ACIT-24(1), MUMBAI, PIRAMAL CHABERS, PAREL vs. IQBAL ABDULAZIZ DAMANWALA , MUMBAI

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ITA 8674/MUM/2025Status: DisposedITAT Mumbai22 May 2026AY 2013-1424 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the CIT(A) rightly set aside the rejection of books of accounts as the discrepancies were reconciled, primarily due to the exclusion of VAT. Consequently, the protective addition of Rs. 25,00,000/- was also deleted.

What were the facts?

The Assessing Officer (AO) rejected the assessee's books of accounts due to discrepancies in purchase figures confirmed by third parties, estimating net profit at 3%. The CIT(A) found the rejection unjustified but sustained a protective addition of Rs. 25,00,000/-.

What were the issues?

Whether the rejection of books of accounts under Section 145(3) was justified, and if a protective addition is sustainable when the primary addition is deleted.

Which sections of the Income-tax Act were involved?

Section 145(3),Section 144

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI “C” BENCH: MUMBAI

Before: SHRI VIKRAM SINGH YADAV & SHRI RAHUL CHAUDHARY

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “C” BENCH: MUMBAI

BEFORE SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER AND SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER

ITA No. A.Y. Appellant Respondent ACIT - 24(1), Mumbai Iqbal Abdulaziz Income Tax, Aaykar Damanwala 8674/Mum/2025 2013-14 Bhavan, Mumbai – 301/302/303, Midas 400020. Chambers, Off. New Link Road, Opp. Laxmi Industrial Estate, Andheri West, Mumbai – 400053

ITA No. A.Y. Appellant Respondent Iqbal Abdulaziz ACIT, Circle – 24(2), Damanwala Mumbai 9148/Mum/2025 2013-14 301/302/303, Midas Income Tax, Aaykar Chambers, Off. New Bhavan, Mumbai – Link Road, Opp. Laxmi 400020. Industrial Estate, Andheri West, Mumbai – 400053

For Assessee : Shri Rishi Agarwal For Revenue : Shri V. S. Mahajan, Sr.DR

Date of Hearing : 23-04-2026 Date of Pronouncement : 22-05-2026

O R D E R PER VIKRAM SINGH YADAV, A.M : These are the cross-appeals filed by the Revenue and the assessee against the order of the Learned Commissioner of Income Tax (Appeals)- National Faceless Appeal Centre (NFAC), Delhi [‘Ld.CIT(A)’], dated 29-

2 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala 10-2025, pertaining to Assessment Year (AY) 2013-14,wherein the respective grounds of appeal are as under:

ITA No: 8674/Mum/2025 1. “Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that rejection of books under section 145(3) was not justified, even though third party responses under section 133(6) revealed purchase differences of Rs. 3,99,03,946/- and one major supplier, M/s MaaChintapurni Iron and Steel (India) Private Limited, remained unverified. The Assessing Officers action is in line with the principle in Kachwala Gems v. Joint CIT that serious defects and incomplete records warrant rejection of books and estimation.

2.

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition from Rs. 8,32,89,346/- to Rs. 25,00,000/- and deleting Rs. 8,07,89,346/-, without showing that the net profit rate of 3 per cent on turnover adopted by the Assessing Officer under section 145(3) read with section 144 was unreasonable. A rational best judgment estimate, once books are rejected, is ordinarily to be respected as recognized in SreeGanpati Embroidery Private Limited v. CIT. 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in placing reliance on the assessees reconciliation by treating the entire difference as value added tax component, despite the assessee not producing the value added tax ledger, complete value added tax records of creditors or proper confirmation from one major supplier, and thereby not fully discharging the onus to prove that purchases and book results were correct. 4. Whether on the facts and circumstances of the case and in law,the Ld. CIT(A) has erred in sustaining only a token protectiveaddition of Rs. 25,00,000/-, being less than 0.01 per cent ofturnover and only a small fraction of the unresolved purchase difference, which bears no reasonable nexus with the magnitude of the discrepancies and results in under assessment of income, contrary to the duty of the Assessing Officer to compute real income as emphasized in CIT v. British Paints India Ltd.”

ITA No. 9148/Mum/2025

“1. The learned CIT(A) erred in law and on facts in sustaining an ad-hoc and protective addition of ₹25,00,000/-, despite recording a categorical finding that rejection of books of account u/s 145(3) was not justified and estimation of profit @3% of turnover was excessive and unwarranted.

3 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala 2. The learned CIT(A) failed to appreciate that once books of account are accepted, no estimation or ad-hoc addition is permissible 3. The addition of ₹25,00,000/- is arbitrary, conjectural and based on suspicion, without any supporting evidence of suppression of income 4. The learned CIT(A) erred in sustaining a so-called protective addition, even though no substantive addition survives and the facts stand conclusively explained 5. The learned CIT(A) failed to appreciate that differences inpurchase figures were fully reconcilable on account of VAT, and that purchases were genuine, supported by invoices, confirmations, banking channels and stock records 6. The impugned addition is unsustainable even on estimation principles, as no comparable cases, past history or industry margins were relied upon 7. The impugned order violates the principles of natural justice, as the addition has been sustained without confronting the Appellant with any adverse material or specific defect in the books of account.”

