, it is undisputed fact that assessee would make payment to the entity from whom it made purchases, who in turn would make consequent payment and the funds would finally reach back to the assessee. In circular trading the payments were made through cheques and profit on circular trading was disclosed by the assessee in its return of income. In the earlier assessment year, the assessee has gone to Settlement Commission and furnished the circular trading/sample bills and chart which was discussed by the Id. CIT(A) in his findings as supra in this order. The complete particulars of circular transaction in the table of transaction given in the finding of Id. CIT(A) demonstrated that assessee had sold goods worth Rs.3,31,79,415/- in circular trading through first party who in turn sold such goods to the second party at Rs.3,32,72,933/- and the last party has sold back to the assessee at Rs.3,32,72,933/- ultimately the difference in the first sale and the last sale was of 0.28% of circular purchases made by the assessee. The Id. CIT(A) has also referred the decision of the ITAT Ahmedabad on the identical issue of circular transaction in the case of M/s. Arman Fashion Pvt. Ld. vs. ITO vide ITA 2400 and 2407/Ahd/2012. The Id. CIT(A) has also discussed in his finding that this was not a case of estimation of net profit on circular purchases but this was a case where the assessee had incurred expenses for circular purchases/transaction @ 0.28% and estimated the disallowance 0.30% of circular trading purchases. The Id. CIT(A) has also explained in his finding regarding analysis of the transaction made by the assessee that these transactions were carried out in order to show better turnover in financial accounts.

The Revenue could not controvert the facts reported by the Id. CIT(A) with any relevant material. Therefore, looking to the above facts and finding, we do not find any infirmity in the decision of Id. CIT(A) in estimating the disallowance @ 0.30% of circular trading purchases of Rs. 283,77,87,618. Accordingly, this appeal of the revenue is dismissed.”

19. On the identical and similar facts, our view is fortified by the judgement of jurisdictional High Court of Gujarat in the case of PCIT v. KFC Exports (P.) Ltd. [2025] 172 taxmann.com157 (Gujarat), wherein, the Hon`ble Court held as follows:

“9. Considering the submissions of learned Senior Standing Counsel Mr.Varun K. Patel appearing for the appellant, it is pertinent to note that addition under Section 68 of the Act can be made where any sum is found credited in the books of accounts maintained for any previous year and no explanation is offered by the assessee for the nature and source thereof and the explanation offered by him is not satisfactory in the opinion of the Assessing Officer. However, the addition made by the Assessing Officer in respect of the purchases cannot be added under Section 68 of the Act as cash credit as the respondent assessee was involved in circular transactions of sale and purchase. Therefore, submission made by the learned Senior Standing Counsel Mr.Varun Patel justifying the addition made by the Assessing Officer under Section 68 of the Act is contrary to the provisions of Section 68 of the Act itself and therefore, in our opinion, both the CIT (Appeals) and the Tribunal has rightly deleted the entire addition of purchases made by the Assessing Officer under Section 68 of the Act.

10. The Tribunal while upholding the Order of the CIT (Appeals) has considered the findings of fact recorded by the CIT (Appeals) regarding admission of the assessee before the V AT Authorities in the case of the survey carried out in M/s.Biotar Industries Limited to the effect that the assessee has entered into a circular transaction of sales and purchases and accordingly, the difference between the sales and purchases has been considered as an income of the assessee.

11. So far as the reliance placed on behalf of the appellant-Revenue on the decision of this Court in case of N.K.Industires Limited (supra) is concerned, the said decision would not be applicable in the facts of the case, as N.K.Industires Limited (supra) was not involved in circular transactions but it was involved in bogus purchases shown on the basis of the fictitious invoices debited in the trading account and there was a manufacturing activity on the basis of such bogus purchases outside the books of accounts and therefore, the addition confirmed by the Tribunal in respect of the undisclosed income relating to the purchases to 25% of the total purchases was upheld by this Court relying upon the decision of Vijay Proteins Ltd. v. Commissioner of Income-tax [2015] 58 com44 (Gujarat). The Hon’ble Apex Court has also upheld the decision of this Court in case of N.K.Industires Limited (supra) by dismissing the Special Leave Petition which is reported in N. K. Proteins Ltd. v. Deputy, Commissioner of Income-tax [2017] 84 taxmann.com 195/250Taxman 22 (SC).

