DCIT Vs Rajesh Chimanlal Patel (ITAT Ahmedabad)
The Income Tax Appellate Tribunal (ITAT), Ahmedabad, decided the Revenue’s appeals and the corresponding cross objections filed by the assessee for Assessment Years 2018-19 to 2020-21 through a common order.
The assessee, an individual engaged in the business of civil construction and infrastructure projects, filed his return of income for AY 2018-19 declaring total income of ₹3,24,52,470. The assessment was reopened under Section 147 of the Income Tax Act, 1961, on the basis of information flagged under the Risk Management Strategy alleging that the assessee had obtained bogus accommodation purchase entries amounting to ₹54,75,907 from M/s India Steel Impex.
During the reassessment proceedings, the Assessing Officer (AO) observed that the assessee failed to furnish e-way bills, purchase vouchers, delivery challans, bilty and weighment slips. The supplier did not respond to notices issued under Section 133(6), and physical verification reportedly showed that the supplier was not available at the stated address. The AO also relied upon the statement of the proprietor of M/s India Steel Impex, who had admitted to issuing accommodation bills without actual movement of goods. Holding that payments through banking channels alone did not establish genuineness, the AO treated the entire purchase amount of ₹54,75,907 as unexplained expenditure under Section 69C and taxed it under Section 115BBE.
Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee contended that the purchases were genuine, supported by tax invoices containing transporter details, and that payments had been made through banking channels. The assessee also submitted that the materials had been used in State Government infrastructure projects.
The CIT(A) observed that the AO had accepted the sales and turnover declared by the assessee and had not rejected the books of account under Section 145(3). The CIT(A) held that the entire purchases could not be disallowed and that only the profit element embedded in the unverified purchases could be brought to tax. Considering that the assessee’s average gross profit rate in earlier years was approximately 2.8%, the CIT(A) applied a rate of 3.5% on the disputed purchases, sustaining an addition of ₹1,91,656 and directing deletion of the balance addition of ₹52,84,250.
The Revenue challenged this relief before the Tribunal, contending that once the purchases were found to be sham accommodation entries, the entire amount should have been disallowed under Section 69C. It also relied upon the decision of the Bombay High Court in Kanak Impex (India) Ltd., as affirmed by the Supreme Court.
The assessee, through cross objections, challenged the validity of the reopening under Sections 148 and 148A and also disputed the sustenance of the 3.5% addition. The assessee submitted that the purchases were genuine and relied upon documentary evidence including audit reports, financial statements, purchase bills, bank statements, ledger accounts, confirmation from the supplier, and GST returns. It was further argued that since the reopening was based on material arising from the search in the case of the supplier, proceedings ought to have been initiated under Section 153C instead of Section 147.
The Tribunal noted that although the AO questioned the genuineness of the purchases, he had accepted the assessee’s turnover generated from those purchases and had not rejected the books of account under Section 145(3). It also recorded that the CIT(A) had considered the utilization of materials in infrastructure projects, the reflection of the transactions in the supplier’s audited accounts, payment of GST, the supplier’s subsequent confirmation resiling from the earlier statement, and the denial of cross-examination.
The Tribunal agreed with the CIT(A) that in cases of alleged accommodation purchases, the objective is to tax the profit element or tax savings embedded in such transactions rather than disallow the entire purchase amount where corresponding sales have been accepted. It found the estimation of 3.5% based on the assessee’s past gross profit history to be fair and reasonable. Accordingly, the Tribunal upheld the restriction of the addition to ₹1,91,656 and dismissed the Revenue’s appeal.
On the assessee’s cross objections, the Tribunal held that the reopening was valid. It observed that the AO had acted on information available through the insight portal and had followed the procedure prescribed under Section 148A. The Tribunal further rejected the contention that proceedings should have been initiated under Section 153C, holding that the reopening was based on the post-search statement of the supplier and post-search enquiries, and not directly on incriminating material found during the search of a third party.
For AYs 2019-20 and 2020-21, the Tribunal noted that the facts and issues were identical and applied the same findings. Consequently, all Revenue appeals and all corresponding cross objections of the assessee were dismissed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeals by the Revenue and the corresponding Cross Objections by the Assessee have been preferred against the separate orders of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘Ld. CIT(A)’] of even dated 22/12/2025 passed u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the Assessment Years (AY) 2018-19 to 2020-21 respectively. Since common facts and issues are involved in all the captioned appeals and cross objections, hence, the same were heard together and are being disposed of by this common order. Revenue’s appeal ITA No.468/Ahd/2026 is taken as the lead case for the purpose of narration of facts.
