DCIT 19 1 MUMBAI, PIRAMAL CHAMBER LAL BAUGH PAREL vs. DHIRAJLAL AND COMPANY, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘D’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI ARUN KHODPIA, ACCOUNTANT MEMBER ITA No.2345/Mum/2026 (Assessment Year :2011-12) DCIT 19(1), Mumbai Vs. Dhirajlal And Company 16-C Orbit Heights Jaojee Dadaji Road Nana Chowk Mumbai- 400 007 PAN/GIR No.AAAFD4826D (Appellant) .. (Respondent) CO No.192/Mum/2026 (Arising out of ITA No.2345/Mum/2026) (Assessment Year :2011-12) Dhirajlal And Company Vs. DCIT 19(1), Mumbai 16-C Orbit Heights Jaojee Dadaji Road Nana Chowk Mumbai- 400 007 PAN/GIR No.AAAFD4826D (Appellant) .. (Respondent)

Assessee by Ms. Dinkle Hariya Revenue by Shri Prasanna Tewari, SR DR Date of Hearing 29/07/2026 Date of Pronouncement 31/08/2026

2 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been preferred by the Revenue against the order dated 24.12.2025 passed by the learned Addl./JCIT(A)-1, Bengaluru, under section 250 of the Income- tax Act, 1961, for the assessment year 2011–12. The assessee has also filed the accompanying Cross Objection bearing CO No. 192/Mum/2026 arising out of the same appellate order. Since the Revenue’s appeal and the Cross Objection arise from the same set of facts and the same appellate order, they were heard together and are being disposed of by this consolidated order. 2. The Revenue, in its appeal, is principally aggrieved by the decision of the learned CIT(A) in restricting the addition made on account of alleged bogus purchases from ₹34,03,964 to ₹4,25,496, being 12.5% of such purchases. The assessee, in its Cross Objection, has raised four grounds. Grounds Nos. 1 and 2 challenge the validity of the notice issued under section 148 and the consequential assessment framed under section 143(3) read with section 147; whereas Grounds Nos. 3 and 4 challenge the rejection of books of account under section 145(3) and the sustenance of the addition to the extent of ₹4,25,496. 3. Brief facts are that the assessee is a partnership firm engaged in the business of manufacturing automotive

3 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company thinner. It had filed its return of income declaring total income of ₹41,24,668. Subsequently, information was received from the office of the DGIT (Investigation), Mumbai, indicating that the assessee had obtained accommodation entries aggregating to ₹34,03,964 from M/s Vijay Barrel Co., which figured in the list of hawala dealers maintained by the Maharashtra Sales Tax Department. On the basis of the said information, the assessment was reopened under section 147. During the reassessment proceedings, the assessee submitted that it had purchased second-hand/reconditioned barrels from the aforesaid concern for storage of raw materials and, in certain cases, for dispatch of low-end finished products. It was also stated that the purchases were supported by invoices and delivery challans and that the payments had been made through account-payee cheques. The assessee, however, admittedly did not maintain a separate day-to-day stock register in respect of such second-hand barrels. The supplier was also not produced for verification and, according to the Assessing Officer, the actual delivery and consumption of the barrels could not be established through reliable evidence. He, therefore, rejected the books of account under section 145(3) and disallowed the entire amount of ₹34,03,964. 4. In the first appeal, the learned CIT(A) upheld the reopening of the assessment as well as the rejection of the books of account. On the quantum of addition, however, he observed

4 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company that the manufacturing activity carried on by the assessee was not in dispute; the corresponding sales had been accepted; and the quantitative details relating to raw materials consumed and finished goods manufactured broadly reconciled. Thus, while the assessee had failed to establish conclusively that the impugned purchases were actually made from the stated supplier, the underlying procurement and utilisation of the goods could not altogether be discarded. Applying the principle that, in such circumstances, only the profit element embedded in the unverified purchases could reasonably be brought to tax, the learned CIT(A) restricted the addition to 12.5% of ₹34,03,964, amounting to ₹4,25,496, and deleted the balance addition. 5. Before us, the learned DR strongly relied upon the assessment order and submitted that, once the assessee had failed to maintain the relevant stock records, produce the supplier or substantiate the actual movement and consumption of the goods, there was no justification for restricting the addition merely to a percentage of the disputed purchases. The learned counsel, on the other hand, relied upon the findings of the learned CIT(A) and submitted that the assessee had disclosed an overall gross-profit rate of 10.33% on its business transactions, which included the purchases under consideration. He further pointed out that even in the assessee’s own case for the assessment year 2019–20, the Assessing Officer had considered an estimation

5 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company of 12.5% of the disputed purchases to be fair and reasonable. As regards the legal grounds raised in the Cross Objection challenging the reopening and the validity of the reassessment order, no substantial arguments were addressed before us and, during the course of hearing, it was agreed that the dispute may be adjudicated on merits and the legal issues may be kept open. 6. We have heard the rival submissions and carefully perused the material placed on record, particularly the assessment order and the findings recorded in the impugned appellate order. There is no dispute that the assessee could not establish, through reliable and independently verifiable material, that the purchases were actually made from M/s Vijay Barrel Co. The absence of a separate stock register for second-hand barrels, the inability to produce the supplier and the adverse information received from the Sales Tax Department certainly impaired the evidentiary worth of the purchase invoices. These circumstances justified the rejection of the books of account in relation to the disputed purchases and called for a reasonable estimation of the income which might have escaped assessment. However, the failure to establish the purchases from the particular supplier named in the books does not, in the facts of the present case, inexorably lead to the conclusion that the entire expenditure represented income of the assessee.