12. Therefore, in the given facts of the case, when there was no activity carried out by the assessee except entering into the circular transactions of issuing purchase and sales, we are of the opinion that the CIT(Appeals) and the Tribunal have rightly made addition of the difference between the sales and purchase and also making addition of 0.02% of the sales by dis-allowing the expenses and therefore, no interference is called for in both the matters. We answer the questions in negative i.e. in favour of the assessee and against the Revenue. Both the Appeals are accordingly dismissed.

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Section 68 of the Income-tax Act, 1961-Cash credit – Assessment Year 2010-11-Assessee was engaged in circular transactions involving sales and purchases with certain entities, without actual movement of goods – During a survey, one of those entities was found to be a paper company providing accommodation entries – Assessing Officer treated sales as unexplained cash credit under Section 68-Assessee argued that all sale proceeds were used for purchases, leaving only a 0.02% commission income-CIT (Appeals) and Tribunal ruled that Section 68 was inapplicable since transactions were circular, and only difference between sales and purchases, along with commission income, was taxable – Whether addition under Section 68 applies when an assessee fails to satisfactorily explain nature and source of a sum credited in books of accounts – Held, yes – Whether however, transactions of sale and purchases cannot be treated as cash credit under Section 68 if they are circular in nature – Held, yes – Whether therefore, in given facts of case, when there was no activity carried out by assessee except entering into circular transactions of issuing purchase and sales, CIT (Appeals) and Tribunal had rightly made addition of difference between sales and purchase and also making addition of 0.02% of sales by disallowing expenses and therefore, no interference was called for Held, yes [Paras 9 and 12][In favour of assessee]

20. On the identical facts, the Coordinate Bench of ITAT, Mumbai, in the case of M/s Patodia Filaments Pvt Ltd, in ITA No. 5696-5699/MUM/2024 (Mum. Trib.), held as follows:

“The court held that it is seen that assessee is dealing in the business of manufacturing of fabrics as well as trading in fabrics. It had made fabric purchases of more than Rs. 49.80 Crores. The only purchases made from these two parties have been doubted on which GP rate has been applied. The assessee to prove the genuineness of the purchases made from both the parties has produced various documents. Once the assessee had provided the details of corresponding sales on such purchases, delivery challans and the quantity of purchases along with payments made through banking channels backed by invoices, then without rejecting the books of accounts or corresponding sales, the trading results and Gross Profit cannot be disturbed. The sole reliance has been placed on the statement of one person who was handling affairs of these two companies and that he was providing bogus bill,

addition has been made by applying higher GP rate. Nowhere has it been pointed out that in his statement he has given the name of the assessee or stated that assessee was also provided any kind of accommodation bill. Once the quantitative details of purchase and sales which tallies with the trading results and overall gross profit has been accepted and corresponding one to one sale of the purchases made from these parties along with delivery challans has been shown, then, no addition can be made by applying any kind of GP rate. Ld. CIT (A) in A.Y.2016-17 has deleted the addition and in A.Y. 2018-19 he has applied GP rate of 0.88% by taking difference. This difference for making addition on account of GP rate of 0.88% is not justified when there is no such finding that there is some discrepancy in the purchases and sales. Accordingly, the entire addition made by the Id. assessing officer and partly confirmed by the Id. CIT (A) is deleted.

21. It is settled principle of law that Judicial discipline demands that once an order has been passed by the Jurisdictional High Court, on particular issue, the Tribunal is duty bound to act in accordance with the same. Therefore, respectfully following the binding precedent of Hon`ble jurisdictional High Court of Gujarat, in the case of KFC Exports (P.) Ltd (supra), and Jurisdictional ITAT -Ahmedabad, in the case of M/S. Pradip Overseas Ltd (supra), we allow the appeal of the assessee.

22. In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on 21/05/2025.