DCIT, MUMBAI vs. RUNGTA RAYON TEX PRIVAGTE LIMITED, MUMBAI

Since common issues are involved and the facts are substantially interconnected, all these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience and brevity.

Briefly stated, the facts are that the Assessee is a private limited company engaged in the business of manufacturing and texturising of yarn and fabrics through its manufacturing units situated at Karad and Masat Industrial Estate, Silvassa (UT of Dadra & Nagar Haveli). The Assessee filed its returns of income for the relevant assessment years in the normal course. 2

Subsequently, proceedings under section 148 of the Act were initiated on the basis of information received from the Investigation Wing, Mumbai. The information emanated from search/investigation proceedings conducted in the case of Shri Gopal Bhattar, wherein a statement under section 131 of the Act was recorded on 22.01.2020. In the said statement, Shri Gopal Bhattar admitted that he was managing and controlling various entities engaged in providing accommodation entries by issuing bogus purchase and sale bills without actual movement of goods.

During the relevant assessment years, apart from its manufacturing activities, the Assessee had also undertaken certain trading transactions involving purchases from entities allegedly controlled by Shri Gopal Bhattar, such as M/s Rathi Style & Textile Pvt. Ltd. and M/s KMP & Sons Trading Pvt. Ltd.

It is pertinent to note that while making the above additions, the AO did not reject the books of account maintained by the Assessee under section 145(3) of the Act.

Aggrieved, the Assessee carried the matter in appeal before the Ld. CIT(A), who vide orders dated 30.06.2025 disposed of the appeals as under:

The Learned Departmental Representative ("Ld. DR") strongly relied upon the assessment orders as well as the written submissions filed before us. It was submitted that once the transactions are found to be bogus, the AO was justified in estimating the profit embedded therein. Reliance was placed upon the decisions in N.K. Industries Ltd. v. DCIT, Kachwala Gems v. JCIT, CIT v. La Medica, CIT v. Sanjay Oilcake Industries and CIT v. Simit P. Sheth to contend that the benefit or profit embedded in such transactions deserves to be brought to tax.

Per contra, the Learned Authorised Representative ("Ld. AR") submitted that the AO himself had accepted that the transactions represented accommodation entries. It was further submitted that all transactions were routed through normal banking channels and no cash movement or indirect tax advantage was established. The books of account were duly audited and had not been rejected under section 145(3) of the Act. It was further argued that in respect of Entity B transactions, the Ld. CIT(A) committed an error in applying the Gross Profit rate earned from manufacturing activities to pure trading/accommodation transactions. Reliance was placed on the decision of the Coordinate Bench in Patodia Filaments Pvt. Ltd. v. DCIT (ITA Nos. 5696 to 5699/Mum/2024 dated 31.12.2024), involving identical parties and similar facts.

We have heard the counsels for both parties, perused the material placed on record, the judgments cited before us, and the order passed by the Revenue Authorities. The only grievance of the Revenue in all the four appeals relates to the deletion of the addition made by the AO by estimating Gross Profit at 5% in respect of Entity A transactions.

We find that both the AO as well as the Ld. CIT(A) have concurrently recorded a finding that the purchases and corresponding sales involving entities controlled by Shri Gopal Bhattar were accommodation entries. The purchase transactions correspond with the sales on a one-to-one quantitative basis.

It is further evident from the record that the Assessee has already disclosed the profit arising from these transactions in its books of account and offered the same to tax in the returns of income. Once both the purchase and sale transactions have been accepted to be accommodation entries and the resultant profit disclosed by the Assessee has already been subjected to tax, we find no justification for estimating any further Gross Profit merely on the purchase side.

We also find merit in the submission of the Assessee that the AO has not rejected the books of account under section 145(3) of the Act. In the absence of rejection of books and without pointing out any discrepancy in the quantitative records maintained by the Assessee, estimation of profit by applying an ad hoc Gross Profit rate cannot be sustained.

The decisions relied upon by the Revenue are distinguishable on facts. Those cases dealt with situations where genuine sales were accepted but purchases were found to have been made through bogus entities, giving rise to an inference of purchases from the grey market. In the present case, the authorities below have themselves recorded a finding that both the purchases as well as the corresponding sales constituted accommodation entries. No finding has been recorded that the Assessee procured goods from undisclosed sources or derived any indirect tax benefit.

We further find that an identical issue came up before the Coordinate Bench of the Tribunal in the case of Patodia Filaments Pvt. Ltd. v. DCIT (ITA Nos. 5696 to 5699/Mum/2024 dated 31.12.2024), involving transactions with the very same entities controlled by Gopal Bhattar. The Coordinate Bench held that where the quantitative details of purchases and corresponding sales were accepted and the books of account were not rejected, no addition could be made by estimating Gross Profit.

Respectfully following the aforesaid decision and in the absence of any distinguishing feature brought to our notice, we find no infirmity in the order of the Ld. CIT(A) deleting the additions made by the AO. Accordingly, all the four appeals filed by the Revenue are dismissed.

The Assessee, in its appeals for A.Ys. 2016-17 and 2017-18, has challenged the action of the Ld. CIT(A) in sustaining additions by applying a Gross Profit rate of 7.94% in respect of Entity B transactions.

We have considered the rival submissions. We find that the Gross Profit rate of 7.94% adopted by the Ld. CIT(A) represents the average Gross Profit of the Assessee's manufacturing business. The impugned transactions, however, admittedly relate to trading/accommodation transactions. Manufacturing activities involve value addition through processing, labour and manufacturing overheads, whereas trading transactions ordinarily operate at substantially lower margins. Therefore, application of the manufacturing Gross Profit rate to trading transactions is not justified.

We also note that the purchases forming part of Entity B transactions were made from entities controlled by Gopal Bhattar and the corresponding sales were duly recorded in the books of account. The AO has neither rejected the books of account nor brought any material on record to establish that the goods sold to the purchasers were procured from any undisclosed source or that the sales represented genuine market transactions supported by unaccounted purchases.

The Assessee has already disclosed the profit earned on these transactions in its books of account and offered the same to tax. In the facts and circumstances of the present case, we are unable to sustain any further estimation of Gross Profit by applying the manufacturing Gross Profit rate of 7.94%.

Accordingly, we direct deletion of the additions sustained by the Ld. CIT(A) in A.Y. 2016-17 and A.Y. 2017-18. The appeals filed by the Assessee are, therefore, allowed.

In the result, the appeals filed by the Revenue in ITA Nos. 5270/Mum/2025, 5261/Mum/2025, 5334/Mum/2025 and 5335/Mum/2025 are dismissed, whereas the appeals filed by the Assessee in ITA Nos. 5325/Mum/2025 and 5326/Mum/2025 are allowed.