ITA No.468/Ahd/2026 & C.O. No. 16/Ahd/2026 :
2. The brief facts of the case are that the assessee is an individual engaged in the business of civil construction and infrastructure projects. For the assessment year under consideration, the assessee filed his return of income under section 139(1) of the Act on 29.09.2018 declaring a total income of Rs. 3,24,52,470/-. The assessment of the assessee was subsequently reopened under section 147 of the Act based on the information flagged under the Risk Management Strategy that the assessee had taken bogus accommodation entries of purchases worth Rs. 54,75,907/- from M/s India Steel Impex, a proprietary concern of Shri Bhaveshkumar Bhogilal Patel. During the course of the assessment proceedings, the Assessing Officer observed that the assessee failed to furnish the required e-way bills, purchase vouchers, delivery challans, bilty, and weighment slips to substantiate the genuineness of the alleged purchases. It was further noted by the Assessing Officer that the supplier neither responded to the notices issued under section 133(6) of the Act nor existed at the given address upon physical verification by the verification unit. The Assessing Officer placed heavy reliance on the investigation report and the statement of Shri Bhaveshkumar Bhogilal Patel recorded under oath, wherein he explicitly admitted to providing bogus sales bills to various beneficiaries, including the assessee, without any actual movement of goods. The Assessing Officer concluded that the mere routing of payments through regular banking channels did not establish the genuineness of the transactions when the surrounding facts strongly point to fictitious and paper transactions created to inflate expenditure and reduce taxable profits. Consequently, the Assessing Officer treated the entire purchase amount of Rs. 54,75,907/- as unexplained expenditure under section 69C of the Act and brought the same to tax as per the provisions of section 115BBE of the Act, completing the assessment at a total income of Rs. 3,79,28,377/- vide order dated 22.03.2023.
3. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A). During the appellate proceedings, the assessee submitted detailed written submissions and contended that the purchases were completely genuine, actual, and utilized in various state government infrastructure projects. The assessee further submitted that the purchases were duly supported by tax invoices reflecting transporter details, and the corresponding payments were entirely processed through banking channels. The Ld. CIT(A), after considering the submissions and the material on record, observed that the Assessing Officer had not doubted the sales declared by the assessee and had accepted the turnover in toto without rejecting the books of account under section 145(3) of the Act. The Ld. CIT(A) observed that the entire purchases made by the assessee cannot be rejected, rather some profit element, which the assessee might have evaded can be taxed. The Ld. CIT(A) further held that to balance the interest of the revenue and justice, it would be appropriate and reasonable to estimate the profit element embedded in such unverified purchases. Accordingly, taking into account the average gross profit rate of approximately 2.8% declared by the assessee in the preceding years, the Ld. CIT(A) applied a slightly higher rate of 3.5% to meet the ends of justice. Consequently, the Ld. CIT(A) restricted the disallowance to 3.5% of the total disputed purchases, which worked out to Rs. 1,91,656/-, and directed the Assessing Officer to delete the balance addition of Rs. 52,84,250/-.
4. Being aggrieved by the said order of the Ld. CIT(A), the Revenue has come in appeal before us, raising the following grounds of appeal:
“(i) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance on proven bogus purchases to Rs.1,91,656/-being 3.5% of bogus purchases of Rs.54, 75,907/-, by merely estimating profit thereon, despite the purchases being sham accommodation entries routed through bogus concerns of Shri Bhaveshkumar Bhogilal Patel, Prop. M/s India Steel Impex, and in view of the decision of the Hon’ble Bombay High Court in Kanak Impex (India) Ltd., as affirmed by the Hon’ble Supreme Court?”
(ii) The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”
4.1. On the other hand, the assessee has filed the following corresponding Cross Objections contesting the legal validity of the reopening of the assessment as well as the sustenance of the partial addition by the Ld. CIT(A) on merits:
“1. Notice issued under section 148 dated. 29.03.2022 and order passed under section 148A d dated.29.03.2022 are bad in law and hence, consequential assessment order passed under section 147 r.w.s 144B dated. 22.03.2023 along with demand notice issued under section 156 dated.22.03.2023 is equally bad in law
2. Ld. CIT Appeal erred in law and facts in confirming addition of Rs.1,91,656 being 3.5 percent of alleged unexplained purchases of Rs.54,75,907 without appreciating facts and law of the case properly.
3. The Cross Objector craves leave to add, amend OR alter the grounds of appeal at the time of hearing, if need arise.”
5. We have heard the rival contentions of the learned representatives of the parties and gone through the record. The Ld. DR, appearing for the Revenue, has vehemently contended that when purchases are found to be mere sham accommodation entries, the entire amount is liable to be disallowed under section 69C of the Act without any scope for profit estimation.
5.1 On the other hand, the Ld. AR for the assessee has submitted that the purchases made by the assessee from M/s India Steel Impex were entirely genuine, actual, and exclusively utilized for executing the government infrastructure projects. He has further contended that the assessee had duly furnished all the requisite details and documentary evidences during the assessment proceedings to prove the identity of the parties and the genuineness of the purchases. He has also invited our attention to the relevant pages of the paper book to demonstrate that the seller had duly deducted the TDS on all the sales made to the assessee, which heavily substantiates the authenticity of the transactions. The Ld. AR has submitted that since the identity of the seller and genuineness of the purchases was duly substantiated with documentary evidence, such as, copy of audit reports and financial statements of the assessee, copy of purchase bills, bank statements, copy of ledger account of M/s. India Steel Impex in the books of the assessee, copy of confirmation letter from Shri Bhavesh Bhogilal Patel- proprietor of M/s. India Steel Impex, copy of the ledger account of the assessee in the books of M/s. India Steel Impex, copies of the GSTR returns. The Ld. AR has further contended that the reopening of the assessment itself was bad in law as the same was done on the basis of incriminating material found during the search action in the case of Shri Bhavesh Boghilal Patel and, therefore, the proper course for the AO was to proceed u/s 153C of the Act and not u/s 147 of the Act.