2.

Briefly, the facts of the case are that the assessee filed its return of income on 31.09.2014 which was processed u/s 143(1) and thereafter, it was selected for scrutiny and notices u/s. 143(2) and 143(1) were issuedcallingfor the necessary information and documentation. During the course of assessment proceedings, the AO observed that the assessee has shown purchases amounting to Rs. 272,10,43,368/-in its profit and loss account and the assessee was asked to furnished party wise details of purchase and other relevant details. In response, the assessee furnished party wise details of purchases along with sample bills which was taken into consideration by the AO and thereafter, the AO issued the notices u/s 133(6) on 10.03.2016 to six selected parties which were duly served on respective parties except in case of Maa Chintapurni Iron & Steel Pvt. Ltd. in respect of which, the notice was affixed on the address furnished by the assessee. Thereafter, considering the replies received from the respective parties, the AO observed that there is the difference in the amount confirmed by the respective parties and the amount shown by

4 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala the assessee in its books of accounts and the difference amounting to Rs. 3,99,03,946/- was determined and the AO held that the assessee has shown less purchases which are made outside the books of the accounts and the assessee was again asked to reconcile the differences and give the latest address of the one of the entity, Maa Chintapurni Iron & Steel Pvt. Ltd in respect of the which information has not been received. Thereafter, the AO observed that the book results disclosed are not reliable as the assessee is not accounted for all the sales and purchase in books of accounts and thereafter, referring to the provisions of Section 145 of the Act, the AO held that there is a gross deviation in the maintenance of the accounts of the assessee, that there is a considerable difference in the amount shown by the Suppliers and as shown in the books of accounts for which no possible explanation has been furnished by the assessee, that the percentage of the profits shown by the assessee at 1.6% of the gross profit is also considerably low as per the business standards especially in the assessee’s line of business and therefore the book results declared by the assessee were held not reliable and were rejected and net profit on total turnover was estimated on 3% of the reported turnover of Rs 277,63,11,547/- and net profit of Rs. 8,32,89,346/- was brought to tax in the hands of the assessee.

3.

The assessee thereafter carried the matter in the appeal before the Ld.CIT(A) wherein the assessee submitted that a letter was received from the AO dated 29/03/2016 asking to reconcile the differences and furnish details in respect of party whose details were not received and such details were asked to be submitted on or before 28/03/2016 and without waiting for the response from the assessee, the assessment order was passed on 30.03.2016 and thus, the assessee was prevented by sufficient cause to furnish the necessary explanation/documentation and basis that the assessee filed certain additional evidences during the

5 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala appellate proceedings which were taken on record by the ld CIT(A) and after calling for the remand report from the AO, and considering the submissions of the assessee, the ld CIT(A) held that the AO’s action in rejecting the books under 145(3) is not justified and estimation of profit at 3% of turnover is excessive and unwarranted. At the same time, protective addition of Rs. 25,00,000/-was sustained to cover any residual, un-verifiable VAT components and the addition of Rs. 8,32,89,346/- was restricted to Rs. 25,00,000/- and the remaining addition was deleted and the relevant findings of the Ld.CIT(A) which are under challenge before us reads as under: “4.6. The matter was remanded to the AO for verification. Notices u/s 133(6) were again issued to the same six parties. Replies were received from all except Maa Chintapurni Iron & Steel (1) Pvt. Ltd., which is under liquidation. The ex-director responded but could not provide full VAT returns. The AO noted that reconciliation statements were filed by the appellant, explaining that differences largely arose due to VAT amounts not recorded in the P&L. However, the VAT ledger was not produced to substantiate this. Hence, the AO recommended that the case be decided on merits. 4.7. I have carefully considered the assessment order, the grounds of appeal, the written submissions filed by the appellant, the remand report of the Assessing Officer (AO), and the material placed on record, including the reconciliation statements furnished by the appellant. The core issue pertains to the rejection of books of account under section 145(3) of the Income-tax Act, 1961, and consequent estimation of business income at 3% of total turnover, resulting in the addition of Rs. 8,32,89,346/-. The AO's action was based on certain differences notice between the purchases recorded by the appellant and those confirmed by suppliers to whom notices under section 133(6) were issued. The appellant, engaged in the business of trading in iron and steel materials under the proprietary concern M/s Sushma Steel Sales, declared total purchases of Rs.272.10 crore during the relevant year. To verify the genuineness of purchases, the AO issued notices under section 133(6) to six parties on a sample basis. Replies were received from five parties, while one - MisMaaChintapurni Iron & Steel (1) Pvt. Ltd. was under liquidation and could not respond through regular channel. On comparison of figures, the AO observed aggregate differences of Rs.3.99 crore and concluded that the appellant had shown lower purchases. The AO therefore held that the books were unreliable and estimated profit at 3% of turnover of Rs.277.63 crore. 4.8. During appellate proceedings, the appellant contended that the differences observed were solely on account of VAT element not being included in the purchase values shown in the Profit & Loss Account. To substantiate this, the appellant submitted detailed party-wise

