Without purchases there cannot be sales – Mumbai ITAT rejects 100% bogus purchase addition

ACIT Vs R. N. Gems (ITAT Mumbai)

“Without purchases there cannot be sales” – Mumbai ITAT rejects 100% bogus purchase addition in diamond trade case

In a significant ruling, the Mumbai ITAT dismissed the Revenue’s appeal and upheld restriction of addition on alleged bogus purchases to only the profit element embedded therein, holding that once sales are accepted, the entire purchases cannot be disallowed.

The reassessment was triggered based on information received from the Investigation Wing alleging that the assessee had obtained accommodation entries from concerns linked to the Rajendra Jain Group through bogus purchase bills amounting to ₹57.51 lakh from M/s Kangan. The AO treated the entire purchases as non-genuine and made a 100% addition.

Before the CIT(A) and Tribunal, the assessee contended that the purchases were supported by tax invoices, bank payments, PAN/TIN details, and corresponding sales entries. It was also argued that the AO relied entirely on third-party statements and generalized investigation reports without conducting any independent inquiry or granting opportunity of cross-examination.

The CIT(A), relying on the Bombay High Court decision in PCIT v. Mohammed Haji Adam & Co., held that in cases where sales are not disputed, only the profit element embedded in alleged bogus purchases can be brought to tax and accordingly restricted the addition to 3% GP on the impugned purchases.

Affirming the CIT(A)’s order, the ITAT observed that the AO had merely relied upon Investigation Wing information and statements recorded during search proceedings, but had failed to establish through any independent verification that the purchases were entirely fictitious or that no goods were actually received.

The Tribunal emphatically held that once the sales are accepted, it necessarily follows that there must have been corresponding purchases, though possibly from the grey market. In such circumstances, making addition of the entire purchase amount would lead to the absurd situation of taxing gross receipts instead of real income.

The Revenue’s reliance on decisions such as N.K. Industries, N.K. Proteins, and Kanak Impex for sustaining 100% addition was rejected by the Tribunal on the ground that those cases involved materially different facts where transactions were found to be entirely bogus without corresponding sales or consumption.

Accordingly, the ITAT upheld the estimation of profit at 3% on alleged bogus purchases and dismissed the Revenue’s appeal, reiterating that the binding jurisdictional High Court ruling in Mohammed Haji Adam & Co. continues to govern such disputes

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal filed by the Revenue, along with the Cross Objection filed by the assessee, is directed against the order dated 24.09.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the CIT(A)”], under section 250 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”], arising out of the assessment order dated 30.12.2017 passed by the Assessing Officer under section 143(3) r.w.s. 147 of the Act for the Assessment Year 2010–11. Both the appeal of the Revenue and the Cross Objection of the assessee are heard together and are being disposed of by this consolidated order for the sake of convenience and brevity.

Facts of the Case

2. Briefly stated, the facts of the case as emanating from the assessment order are that the assessee is a firm engaged in the business of diamonds and follows mercantile system of accounting. The assessee filed its return of income for the year under consideration on 28.09.2010 declaring total income of Rs. 40,67,452/-, which was initially processed under section 143(1) of the Act. Subsequently, the case was reopened under section 147 of the Act after recording reasons and obtaining prior approval, and notice under section 148 dated 30.03.2017 was issued and served upon the assessee.

3. The Assessing Officer recorded that a search and survey action carried out by the DGIT (Investigation), Mumbai in the case of Shri Rajendra Jain Group on 03.10.2013 revealed that the said group was engaged in providing accommodation entries through a network of benami concerns in the nature of bogus purchase bills, unsecured loans and advances. On the basis of information received from the Investigation Wing, it was alleged that the assessee had obtained accommodation entries in the form of bogus purchases from one such concern, namely M/s. Kangan, amounting to Rs. 57,51,338/-.

4. During the reassessment proceedings, the assessee was confronted with the information and was required to substantiate the genuineness of the impugned purchases. The Assessing Officer also referred to statements recorded during search proceedings of Shri Rajendra Jain and other persons, wherein it was stated that various concerns operated by him were dummy entities engaged in issuing bogus bills without actual delivery of goods.