6. The core dispute in the present case revolves around the treatment of purchases amounting to Rs. 54,75,907/- made by the assessee from M/s India Steel Impex. The Revenue is aggrieved by the restriction of the disallowance to 3.5% of the disputed purchases, as against 100% disallowance made by the AO of the disputed purchases made by the assessee from M/s. India Steel Impex. Conversely, the assessee, through his Cross Objections, is aggrieved by the reopening of the assessment as well as the sustenance of the 3.5% addition. A perusal of the assessment order reveals that while the Assessing Officer has doubted the genuineness of the purchases, he at the same time has accepted the gross turnover achieved by utilizing these very purchases in various civil construction and infrastructure projects. The books of account have not been rejected under section 145(3) of the Act. We find that the Ld. CIT(A) has meticulously taken note of the aforesaid factual matrix canvassed by the assessee, particularly regarding the utilization of materials in the execution of the GIDC infrastructure projects, the reflection of transactions in the audited accounts of the supplier along with the payment of GST, the subsequent confirmation by the supplier resiling from his earlier uncorroborated statement, and the severe prejudice caused to the assessee by the denial of the opportunity of cross-examination. While appreciating these glaring facts alongside the documentary evidences placed on record, the Ld. CIT(A) has categorically held that a 100% disallowance is legally unsustainable. He in this respect has gone on the footing that the primary purpose of making any disallowance in such cases of unverified or alleged accommodation purchases is to bring to tax the extra profit element or the savings in taxes that the assessee might have made by procuring goods from the grey market at a discounted rate while obtaining accommodating bills from other entities to inflate the expenditure. He has observed that the source of the expenditure is clearly explained by the assessee and the transactions have been made through banking channels and the corresponding sales are an accepted fact on record. The Ld. CIT(A) in order to balance the interest of the revenue and to meet the ends of justice, has estimated the profit element embedded in these transactions. By analyzing the assessee’s own financial history, the Ld. CIT(A) noted that the average gross profit rate declared by the assessee in the preceding years was approximately 2.8%. Adopting a fair and reasonable approach, the Ld. CIT(A) applied a slightly higher rate of 3.5% on the alleged bogus purchases of Rs. 54,75,907/- to neutralize any potential leakage of revenue, thereby restricting the addition to Rs. 1,91,656/- and deleting the balance amount of Rs. 52,84,250/-. The findings recorded by the Ld. CIT(A) are well-reasoned. Considering the overall facts and circumstances of the case, we are not inclined to interfere with the order of the Ld. CIT(A) and the same is therefore upheld. There is no merit in the appeal of the Revenue and the same is, therefore, dismissed.
7. So far as the cross objections filed by the assessee are concerned, it is noted that the Ld. CIT(A) has rightly observed that since the information was flagged on the insight portal that the assessee had made certain bogus purchases and the said information was further based upon the statement of the proprietor of M/s. India Steel Impex admitting that he was involved in providing accommodation entries, therefore, the Ld.AO taking cognizance of the said information, show caused the assessee as to why the assessment be not reopened in the case of the assessee. The AO, thereafter, duly followed the procedure as prescribed u/s 148A of the Act. The Ld. Counsel for the assessee could not bring out any default on the part of the AO in this respect. Therefore, the Ld. CIT(A) rightly decided this legal issue against the assessee. During the course of arguments before us, the Ld. Counsel for the assessee has advanced arguments on the other legal issue that in this case, the reopening was based on the incriminating material found during the search action in the case of Shri Bhavesh Boghilal Patel and, therefore, the proper course for the AO was to proceed u/s 153C of the Act and not u/s 147 of the Act. However, we do not find merit in the said contention also. A perusal of the impugned assessment order along with the documents placed in the paper book would reveal that the reopening was not based on any incriminating material found during the course of search action, rather, the alleged information was collected by the Department from the post search statement recorded of Shri Bhavesh Boghilal Patel and post search enquiries. It is not a case where the reopening is based directly on the incriminating material found during the course of search action in case of third party. Therefore, we do not find merit in the said contention also.
8. In the result, the appeal filed by the Revenue as well as the Cross Objection filed by the assessee are dismissed.
ITA Nos. 469 & 530/Ahd/2026 A/w. CO Nos. 17 & 23/Ahd/2026
9. Since the facts and issues involved in above captioned appeals and corresponding cross objections are identical, hence, our finding given above will mutatis mutandis apply to these appeals and Cross Objections. Therefore, all the appeals of the Revenue and the corresponding cross objections of the assessee are, hereby, dismissed.
10. In the combined result, all appeals of the Revenue and all corresponding cross objections of the assessee are dismissed.
Order is pronounced under provision of Rule 34 of ITAT Rules, 1963 on 07.07.2026