6 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala

reconciliation, which demonstrated that once VAT is added, the purchases as per the appellant's books match the figures reported by suppliers. A summary of reconciliation is reproduced below: Sr. Name of Party Amount as VAT (Rs.) Total Amount as Difference No. per P & L incl.VAT(Rs.) per Party (Rs.) (Rs.) 1. Sri. Jagannath 82,19,870 4,10,995 86,30,865 97,05,800 -10,74,935 Steel Co. 2. Shree Vaishnav 7,92,24,926 39,61,247 8,31,86,173 8,32,75,879 -89,706 Alloys Pvt. Ltd. 3. Heena 1,48,78,195 7,43,911 1,56,22,106 1,56,22,126 -20 Enterprises 4. Guardian Steel 8,67,896,380 43,39,323 9,11,25,703 9,952,67,960 -81,42,257 Pvt. Ltd. 5. Maulai Raj Steel 1,81,12,290 9,05,616 1,90,17,906 1,90,17,926 -20 Pvt. Ltd. 6. MaaChintapurni 37,93,63,916 1,89,69,847 39,83,33,763 39,83,33763 0 Iron & Steel (1) Pvt. Ltd. 4.9. The appellant submitted that purchases were fully supported by invoices, payments were made through banking channels, and quantitative stock records were maintained. During remand proceedings, the AO reissued notices u/s 133(6). All parties except the company under liquidation responded and confirmed the transactions. The AO acknowledged that differences were substantially explained but noted that the appellant had not produced the VAT ledger, which could conclusively verify that the entire difference was attributable to tax. On examination of the reconciliation and other documentary evidence, it is clear that the differences arose primarily due to exclusion of VAT in the appellant's purchase records, while the suppliers' confirmations included it. When VAT is added, the purchase figures tally almost completely, with only nominal rounding-off variances. All suppliers have confirmed the transactions; payments are made through proper banking channels; and the stock records correspond to purchase quantities. No evidence has been brought by the AO to show that any purchases are bogus or fictitious. The aggregate difference, after considering VAT, is negligible in the context of total purchases exceeding Rs.272 crore. 4.10. Accordingly, I find that the rejection of books of account under section 145(3) was not justified. Minor reconcilable variations cannot by themselves render the books unreliable. While the reconciliation filed is substantially satisfactory, the appellant failed to furnish the detailed VAT ledger, preventing full verification of the claim that the entire difference represented VAT component. Hence, a minor element of uncertainty remains regarding exact tax computations and treatment. In view of the above, a small estimated addition is warranted - not as a punitive measure, but as a protective, reasoned estimate to cover any unverified VAT component or possible reconciliation gaps. The addition of Rs.25,00,000/- is therefore made on the following grounds: 1. It represents less than 0.01% of the total turnover and less than 1% of the aggregate difference, hence proportionate to the scale of operations.

7 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala

2.

It acknowledges that although no bogus purchases are established, some supporting VAT ledgers were not produced for verification. 3. It is consistent with established judicial practice that permits small protective additions where records are substantially reliable but minor unverifiable elements exist. 4. It balances both revenue protection and fairness to the appellant, avoiding arbitrary profit estimation. Thus, the Rs.25 lakh addition is not arbitrary but is a measured, equitable, and protective adjustment reflecting the partial unverifiability of VAT reconciliation. In viewof the above discussion, the AO's action in rejecting the books u/s 145(3) is not sustainable. The estimation of profit @3% of turnover is excessive and unwarranted. The appellant's reconciliation has satisfactorily explained the differences. A small, protective addition of Rs.25,00,000/- is sustained to cover any residual unverifiable VAT component. Accordingly, the addition of Rs.8,32,89,346/- is restricted to Rs. 25,00,000/- and the balance is deleted.”

4.

Now, both the Revenue and the assessee are in cross-appeals before us.

5.

During the course of hearing, the ld DR submitted that the Ld. CIT(A) has erred in holding that rejection of books under section 145(3) was not justified, even though third party responses under section 133(6) revealed purchase differences of Rs. 3,99,03,946/- and one major supplier, M/s Maa Chintapurni Iron and Steel (India) Private Limited, remained unverified. It was further submitted that the Ld. CIT(A) has erred in restricting the addition from Rs. 8,32,89,346/- to Rs. 25,00,000/- and deleting Rs. 8,07,89,346/-, without showing that the net profit rate of 3 per cent on turnover adopted by the Assessing Officer under section 145(3) read with section 144 was unreasonable. It was submitted that a rational best judgment estimate, once books are rejected, is ordinarily to be respected as recognized in Sree Ganpati Embroidery Private Limited v. CIT. It was submitted that the Ld. CIT(A) has erred in placing reliance on the assessee’s reconciliation by treating the entire difference as value added tax component, despite the

8 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala assessee not producing the value added tax ledger, complete value added tax records of creditors or proper confirmation from one major supplier, and thereby not fully discharging the onus to prove that purchases and book results were correct. It was further submitted that the Ld. CIT(A) has erred in sustaining only a token protective addition of Rs. 25,00,000/-, being less than 0.01 per cent of turnover and only a small fraction of the unresolved purchase difference, which bears no reasonable nexus with the magnitude of the discrepancies and results in under assessment of income, contrary to the duty of the Assessing Officer to compute real income as emphasized in CIT v. British Paints India Ltd.