5. The Assessing Officer, relying upon the investigation findings, the alleged modus operandi of the Rajendra Jain Group and the statements recorded under section 132(4), concluded that the purchases shown by the assessee from M/s. Kangan were non-genuine accommodation entries. Accordingly, the entire amount of Rs. 57,51,338/- was treated as bogus purchases and added to the total income of the assessee. Penalty proceedings under section 271(1)(c) were also initiated separately.

6. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). The facts as recorded by the learned CIT(A) reveal that the assessee reiterated that it is engaged in the business of diamonds and had made purchases in the ordinary course of business which were duly supported by tax invoices, delivery of goods, PAN and TIN details of the supplier, and proper entries in the books of account. It was contended that payments were made through banking channels and corresponding sales were duly recorded, thereby establishing the genuineness of the transactions. The assessee further submitted that the Assessing Officer had erred in treating the purchases as bogus solely on the basis of statements of third parties without conducting any independent verification and without providing opportunity of cross-examination. It was also contended that complete details and evidences were furnished during reassessment proceedings and the addition of 100% of purchases was unjustified and resulted in distortion of the profit of the assessee.

7. On merits, the learned CIT(A) observed that the sales declared by the assessee were not disputed by the Assessing Officer and therefore, without purchases, there could not be any sales. Placing reliance on the decision of the Hon’ble jurisdictional High Court in the case of PCIT vs. Mohammed Haji Adam & Co.[2019] 103 taxmann.com 459, the learned CIT(A) held that in cases of alleged bogus purchases, only the profit element embedded in such purchases is required to be brought to tax. The learned CIT(A) further observed that the Assessing Officer had not conducted any independent inquiry to establish that the entire purchases were bogus. Accordingly, the addition was restricted by directing the Assessing Officer to apply a gross profit rate of 3% on the impugned purchases. The appeal of the assessee was thus partly allowed.

8. Being aggrieved by the relief granted by the learned CIT(A), the Revenue is in appeal before us raising the following grounds:

1. Whether on the facts and in the circumstances of the case and in law, the Learned CIT(A) was justified in restricting the bogus purchases @3% as against the 100% addition on account of bogus purchases of Rs. 57,57,338/- from M/s. KANGAN, though there was no dispute that the bogus purchases were made and so an act of infraction of law was committed in violation of section 74(1A) of the Maharashtra Value Added Tax Act, 2022 and therefore such expenses are not allowed as per express provision u/s 37 of the Act.

2. Whether on the facts and in the circumstances of the case and in law, the Learned CIT(A) was justified in estimating the income of bogus purchases based on comparing of the bogus purchases with the purchases in the regular books of accounts ignoring that the fact of procuring bogus invoices leads to the unverified inflation of purchase price by the assessee which cannot be compared with the regular GP of the books of the accounts.

3. Whether on the facts and in the circumstances of the case and in law, the Learned CIT(A) was justified in ignoring the element of reason for procuring of bogus invoices when it is observed that the GP on these bogus invoices are almost matching with the GP as per genuine invoices and therefore such estimation of income out of bogus purchases with the GP as per regular books of accounts is not justified.

4. Whether on the facts and in the circumstances of the case and in law, the Learned CIT(A) is perverse in not considering the order of the Hon‘ble Gujarat High Court in the case of N.K. Industries Ltd. (2016) 72 co 289 (Guj) relating toa similar issue of bogus purchase, which has been confirmed by the Hon‘ble Supreme Court by dismissing SLP in SLP(CC) of 963/2017 dated 16.01.2017?

5. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the addition was based on mere suspicion, surmises, and conjectures, ignoring the fact that the addition was founded on credible investigation inputs and corroborative evidence of bogus accommodation entries

6. While deciding the issue, Ld. CIT(A) has ignored the fact his order is perverse in not considering that the order of Hon‘ble Supreme Court in the case of M/s. N. K. Proteins Ltd. Vs. Dy. CIT (2016) 292 CTR (Guj.) 354, Dated. 16.01.2017, which is on the similar issue of bogus purchases, was already the law of the land when the Ld. CIT(A) has pronounced it’s order on 24.09.2025.

