INCOME TAX OFFICER/WARD-19(2)(2), MUMBAI vs. KRUTI SANDEEP SHAH, MUMBAI

Briefly the facts of the case are that the assessee filed her return of income u/s. 139(1) of the Income Tax Act, 1961 („the Act‟) on 26-09-2009, declaring total income of Rs. 4,04,880/-. The return was processed u/s. 143(1) of the Act. Subsequently, the AO was in receipt of information from the Investigation Wing that the assessee has obtained accommodation entries in the form of bogus purchase bills to the tune of Rs. 34,20,545/- from various hawala parties as detailed in para 3 of the assessment order and basis that, the case of the assessee was reopened by issuance of notice u/s. 148 of the Act, dt. 24-03-2014. However, there was no response to the notice so issued by the AO. Subsequently, notice u/s. 142(1) of the Act was issued and thereafter, a show cause was issued as to why the aforesaid purchases should not be treated as non-genuine and added to the total income of the assessee and also to explain why the book results could not be rejected u/s. 145(3) of the Act. There was, however, no compliance to the show cause so issued by the AO and thereafter, the AO proceeded and passed the order u/s. 144 r.w.s. 147 of the Act, dt. 18- 03-2015, wherein the AO has held that purchases shown to have been made by the assessee and claimed as expenses are not genuine and in absence of any requisite submissions made by the assessee, he is not satisfied about the correctness and completeness of accounts of the assessee and the books of account of the assessee were rejected u/s. 145(3) of the Act and the AO made the addition on whole purchases amount amounting to Rs. 34,20,545/-, treated them as „non-genuine purchases‟ and the same were brought to tax in the hands of the assessee. As against the returned income of Rs. 4,04,880/-, assessed income was determined at Rs. 38,25,430/-.

The assessee carried the matter in appeal before Ld.CIT(A), wherein he has directed the deletion of disallowance of Rs. 34,20,345/- and at the same time, has directed to make an addition of Rs. 3,42,055/- being 10% of such bogus purchases as reasonable estimation of the undisclosed profits of the assessee. Against the said order, the Revenue is in appeal before us.

Both the parties were heard and material available on record was perused. We find that once the AO has rejected the books of account and invoked provisions of section 145(3), the only recourse available with the AO is to estimate the net profit based on certain reasonable criteria and he cannot add the purchases which were part of the books of accounts and have been rejected at first place. In the instant case, the AO has rejected the Books of Account and at the same time, has brought whole of the purchases to tax which cannot be sustained. At the same time, the AO is required to estimate the net profit based on past declared results which have attained finality or any other reasonable criteria. Accordingly, the matter is set-aside to the file of the AO for the limited purposes of estimation of net profit based on certain reasonable criteria and where the net profit so determined is higher than the net profit declared by the assessee in her return of income, the differential can be brought to tax in the hands of the assessee.

In the result, the appeal of the Revenue is disposed off in light of aforesaid directions. Order pronounced in the open court on 17-12-2025