6.

The ld AR supported the order and the findings of the ld. CIT(A),in so far as his findings, wherein, he has upheld the book results and has deleted the estimation of net profit at the rate of 3% of the reported turnover. It was submitted that the ld. CIT(A),after detailed examination of the relevant facts, the reconciliation and explanation submitted by the assessee, the party-wise responses to notices issued u/s, 133(6)and the remand report submitted by the Assessing officer, has rightly held that the rejection of books of accounts was not justified and that estimation of profit @ 3% was excessive and unwarranted.

7.

It was submitted that the assessee has been regularly maintaining books of accounts under mercantile system of accounting consistently over the years.The books of accounts are duly audited under the Income Tax Act and MV Act, 2002 and the VAT audit report and Annexure J2 submitted during remand proceedings confirmed the purchase figures as recorded in the books of accounts and the auditors have also confirmed in its audit report without any adverse finding regarding the maintenance of books of accounts or true and fair disclosure of the financial results so presented in the books of accounts.

9 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala 8. Regarding the differences in the purchase figures and the figures as confirmed by the respective parties, it was submitted that the Assessing Officer in the remand report has clearly acknowledged the fact that the differences have been largely explained to be the amount of VAT not included in purchases as per the profit and loss account. It was further submitted that in case of Kachwala Gems, the defects in the books of accounts were specific, identified and went to the root of the trading accounts.However, in the present case, the ld. CIT(A) has specifically found that no such specific defects have been established. The differences arose entirely from reconciling the accounting treatment of VAT in the books of accounts wherein the assessee has followed VAT exclusion method whereby the purchases have been shown exclusive of VAT and VAT has been shown separately and not from any falsification, suppression or omission and that finding is supported by the remand report issued by the Assessing Officer. Therefore, mere difference in the accounting treatment, wherein, the VAT component in the purchases have been shown separately in the balance sheet as against being reported as part of the purchases in the profit and loss account is an accepted accounting practice duly authorized by the accounting standards (AS-2) and cannot be a defect warranting rejection of books of accounts and therefore, reliance on the decision of Hon'ble Supreme Court in case of Kachwala Gemsdoesn't support the case of the Revenue.

9.

It was further submitted that the ld. CIT(A) has rightly held that estimation of profit at 3% is unwarranted. In this regard, it was submitted that the Assessing Officer without pointing out any comparable case where 3% was accepted as the net profit for iron and steel trading or producing any industrial data or demonstrating that the assessee’s past history suggested a 3% margin has estimated the profit at 3% which is clearly arbitrary and disconnected with the material on

10 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala record. It was submitted that the assessee declared net profit from iron and steel trading which is a high-volume, low-margin business and is consistent with industry norms and a 3% estimation on turnover of Rs.277 croresresult in an estimated profit of Rs. 8.32 crores as against the declared profit of Rs. 4.73 crore representing a doubling of declared income without any shred of evidence that any income has been suppressed.Regarding reliance on the decision of Sri Ganpati Embroidery Pvt. Ltd., it was submitted that in the said decision, it was held that a rational best judgment estimate, once books are rejected is ordinarily to be respected.It was submitted that in the instant case, the said principle has no application where the ld. CIT(A) has specifically found that rejection of book results itself was not justified. Therefore, the said decision again does not support the case of the Revenue.

10.

It was further submitted that the department ground no. 3 proceeds on the assumption that reconciliation is unreliable as the VAT ledger was not produced.It was submitted that the VAT reconciliation submitted by the assessee is self-verifying and it does not depend on the assessee’s own VAT ledger for its credibility. It depends on the VAT figures confirmed by the suppliers supported by the VAT Form 704 with annexure J1 and J2 submitted by five out of the six parties during the remand proceedings and once the supplier confirms in its own VAT return that it charged VAT on sales to the assessee, that confirmation is independent evidence and it does not require the assessee’s VAT ledger to validate the same. It was submitted that for four of the six parties, the reconciliation after accounting for VAT shows a rounding off residual difference which does not require a VAT ledger to explain. It was submitted that the assessee has discharged the necessary onus in terms of supporting the purchase transactions in terms of invoices, the payments being done through the banking channel, stock records being consistent with purchases, five of the six parties confirming the

11 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala transaction and the sixth party submitted its own ledger and signed confirmation through its director and reconciliation for that party also shows zero difference after VAT and therefore the mere non-production of the VAT ledger, being a supporting accounting document in a situation where the VAT figures are independently confirmed by the supplier's own VAT returns does not constitute a failure to discharge the onus cast on the assessee. Further, the remand report issued by the Assessing officer acknowledges the reconciliation and the differences arising on account of the VAT and therefore the ld. CIT(A) acceptance of the reconciliation is fully supported by the evidence on record including the supplier's own VAT forms, parties confirmations, bank payments, invoices and the AO's remand report.