6 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company 7. The assessee was admittedly carrying on an established manufacturing activity. Its sales have neither been rejected nor found to be fictitious. The production and sale of finished goods necessarily presuppose the procurement and utilisation of the corresponding raw materials, barrels and other storage or packing material required in the course of business. The Assessing Officer has not pointed out any unexplained accumulation of stock, discrepancy in the recorded sales, or any other positive material demonstrating that no goods whatsoever were received or utilised by the assessee. The more reasonable inference, therefore, is that the goods may have been procured from sources other than the concern recorded in the books and the bills of the said concern were used to regularise such purchases. In such circumstances, what can properly be brought to tax is the economic advantage derived by the assessee through procurement from the unaccounted or grey market, which may comprise savings in taxes, incidental expenses and a possible suppression of the actual purchase price. The entire value of the purchases cannot, without anything further, be regarded as the income of the assessee when the corresponding business activity and sales stand accepted. 8. The Revenue has relied in its grounds upon the decision of the Hon’ble Supreme Court in N.K. Proteins Ltd. That decision, however, cannot be understood as laying down an inflexible proposition that every case involving an unverified

7 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company supplier must necessarily result in disallowance of the entire purchase amount, irrespective of the nature of the business, acceptance of the corresponding sales and the surrounding evidence. The extent of addition has to be determined on the factual substratum of each case. Here, the accepted sales and the subsisting manufacturing activity materially distinguish the matter from one where both the purchases and the corresponding movement or utilisation of goods are found to be wholly fictitious. In this factual setting, the principle recognised in CIT v. Simit P. Sheth (2013) 356 ITR 451 (Guj), that where the goods have entered the business but the stated source of procurement remains unverifiable, the profit element embedded in such purchases may appropriately be estimated, is more apposite. 9. The assessee had disclosed an overall gross-profit rate of 10.33%, which encompassed the purchases under consideration. Against this backdrop, the estimation made by the learned CIT(A) at 12.5% of the disputed purchases cannot be regarded as arbitrary, inadequate or unduly lenient. The said rate reasonably takes within its fold the probable saving and additional profit which the assessee might have derived through procurement outside the regular channel. It is also relevant that, in the assessee’s own case for the assessment year 2019–20, the Assessing Officer himself adopted the rate of 12.5% in respect of purchases of a similar nature. Though the determination made in one assessment year does not

8 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company operate as res judicata in another, consistency in the estimation of profit arising from transactions of the same character in the same business remains a relevant consideration, particularly when no distinguishing feature has been brought on record by the Revenue warranting a materially different approach. We, therefore, find no infirmity in the order of the learned CIT(A) restricting the addition to ₹4,25,496, being 12.5% of the disputed purchases of ₹34,03,964. The grounds raised by the Revenue are accordingly dismissed. 10. Coming to the Cross Objection filed by the assessee, Grounds Nos. 3 and 4 challenge the rejection of the books of account under section 145(3) and the sustenance of the addition of ₹4,25,496. For the reasons already discussed while adjudicating the Revenue’s appeal, the purchases from the stated supplier remained unverifiable and the estimation of the profit element at 12.5% is fair and reasonable on the peculiar facts of the case. We, therefore, do not find any substance in the assessee’s challenge either to the rejection of the books in relation to the disputed purchases or to the addition sustained by the learned CIT(A). Grounds Nos. 3 and 4 of the Cross Objection are accordingly dismissed. 11. Insofar as Grounds Nos. 1 and 2 of the Cross Objection challenging the validity of the notice issued under section 148 and the assessment framed under section 143(3) read with section 147 are concerned, no substantial arguments were

9 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company advanced before us. Since the matter has been adjudicated on merits with the concurrence of the parties and the relief granted by the learned CIT(A) has been sustained, we do not consider it necessary to render any finding on these jurisdictional grounds in the present proceedings. The legal issues raised therein are, therefore, expressly kept open and Grounds Nos. 1 and 2 are disposed of accordingly. This course should not be understood as either affirming or rejecting the legal contentions raised by the assessee.

Order pronounced in the open Court on 31st August, 2026.

Sd/- Sd/- (ARUN KHODPIA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 31/08/2026 KARUNA, sr.ps

10 ITA No.2345/Mum/2026 & CO No.192/Mum/2026 Dhirajlal and Company Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai