Entire Bogus Purchase Cannot Be Added When Sales Are Not Disputed: ITAT Rajkot

ITO Vs Bhagavanji Bhai Damjibhai Bhimani (ITAT Rajkot)

Summary : The Income Tax Appellate Tribunal (ITAT), Rajkot dismissed the Revenue’s appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] relating to Assessment Year 2019-20 concerning additions made on account of alleged bogus purchases. The assessee had filed a return declaring total income of Rs. 9,98,510/-. The case was reopened under Section 147 of the Income Tax Act based on information received through the Insight Portal under the Risk Management Strategy (RMS), indicating that the assessee had allegedly obtained bogus purchase bills amounting to Rs. 13,84,955/- from entities associated with the Chaniyara Group, which was alleged to be engaged in providing accommodation entries.

During assessment proceedings, the Assessing Officer treated the purchases of Rs. 13,84,955/- as bogus under Section 69C and added the entire amount to the assessee’s income. An additional sum of Rs. 13,849/- was added towards alleged commission expenditure for obtaining accommodation entries. The assessed income was determined at Rs. 23,97,314/-. The Assessing Officer also applied Section 115BBE to the addition.

The assessee challenged the assessment before the CIT(A). After considering the submissions and case laws, the CIT(A) observed that although the parties from whom purchases were shown were found to be bogus, the Assessing Officer had not doubted the consumption or sales recorded by the assessee. The CIT(A) held that the purpose behind obtaining such bills appeared to be inflation of purchase price to suppress profits. Accordingly, instead of sustaining the entire addition, the CIT(A) estimated the suppressed profit element embedded in the purchases at 13.7%, being the gross profit ratio shown by the assessee, and restricted the addition to Rs. 1,89,739/-. However, the addition of Rs. 13,849/- towards commission expenses was confirmed.

The Revenue filed an appeal before the ITAT contending that once the purchases were found to be bogus accommodation entries, the entire amount ought to have been disallowed instead of restricting the addition to the profit element. The Department also argued that the case fell within the exception carved out under paragraph 3.1(h) of CBDT Circular No. 5/2024 dealing with organized tax evasion and accommodation entries, despite the tax effect being below the prescribed monetary limit.

The Tribunal observed that although the tax effect of Rs. 9,32,268/- was below the monetary threshold prescribed for departmental appeals, the case involved alleged bogus purchases and accommodation entries and therefore fell within the exceptions under the CBDT Circular. On merits, the Tribunal noted that the purchases had been accounted for and the gross profit arising from them had already been offered to tax. The Tribunal referred to judicial precedents including the decisions in PCIT vs. S.V. Jiwani and Mohammad Haji Adam & Co., which held that in cases of bogus purchases, only the profit element embedded in such purchases should be brought to tax.

The ITAT held that the CIT(A) had correctly estimated the suppressed profit element and found no infirmity in the appellate order restricting the addition to 13.7% of the alleged bogus purchases. Accordingly, the Tribunal upheld the order of the CIT(A) and dismissed the Revenue’s appeal.

FULL TEXT OF THE ORDER OF ITAT RAJKOT

Captioned appeals filed by the assessee, pertaining to Assessment Year 2019-20, is directed against order passed under section 250 of the Income Tax Act, 1961 by National Faceless Appeal Centre (NFAC), Delhi/Commissioner of Income Tax (Appeals), dated 02.06.2025, which in turn arises out of an order dated 26/03/2025 passed by the Assessing Officer u/s 147 of the I.T. Act,1961.

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

(i) The Ld. CIT(A) has erred in law and on facts in restricting the addition made by the Assessing Officer on account of bogus purchases, despite the same being substantiated by survey findings, third-party statements, and absence of delivery proofs indicating use of accommodation entries.

(ii) The Ld. CIT(A) failed to appreciate that available facts and circumstances establish that purchases were mere accommodation entries, as evidenced by third-party statements and other corroborative material, thus attracting the provisions applicable to organized tax evasion and sham transactions.

(iii) The Ld. CIT(A) erred in restricting disallowance under section 69C to 13.7% of unexplained expenditure, rather than disallowing the entire amount of bogus purchases, despite clear evidence that no genuine transaction or delivery occurred.