11.

It was further submitted that the department relianceon the decision of British Paints India Ltd.in fact support the assessee’s case and it is the duty of the Assessing Officer to tax the income actually earned/accrued and not an inflated, estimated, a notional figure and a percentage of turnover that has no basis in the facts of the case. It was submitted that the assessee declared income represents the real income earned from iron and steel trading and the reconciliation demonstrate that the purchases are genuine and the differences are only account of the accounting treatment of VAT in its books of accounts and which cannot be characterized as a fabrication resulting in any suppression or non-disclosure.It was accordingly submitted that as far as the Revenue’s appeal is concerned, the same should be dismissed and the order of the ld. CIT(A) be confirmed.

12.

Coming to the assessee’s cross appeal, it was submitted that the ld. CIT(A) has erred in sustaining an ad-hoc and protective addition of Rs. 25 lakhs despite recording a categorical finding that the rejection of books of accounts u/s. 145(3) was not justified and that the estimation of profit at the rate of 3% was excessive and unwarranted. In this

12 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala regard, it was submitted that the ld. CIT(A)records unambiguously that the differences in purchase figures arose primarily due to exclusion of VAT in the assessee’s books of accounts, the purchase figures tally almost completely once the VAT is added, all suppliers have confirmed the transactions, payments were made through proper banking channels, stock records corresponding to purchase quantities and lastly no evidence was brought by the AO to show that any purchases are bogus or fictitious. It was submitted that having recorded these findings, the ld. CIT(A) goes on to hold that rejection of books u/s. 145(3) is not sustainable and estimation of profit at 3% is excessive. It was submitted that these are not tentative observations, these are final findings of fact in favor of the assessee and once these findings are recorded, there is simply no legal basis for any addition, whether estimated, ad-hoc or protected. It was submitted that it is a settled proposition that rejection of books of accounts u/s. 145(3) and best judgment assessment u/s. 144 of the Act are conditioned precedent for any estimated addition, where the ld. CIT(A) himself holds that Section 145(3) rejection was unsustainable, the book results stand accepted and therefore, the income must be computed as per the accepted books of accounts and there cannot be any other basis but to accept the book results and the estimated addition, therefore, needs to be necessarily set aside.

13.

It was further submitted that the ld. CIT(A) has characterized Rs. 25 lakhs addition as a protective addition. In this regard, it was submitted that the concept of protective addition in income tax jurisprudence has a specific and well-defined meaning. It is employed where the same income is assessable in the hands of two different assessees and the Revenue seeks to protect its interest by assessing in both hands pending determination of the correct taxable entity. It was submitted that in the instant case, there is no competing assessment,

13 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala no uncertainty about the identity of the person liable to tax and no alternative claim. Therefore, using the term ‘protective’ to justify a residual estimated addition in the hands of the assessee after the foundation of the original addition has been demolished is a misapplication of an established legal principle and therefore, the said findings of the ld. CIT(A) deserve to be set aside.

14.

Regarding transaction with one of the entity namely, Maa Chintapurni Iron and Steel (I) Pvt. Ltd. It was submitted that the notice u/s. 133(6) was issued to the said party on 10.03.2016 which was served by affixture.The said party replied on 31.03.2016 submitting all the details of the transaction with the assessee. However, by that time, the assessment order was already passed on 30.03.2016 without considering the replies so submitted by the party. It was further submitted that the assessee thereafter filed the appeal on 17.04.2016 and the remand report was finally issued by the Assessing Officer on 12.02.2024 nearly 8 years after the appeal was filed and in the interim, the said entity went into liquidation and had the remand proceedings been conducted timely, the entity might have been a fully functional company capable of providing complete documentary verification of the transaction. It was submitted that by the time, the AO finally issued the remand report, the company was in liquidation, its day to day management was disrupted, records were scattered and obtaining a comprehensive response from the company had become difficult and the partial nature of the response received from the said entity during remand, disregarding the initial response submitted on 31/03/2016, which the ld. CIT(A) then used as a ground for sustaining the addition cannot be held adversely against the assessee as the entire delay is on account of the Revenue in not considering the submissions already filed on 31.03.2016 and not completing the remand proceedings within a reasonable period of time. It was further submitted that the assessee in response to the remand report vide its submission dated 5/04/2024

