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Facts
The assessee, engaged in trading and installation of Air Control and Pollution Control Equipments, filed its return for AY 2011-12. The AO received information that the assessee was a beneficiary of bogus purchases from two parties, amounting to Rs. 51,65,521/-. The AO treated the entire purchases as bogus and added it to the assessee's income.
Held
The Tribunal held that the AO incorrectly added 100% of the purchases as bogus without rejecting the corresponding sales. The CIT(A) had rightly restricted the addition to the profit element. The Tribunal further reduced the addition to 5% of the bogus purchases, considering the assessee's GP ratio and the fact that it had provided documentary evidence.
Key Issues
Whether the AO was justified in adding 100% of the purchases as bogus when the sales were not doubted and the assessee provided documentary evidence? Whether the addition should be restricted to the profit element and if so, at what rate?
Sections Cited
250, 133(6)
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, VP &
& 5852/Mum/2025 Anil Jagdishchandra Ahuja Per Padmavathy S, AM: These cross appeals by the assessee and the revenue are against the order of the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 23.07.2025 for Assessment Year (AY) 2011-12.
The assessee is an individual carrying on a business of trading and installation of Air Control and Pollution Control Equipments. The assessee filed the return of income for AY 2011-12 on 06.09.2012 declaring total income of Rs. 50,59,060/-. The AO received information from Sales Tax Department through DGIT(Inv.), Mumbai that the assessee is a beneficiary of bougs purchase from the following parties:
(i) Bhagyalaxmi Steel Industries - Rs. 21,84,925/- (ii) Vijay Trading Company - Rs.29,80,596/-
The AO called on the assessee to furnish relevant details in this regard. The AO also issued a notice u/s. 133(6) to the parties. The assessee furnished the details such as bills, bank statements, delivery challans, etc. before the AO. The AO however, did not accept the submissions of the assessee and proceeded to treat the entire purchases as bogus. Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) restricted the addition to 10% of the alleged bogus purchases by placing reliance on the decision of the Co-ordinate Bench in the case of Leelaben Kantilal Parekh vs. ITO (ITA No. 2926/Mum/2023). The CIT(A) further held the AO has not doubted the sales declared by the assessee and therefore it would not be correct to add the entire purchases as bogus. Both the assessee and the revenue are in appeal against the order of the CIT(A).
The ld. AR submitted that the assessee has discharged the onus by submitting all the relevant details before the AO to prove the genuineness of the purchases. The ld. AR further submitted that the GP ratio of the assessee for the earlier year and the subsequent year are in line with the GP declared by the assessee for the year under consideration and therefore the 100% of the purchases is treated as bogus, it would result in unexpected GP which is not correct. The ld. AR argued that the assessee has discharged the onus of proving the genuineness of the by submitting various documentary evidences then no addition could be sustained without recording any finding with regard to the documents submitted by the assessee.
The ld. DR on the other hand argued that the CIT(A) no correct in restricting the addition based on the findings of the Tribunal in another case without examining whether the facts are identical or not. The ld. DR further argued that the CIT(A) having accepted the fact that the purchases are bogus should not have restricted the addition on the ground that the AO has not rejected the sales. The ld. DR placed reliance on the decision of the Jurisdictional High Court in the case of PCIT vs. Kanak Impex (India) Ltd. [2025] 172 taxmann.com 283 (Bom.) to submit that the Hon'ble High Court has held that when the purchases are admittedly non- genuine then there is no question of restricting the addition to the GP ratio since the assessee has not explained the source for 100% of the non-genuine purchases. Accordingly, the ld. DR submitted that the order of the AO be upheld.
We heard the parties and perused the material on record. The AO based on information received from Investigation Wing that the assessee is a beneficiary of alleged bogus purchases and accordingly called for details pertaining purchases from two parties. The AO did not accept the submissions and the documentary & 5852/Mum/2025 Anil Jagdishchandra Ahuja evidences submitted by the assessee stating that mere furnishing of invoices and making payments through banking channel does not prove the genuineness. Accordingly the AO added 100% of the purchases as non-genuine. The CIT(A) restricted the addition to 10% stating that the when sales is accepted then the addition could be made only to the extent of profit element embedded and by placing reliance on judicial precedence. Before us the ld AR argued that the assessee has discharged the onus of proving the genuineness of the purchases by submitting the relevant documents. The ld AR alternatively submitted that the AO is not correct in adding 100% of the purchases without rejecting corresponding sales which is offered to tax by the assessee. In this regard we notice that the coordinate bench in assessee's own case has considered a similar issue where it has been held that –
“5. We have heard rival submissions and perused the materials available on record. We find that in this case undisputedly, the assessee had made purchases from hawala dealers to the tune of Rs. 53,58,291/- which were added by the AO to the income of the assessee by alleging the same as non-genuine for the reasons that assessee could not offer any plausible explanation. However, the Id. CIT(A) partly deleted the addition to the tune of 87.50% thereby partly sustaining the addition at 12.5%. In this case, we note that assessee has produced bills and vouchers, proof of identity and payments through account payee cheques, co-relation between purchases and sales and stock tally etc. The ld. CIT(A) had rightly drawn the presumption that only profit element embedded in the purchases are to be taxed. In this case, we note that the GP of the assessee from A.Υ.2008-09 to 2012-13 ranges between 17.27% to 19.60%. Pertinent to state that the assessee is engaged in the business of re-selling and installing air control and pollution control equipments and assessee has offered GP which is quite satisfactory ranging from 17.27% to 19.60% during the above period. Under these circumstances, we note that to make an addition @12.5% over and above the GP rate disclosed by the assessee in the books of accounts would be unfair and unreasonable. In this case, we are of the view that it would serve the ends of justice if the GP rate of 5% is applied on account of bogus purchases over and above the GP disclosed in the books of accounts. Accordingly, we modify the findings of ld. CIT(A) on this issue and direct the AO to apply the rate of profit @ 5% on the bogus purchases.”
We notice from the perusal of records that the GP ratio of the assessee is in the range of 16.88% to 18.61% for earlier and subsequent years (including the year under consideration) and therefore there is merit in the submission that making 100% addition towards purchases would skew the normal GP ratio. This also supports the contention that the alleged bogus purchases have corresponding sales which is part of the overall financials of the assessee and that only the profit element embedded therein could be added. The ld AR contented that the entire premise under which the Hon'ble Bombay High Court in the case of Kanak Impex (India) Ltd. (supra) concluded that the transaction was bogus was that the assessee in the said case has not furnished any details and has not discharged the onus of proving the genuineness of the transaction by filing the relevant documents. The ld. AR further argued that the assessee's case is clearly distinguishable since the assessee has furnished the relevant details before the AO and no adverse finding has been recorded by the AO on the merits. Accordingly we see merit in the submission that the facts in assessee's case are distinguishable. In view of these discussions and considering the decision of the coordinate bench in assessee's own case we restrict the addition made by the CIT(A) to 5% of the alleged bogus purchases.
In result the appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.