7. The Ld. CIT(A) has erred in restricting the addition without appreciating the fact that in the case of M/s. Swetamber Steels Ltd. (Supra), the Hon‘ble ITAT, Ahmedabad had conformed the disallowance of the bogus purchase, by stating that the purchases shown from respective parties were found non genuine and the decision of the ITAT was upheld by Han‘ble Gujrat High Court and also by the Hon‘ble Supreme Court.

8. The Ld. CIT(A) is erred in not considering the view expressed in the decision of the Hon‘ble High Court Mumbai, in the case of Pr. Commissioner of Income-Tax-5,Mumbai Vs. Kanak Impex (India) Ltd(2025)172 com 283 (Bombay ) Dated. 03.03.2025, wherein the decision of 100% addition made by AO has been allowed, by rejecting the ITAT‘s decision of estimating the profit rate @12.5% on bogus purchases and thereby impliedly granting deduction of such unexplained expenditure incurred u/s. 69C of the Act, even though the assessee failed to discharge its onus to prove the genuineness of alleged purchases and has not explained the sources of expenditure incurred on account of such purchase.

9. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.

9. During the course of hearing, the learned Departmental Representative relied upon the assessment order and assailed the findings of the learned CIT(A). It was submitted that the Assessing Officer had rightly treated the purchases amounting to Rs. 57,51,338/- as non-genuine based on specific information received from the Investigation Wing, Mumbai, coupled with statements recorded in the course of search proceedings in the case of Shri Rajendra Jain Group, which clearly established that the concerns from whom the assessee claimed to have made purchases were merely accommodation entry providers. The learned DR further submitted that the learned CIT(A) erred in restricting the addition to 3% of the alleged bogus purchases without properly appreciating the material brought on record by the Assessing Officer. It was contended that once the purchases are held to be non-genuine and represent accommodation entries, the entire amount is liable to be disallowed, as the same constitutes unexplained expenditure not allowable under the provisions of the Act. The learned DR, placing reliance on the grounds of appeal, submitted that the action of the learned CIT(A) in estimating profit by applying a gross profit rate is contrary to the factual matrix of the case, as the assessee had failed to discharge the onus of proving the genuineness of the purchases. It was further submitted that the learned CIT(A) has ignored binding judicial precedents relied upon by the Revenue, which support the view that in cases of bogus purchases, addition of the entire amount is justified. It was thus submitted that the order of the learned CIT(A) be set aside and that of the Assessing Officer be restored.

10. On the other hand, the learned Authorised Representative relied upon the order of the learned CIT(A) and supported the findings recorded therein. It was submitted that the learned CIT(A), after due consideration of the facts and material on record, has rightly restricted the addition by applying a reasonable gross profit rate in line with the settled judicial principles, particularly when the sales have not been disputed by the Assessing Officer.

11. The learned AR further submitted that in the event the issue is decided in favour of the assessee, the grounds raised in the Cross Objection would not be pressed.

12. We have carefully considered the rival submissions, perused the material available on record and gone through the orders of the lower authorities. The short issue arising for our consideration is whether the learned CIT(A) was justified in restricting the addition on account of alleged bogus purchases to 3% as against 100% addition made by the Assessing Officer.

13. Before adverting to the rival contentions, it would be appropriate to examine the findings recorded by the learned CIT(A). The learned CIT(A), after considering the factual matrix and submissions of the assessee, has recorded the following findings:

“In the instant case, for the year under consideration, the sales made by the appellant were not disputed. Hence, it could be safely concluded that without the purchases, there cannot be any sales. In the Hon’ble Jurisdictional High Court of Bombay in the case of PCIT vs. Mohammed Haji Adam and Co. [2019] 103 taxmann.com 459 (Bom) the principle of taxing income on the non-genuine purchases rather than adding the entire purchases was upheld. The Hon’ble court in this respect observed that ^„the tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sale in case of trader. The Tribunal therefore correctly restricted the additions limited to the extent of bringing the GP rate on purchases at the same rate of other genuine purchase.” (para 5.2)