14 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala

has filed the necessary reconciliation and it was submitted that there are no differences in respect of the said party and the contents thereof read as under: “Maa Chintapuri Iron & Steel (I) Pvt. Ltd. :- (Total Difference : Rs. 39931946) Our client received a letter dated 29th March, 2016 asking to furnish details in respect of parties whose details were not received. The mentioned notice was to be compiled on or before 28th March, 2016, which itself rendered the notice invalid. The party could not submit the details in response to notice w/s 133(6) due to some personal affairs. The assessment order was passed on 30th March 2016 considering the sum of purchase as per party as Rs 0; a day before the party had submitted the details (ie on 31 March 2016) without giving proper opportunity to the assesse for providing the reconciliation which was also one the grounds of appeal filed against the assessment order. The amount of difference resulting due to this was Rs. 379396916. We have enclosed the copy of Covering letter submitted by the party to the Department as on 31st March, 2016. The remaining difference of Rs. 18969847 amounts towards the VAT. Further, with the regards to the calling for the rejoinder on remand report we would like to state that in respect of Maa Chintpurni Iron & Steel (I) Pvt Ltd, we had submitted the following documents, which we are again attaching the same for your perusal. i) Our own books of accounts containing party's ledger in our books ii) Our bank statements highlighting the date-wise transactions of payments made to the above party iii) We are also attaching copy of our VAT Audit Report & Annexure 12 highlighting the party's figures which matches with our books of accounts. We would like to highlight that our books of accounts were verified our purchase figures which constitutes as a strong proof of the genuine purchases made by us and audited under the Income Tax Act, 1961 & as per MVAT Act, 2002 by the auditors who have alreadycorrectly recorded in our books of accounts. iv) We are also attaching the party's ledger along with their signed ledger confirmation for FY 12-13 which also tallies with our books of accounts. Ledger Account as per BOA of Maa 400956241 Chintpuri Pvt ltd Less: Opening Balance as on (1110149) 01.04.2012 Less: Payments made against (436651) Purchase on 09/09/2012. Less: Payments made against L^ 042717) Purchase on 10/10/2012 Less: Rounding off difference (59)

15 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala

Total of Purchase from Maa Chintpuri 398366783 for FY 12-13

In the books of Sushma Steel Sales Sr. No. Name Amount as per Amount of Total Amount as Difference Assesses' s P&L VAT Amount per party's including ledger VAT Maa 379396936 18969847 398366783 398366783 0 Chintapuri Iron & Steel (I) Pvt. Ltd. Reconciliation of Ledgers: - Particulars Amount Total Debit side as per Maa Chintpurni's books 400956241 Total Credit side as per Sushma’s books 405733080 Total Diff -4776839 Reason 1) CHQ returned not considered in maa chintpurni's books As on 03/04/2012 2078807 As on 16/04/2012 3808122 Total Chq Returned 5886929 Net Difference after CHQ Return 1110090 Reason 2) DIFF OF OPG BALANCE & ROUNDING OFF Not considered in total of Sushma' s Cr side 1110049 Rounding off 59 Net Difference after Opening Balance 0 Total Credit Side as per Maa Chintpurni's books 392923264 Total Debit Side as per Sushma’s books 398810193 Total Difference -5886929 Reason: Cheque returned not considered in Maa Chintpurni's books Cheque as on 03/04/2012 2078807 Cheque as on 16/04/2012 3808122

16 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala Total Cheque Returned 5886929 Net Difference after CHQ Return 0 15. It was further submitted that regarding non-submission of the VAT ledger, the Assessing Officer has conducted independent enquiries from each of the suppliers u/s. 133(6) of the Act, both during the original assessment proceedings and thereafter, again during the remand proceedings and where the AO issued notice to the supplier, the supplier responds directly to the AO, with its own records, the assessee’s books and the VAT ledger play no role whatsoever in the Section 133(6) process. It was submitted that the confirmation so received by the Assessing Officer constitute independent third party evidence of the highest reliability, wherein, five out of the six parties independently confirmed the purchases. The sixth party also confirmed the transaction through its representative and provided its signed ledger confirmation showing zero difference after VAT and cheque returns and therefore, sustaining any addition on a protective basis on this ground is clearly unwarranted and deserve to be set aside It was submitted that the non-production of a VAT ledger therefore, does not automatically or mechanically lead to the estimated addition. The onus is on the Revenue to demonstrate through material and evidence that the income was actually suppressed or the purchases were not genuine. It was further submitted that at no stage during the assessment or during the remand proceedings, the assessee was specifically called upon or directed to produce the VAT ledger. It was submitted that the assessee had in fact furnished comprehensive documentary evidence including copy of the invoices, bank statements evidencing payments made through banking channels, quantitative stock records, extract of form 704, all of which collectively and independently established the VAT component. In the absence of any specific requisition for the VAT ledger, there was thus no occasion for the assessee to produce the same. It was submitted that the assessee had no reason whatsoever to withhold such

17 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala

a document particularly when all supporting primary evidence substantiating the VAT reconciliation has already been placed on record. In that background, it was submitted that given that the ld. CIT(A) has sustained the estimated addition on account of non- production of the VAT ledger, the assessee seeks the permission to place on record its VAT ledger covering all VAT input credit entries for the relevant period highlighting the transactions with parties, party- wise statement of accounts of each of the six parties with the breakup of purchases exclusive of VAT and VAT amount separately and extract of VAT annual return in form 704 independently filed by the respective parties with the Maharashtra Sales Tax Authority for the relevant period.