(iv) The Ld. CIT(A) erred in appreciating the intent that once the entire transaction is found bogus, estimation of mere profit element and grant of relief on the balance amount defeats the intent and purpose of section 69C of the Income-tax Act, 1961.

 (v) The Ld. CIT(A) erred in partly allowing the assessee’s appeal despite agreeing with the AO’s findings regarding accommodation entries and incurrence of commission expenses and also sustain the addition made in this regard, effectively acknowledging the sham nature of the accommodation transactions.

(vi) The Ld. CIT(A) erred in not sustaining the full addition of Rs. 13,84,955/-, and in restricting it to Rs. 1,89,739/- (13.7%) without adequate justification, notwithstanding conclusive findings supporting the bogus nature of the purchases.

(vii) The Ld. CIT(A) erred in applying judicial precedents that are factually distinguishable and by overlooking binding rulings which hold that when purchases are held bogus, the entire amount is liable to be disallowed, not merely a percentage thereof.

(viii) The Ld. CIT(A) wrongly relied on inapplicable case laws while disregarding judicial pronouncements supporting full disallowance of bogus purchases involving accommodation entries.

(ix) That the revenue craves leaves to add, amend, alter or withdraw any ground of appeal.

3. Brief facts qua the issue are that The assessee filed his return of income for the Assessment Year 2019-20 on 24.10.2019, declaring a total income of Rs. 9,98,510/. The case was reopened under section 147 of the Income-tax Act, 1961, on the basis of information received on the Insight Portal under the case type Risk Management Strategy (RMS)-High Risk CRIU/VRU Information. The information indicated that the assessee had entered into financial transactions during the previous year relevant to A.Y. 2019-20 and was identified by the Investigation Wing as a beneficiary of bogus purchase bills amounting to Rs. 13,84,955/-. The information was gathered pursuant to search action carried out in the case of Chaniyara Group and others, who were found to be engaged in providing accommodation entries. During the assessment proceedings, the Assessing Officer (AO) provided adequate opportunity to the assessee to present his case. After considering the material on record and the submissions of the assessee, the AO framed the assessment under section 147 of the Act vide order dated 26.03.2025, determining the assessed income at Rs. 23,97,314/-, as under:

• Returned income: Rs. 9,98,510/-
• Addition of Rs. 13,84,955/- on account of bogus purchases u/s 69C of the Act
• Addition of Rs. 13,849/ on account of unexplained expenditure (commission) u/s 69C of the Act
• Assessed income: Rs. 23,97,314/-
• Net agricultural income for rate purposes: Rs. 74,300/-

Being aggrieved, the assessee preferred an appeal before the Ld. Commissioner of Income Tax (Appeals), NFAC, vide Appeal No. NFAC/2018-19/10473078 dated 15.04.2025. The Ld. CIT(A), vide order dated 02.06.2025 passed under section 250 of the Act (DIN & Order No. ITBA/NFAC/S/250/2025-26/1076634093(1)), partly allowed the appeal by holding as under:

• The addition of Rs. 13,84,955/- made by the AO on account of bogus purchases was restricted to Rs. 1,89,739/-, being 13.7% of the alleged purchases, by estimating the suppressed profit element.
• The addition of Rs. 13,849/- on account of commission paid towards arranging accommodation entries was confirmed in full.

Thus, the appeal was partly allowed by the Ld. CIT(A). The tax effect involved in this case is Rs.9,32,268/- which is below the monetary limit (Rs.60 Lakh) as prescribed by the CBDT’s Circular No.9/2024

4. That the Department of revenue has filed an appeal against the impugned order before Ld. CIT(A), by order dated 02/06/2025.

5. During the course of argument DR submitted that their was a bogus purchase of Rs. 13,84,955/-. However, Ld. CIT(A) has reduced the addition from 100 to 30%.

6. The AR submitted that demand is less than the prescribed limit. Hence, the appeal is to be dismissed, summerly.

7. We have heard the rival contention of both the parties and perused the material available on record. We note that the tax effect involved in this case of Rs. 9,32,268/- is below the monetary limit as prescribed by the CBDT’s Circular No. 9/2024. The DR has brought to our notice: Nevertheless, the Revenue has preferred to file this appeal before the Hon’ble ITAT because the case falls within the exceptions provided in para 3.1(h) of CBDT Circular No. 5/2024. The appeal is therefore maintainable, and the Revenue seeks restoration of the additions made by the Assessing Officer in full.