14. Further, the learned CIT(A) has observed as under:

“The Assessing Officer has not conducted any independent inquiry in the case of the appellant to prove that the entire purchases are Bogus. Considering the facts of the case, the Assessing Officer is directed to follow Gross Profit percentage at 3% as held by the Jurisdictional High Courts.”(para 5.3)

15. From the above findings, it is evident that the learned CIT(A) has primarily proceeded on two foundational aspects, namely, firstly, that the sales declared by the assessee have not been doubted by the Assessing Officer, and secondly, that no independent inquiry has been conducted by the Assessing Officer to establish that the entire purchases are non-genuine. The learned CIT(A) has thereafter applied the ratio laid down by the Hon’ble jurisdictional High Court in the case of Mohammed Haji Adam & Co. and restricted the addition to the profit element embedded in such purchases.

16. On careful examination of the assessment order, we find that the Assessing Officer has made the addition solely on the basis of information received from the Investigation Wing regarding the alleged accommodation entries provided by the Rajendra Jain Group and statements recorded during search proceedings. However, except for placing reliance on such third-party information and general modus operandi, no further independent verification has been carried out by the Assessing Officer to demonstrate that the purchases recorded by the assessee were entirely fictitious or that no goods were received by the assessee. It is also an undisputed fact emerging from the record that the sales declared by the assessee have been accepted.

17. In such circumstances, the settled judicial position, particularly as laid down by the Hon’ble jurisdictional High Court, is that where the sales are accepted and only the purchases are doubted, the addition cannot be made to the extent of entire purchases but has to be restricted to the profit element embedded therein. The learned CIT(A) has correctly applied this principle.

18. The Revenue has placed reliance on the decision of the Hon’ble Gujarat High Court in the case of K. Industries Ltd. and N.K. Proteins Ltd., as also other decisions to contend that 100% addition is justified. However, the reliance placed on these decisions is misplaced in the facts of the present case. In the said decisions, the Courts were dealing with situations where there was clear finding that the transactions were entirely bogus and no corresponding sales or consumption of goods were established, or where the factual matrix demonstrated complete absence of genuineness in the transactions. In the present case, however, the factual position is materially different. The Assessing Officer has not disputed the sales effected by the assessee. Once the sales are accepted, it necessarily follows that there must have been corresponding purchases, though possibly from the grey market. In such a situation, the addition of entire purchases would lead to an absurd result of taxing gross receipts instead of real income, which is contrary to the settled principles of taxation.

19. The Revenue has also relied upon the decision in the case of Kanak Impex (India) Ltd. to contend that 100% addition is permissible. However, the said decision is distinguishable on facts, as the findings therein were based on the failure of the assessee to discharge the onus regarding the genuineness of purchases coupled with factual findings warranting such addition. In the present case, the learned CIT(A) has recorded a categorical finding that no independent inquiry has been conducted by the Assessing Officer and the sales have been accepted, which brings the case within the ratio of the jurisdictional High Court decision in Mohammed Haji Adam & Co.

20. Further, the reliance placed by the Revenue on decisions of non-jurisdictional High Courts cannot override the binding precedent of the Hon’ble jurisdictional High Court. It is a settled proposition of law that the decision of the jurisdictional High Court is binding on the Tribunal and subordinate authorities within its jurisdiction.

21. In view of the above discussion, we find no infirmity in the approach adopted by the learned CIT(A) in restricting the addition to the profit element embedded in the alleged bogus purchases. The estimation of profit at 3% is a finding of fact based on the material on record and the Revenue has not brought any cogent material to demonstrate that such estimation is arbitrary or perverse. Accordingly, the grounds raised by the Revenue are dismissed.

22. Insofar as the Cross Objection filed by the assessee is concerned, the learned Authorised Representative has fairly submitted that the same is not pressed if the issue is decided in favour of the assessee. Since we have upheld the order of the learned CIT(A), the Cross Objection filed by the assessee is dismissed as not pressed.

23. In the result, the appeal of the Revenue is dismissed and the Cross Objection of the assessee is dismissed as not pressed.

Order pronounced in the open court on 05.05.2026.