16.

It was further submitted that certain residual differences which have been referred by the ld. CIT(A), the same have in fact been reconciled and responded by the assessee vide its letter dated 12.02.2023 which apparently has not been taken into consideration and in this regard, our reference was drawn to the following table which reads as under:

Sr. Name of Party Purchase VAT Total Amount as Residual No. Amount as Amount Purchase per Party Difference per P&L (Rs.) Incl. VAT Confirmation (Rs.) Account (Rs-) / Form 704 (Excl. VAT) (Rs.) (Rs.) 1. Sri Jagannath Steel Co. 82,19,870 4,10,995 86,30,865 97,05,800 10,74,935 2. Shree Vaishnav Alloys 7,92,24,926 39,61,247 8,31,86,173 8,32,75,879 89,706 Pvt. Ltd. 3. Heena Enterprises 1.48,78,195 7,43,911 1,56,22,106 1,56,22,126 20 4 Gaurdian Steel Pvt. Ltd. 8,67,86.380 43,39,323 9,11,25.703 9.92,67,960 81,42,257 5 Maulai Raj Steel Pvt. 1,81,12.290 9,05,616 1,90,17,906 1,90,17,926 20 Ltd.

18 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala 17. In this regard, it was submitted that regarding Sri Jagannath Steel Co., the residual difference of Rs 10,74,935 arises because the AO erroneously treated both the Sales Ledger and the Purchase Ledger submitted by the party as Purchase Ledgers, without segregating the Taxable Value and VAT figures. On correct reading, the Sales Ledger (Rs. 86,30,885) and Purchase Ledger (Rs. 10.74,915) are separate the actual purchase figure inclusive of VAT is Rs. 86,30,865, resulting in a residual VAT- only difference of Rs. 4,10,995 which is reflected in the party's VAT Form 704.

18.

Regarding Shree Vaishnav Alloys Pvt. Ltd, the residual difference of Rs. 89,706 arises because the AO took the incorrect figure of Rs. 8,32,75,879/- as the party's amount whereas the party's actual ledger shows Rs. 8,31,86,173/- which exactly matches the Appellant's books inclusive of VAT and the remaining difference of Rs. 89,706 is a rounding variance.

19.

Regarding Gaurdian Steel Pvt. Ltd, the residual difference of Rs. 81,42,257/- is fully explained as follows: (a) Opening balance of Rs. 8,96,422 (cheque issued in FY 2011-12, not part of FY 2012-13 transactions), (b) Cheque return entries of Rs. 12,92,874: and (c) Sales of Sushma Steel Syndicate of Rs. 59,52,941 erroneously included by the party in the Sushma Steel Sales ledger and after these adjustments the figures tally exactly. It was accordingly submitted that a careful reading of the aforesaid table and the explanation will demonstrate that every difference mentioned in the ld. CIT(A) order has been fully explained and reconciled with specific documentary evidence and estimated and protective addition so sustained by the ld CIT(A) be directed to be deleted.

20.

We have heard the rival contentions and perused the material available on record. The issue under consideration relates to rejection of

19 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala the results so declared by the assessee as per its audited financial statements in terms of power vested with the Assessing Officer u/s. 145(3) of the Act. Further, the basis and the manner of estimation of net profit in terms of provisions of Section 144 of the Act. Section 145(3) provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) of Section 145 of the Act has not been regularly followed by the assessee or income has not been computed in accordance with the standards notified under sub-section (2) to Section 145(2) of the Act, the Assessing Officer may make an assessment in the manner provided in section 144 of the Act. The emphasis therefore is on the correctness and completeness on the accounts of the assessee, the method of accounting regularly followed by the assessee as well as compliance with the standards notified by the Central Government u/s. 145(2) of the Act.

21.

In the instant case, on perusal of the assessment order, we find that the Assessing Officer has stated two reasons as to why he was of the opinion that the books of accounts and the result so declared are not reliable. Firstly, he referred to the difference in the amount of the purchases as reflected by the assessee in its books of accounts and as confirmed by the suppliers in respect of which the notices u/s. 133(6) were issued during the course of assessment proceedings. Secondly, he referred to the low profit margin of 1.6% so declared by the assessee.

22.

Firstly, we find that as far as the low gross profit margin is concerned, where the Assessing Officer is of the opinion that the profit margin so declared is lower as compared to the industry standard in the assessee’s line of business, the same is a good starting point to initiate the investigation in order to verify the reasons as to why the assessee has disclosed low profit margin. However, the same cannot be the basis for the rejection of books of accounts in absence of any contrary finding

20 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala or evidence which has been brought on record. Therefore, as far as the low profit margin so disclosed by the assessee is concerned, we find that the whole basis of rejection of the book results suffers from the fundamental lack of appreciation on the part of the Assessing Officer in terms of exercise of his powers, wherein, the book results have been rejected. In this case, it is noted that the assessee has reported a turnover of Rs. 277 crores and disclosed the total income of Rs. 4.73 crore in its return of income. Therefore, on such a huge turnover where the assessee’s reporting a certain profit percentage, it is imperative for the Assessing Officer to investigate the reasons as to why he is of the opinion that the profit margins so disclosed are lower than the industry margins. However, we find that nothing of that sought has been undertaken during the course of assessment proceedings and nothing has been so specified in the assessment order so passed by the Assessing Officer.