8. We note that the appeal filed by the revenue is below the monetary limit prescribed for filing the appeal before ITAT by the CBDT, vide its circular No.5/2024 dated 15/03/2024 as mended by circular No. F.No.279/Misc/142/2007-ITJ(PG) dated 15/03/2024. But the Ld.DR stated that the assessee’s case falls under the exception provided in paragraph 3.1(h) of the above circular, wherein it is stated that in case involving organized tax evasion including the case of accommodation entry of bogus purchases, the decision of that appeal shall be taken on merit without having rigor to tax effect and the monetary effect. The Ld.AR has not made any objection. So accordingly, the appeals are taken for adjudication. As per the information that the assesse was entered in to financial transactions which was identified by investigation wing as beneficiary of bogus purchased bill amounting to Rs.13,84,955/-. In the assessment order the AO finding that the assesse has shown bogus purchases amounting to Rs.13,84,955/- from entities who are indulged in providing accommodation entries in the guise of the invoice issuance. Therefore, purchases of Rs.13,84,955/- shown by the assesse is hereby treated as bogus purchases u/s. 69C of the I.T. Act and added to the total income of the assesse. For this addition, tax is being charged u/s. 115BBE of the I.T. Act. The Ld.AO added back the gross profit @100% on alleged bogus purchases amount to Rs.13,84,955/- with the total income of the assessee. The assessee filed an appeal by challenging the addition before the Ld. CIT(A). The Ld.CIT(A) considered the submission of the assessee and restricted the addition of the gross profit 13.7% on the alleged bogus purchases. Being aggrieved on the order of the Ld.CIT(A), the revenue filed an appeal before us. We heard the rival submission and considered the documents available in record. The Ld.CIT(A) has taken the view which is reproduced as below: –

“The AO in this case has held that the parties from whom the purchases were made by the appellant were found to be bugus and that is the reason for which it was not produced during the assessment procedings. Not having doubted the consumption/sales, the motive behing obtaining bogus bills thus, appeas to be inflation of purchase price so as to suppress true profits. Considering the faccts of the case as well as the various case laws cited (supra), I stimate the suppressed profit to the extent of 13.7% i.e. the GP ratio shown by the appellant himself of the purchases made from the bogus entities, as the suppressed profit element embedded in such purchases. This estimation is in addition to the GP shown by the appellant. Thus, these grounds are partly allowed.”

10. The Ld. AO determined the gross profit at 100% on the alleged bogus purchases. The alleged bogus purchases were accounted for, and tax was paid on the gross profit so determined. The Ld. AR relied on the decision of the co-ordinate Bench-“H” of the ITAT, Mumbai in the case of Hasmukh Jagshi Visaria vs. ITO, ITA Nos. 2302/M/2016 & 2303/M/2016, pronounced on 12/07/2021. In that case, the bench held that where the assessee had a lower gross profit rate, the adoption of a gross profit rate of 12.5% was excessive, as it also included a VAT component of 4%. Consequently, the gross profit rate was reduced to 2% on the bogus purchases. Reliance was also placed on the judgment of the Hon’ble Bombay High Court in PCIT vs. S.V. Jiwani, (2022) 145 taxmann.com 230 (Bombay), where the Hon’ble High Court held that in cases involving bogus purchases, only the profit element embedded in such purchases should be treated as the income of the assessee. The Ld. CIT(A) accordingly adopted a gross profit rate of 4%, respectfully following the rulings of the Hon’ble Bombay High Court in Mohammad Haji Adam & Co. (supra). These decisions of the Hon’ble Jurisdictional High Court are binding upon us. We respectfully follow the direction in the cases of Mohammad Haji Adam & Co(supra) and S.V. Jiwani (supra). We find no infirmity in the impugned appellate order. Accordingly, the grounds raised by the revenue fail and are dismissed.

11. In view of the above facts and circumstance of the case, we are of the view that there is no infirmity is the order of CIT(A), we approve the decision of the Ld. CIT(A) and the appeal of the department is dismissed.

12. In the result, the appeal of the Department is dismissed.

Order pronounced in the open Court on 09/04/2026.