23.

Secondly, coming to the matter relating to the purchases so undertaken by the assessee. During the course of assessment proceedings, the Assessing Officer observed that the assessee has shown purchases of Rs 272 crores during the year under consideration. In response, the assessee was asked to furnish the party-wise details of the purchases so made and their respective particulars in terms of the quantum of purchases, the name and address as well as the PAN number of the parties. In response, the assessee furnished the necessary details along with the sample bills/invoices which evidently have been gone through by the Assessing Officer. No adverse finding has been recorded by the Assessing Officer in terms of any of the purchases not being supported by adequate documentation. Further, in order to verify those purchases, the Assessing Officer invoking his powers u/s. 133(6), issued notices to six of the parties on 10.03.2016 at the fag-end of the limitation period for completion of the assessment

21 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala proceedings, which finally culminated with passing of the assessment order on 30.03.2016. Five of the parties responded and confirmed having undertaken the transaction with the assessee. However, there were certain differences in terms of the amount confirmed by the respective parties and the amount shown by the assessee in its books of accounts as evident from the assessment order. One of the parties as per the assessment order could not confirm the transaction which has been contested by the assessee stating that the said party did respond with the necessary confirmation and documentation on 31.03.2016 and by that time, the assessment order was already passed. At the same time, it was submitted that it is a matter of record that said confirmation and supporting documentation is available as part of the assessment records and copy thereof has again been submitted during the course of remand proceedings. So, based on those differences in the amount as confirmed by the parties and as reflected in the books of accounts, the Assessing Officer worked out a figure of Rs. 39,90,31,946/- being the amount of purchases which are made outside the books of accounts. Here, we find that there is apparently error in the working so done by the Assessing Officer as one of the parties whose confirmation was not taken into consideration, the amount of purchases shown by the assessee amounts to Rs. 37,93,63,916/- which has been duly reflected in the books of accounts and therefore, cannot be taken as the purchases which have been made outside the books of accounts and where the said figure is excluded, the remaining figure comes to Rs. 1,96,68,030/-. In any case, during the appellate proceedings, we find that fresh notices were issued to all of the parties by the Assessing Officer and necessary confirmations were filed which has been taken into consideration by the Assessing Officer while issuing his remand report. Here, it is relevant to refer to the remand report submitted by the Assessing Officer vide his letter dated 12.02.2024, wherein after carrying out the necessary verification and the

22 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala reconciliation submitted by the assessee, the Assessing Officer records that the difference between amount as per profit and loss account and ledger account of the parties have largely been explained to the amount of VAT not included in purchases as per profit and loss account. We thus find that where the very much of rejection being the un-reconciled differences in the purchase figures have been verified during the remand proceedings by the AO, no further cause of action remains which the Revenue is agitating before us.

24.

Further, the ld. CIT(A) recorded his finding stating that the differences arose primarily due to exclusion of VAT in the assessee’s purchase records while the supplier confirmation included the said VAT figures and where VAT is added, the purchase figures tally almost completely with only nominal rounding of variances. The ld. CIT(A) further held that all suppliers have confirmed the transactions, the payments are made through proper banking channels and stock records correspond to purchase quantities and there is nothing on record to show that any purchases are bogus or fictitious and thereafter, he records the finding that the rejection of books of accounts u/s. 145(3) was not justified and the minor reconcilable variations cannot by themselves render the books unreliable.

25.

We therefore, find that the whole basis of rejection of the books of accounts of the assessee was limited to certain un-reconcilable differences in the purchases so undertaken by the assessee and that too limited to six parties amounting to Rs. 58,65,85,577/- as against the total purchases of Rs.272 crores. Therefore, both from the perspective of the sample transactions identified by the Assessing Officer vis-à-vis the total purchases so undertaken by the assessee and even on merits, where the differences in the books of the assessee and as confirmed by the respective parties have been reconciled, we agree with the findings of the ld. CIT(A) that there is no basis which remains for continuation

23 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala with the rejection of the book results so declared by the assessee and for that reason, we are of the considered view that the ld. CIT(A) has rightly appreciated the entirety of the facts and circumstances of the case and has therefore recorded a clear finding in terms of setting aside the action of the Assessing Officer in terms of rejection of the book results in terms of Section 145(3) of the Act.

26.

Once the book results have been accepted, the resultant profits so declared therein have to be necessarily accepted and where the ld. CIT(A) has set aside the estimation of profit at 3% as against the profits so declared by the assessee, we confirm the findings of the ld. CIT(A) as in such a situation, there is no basis for invocation of the powers u/s. 144 of the Act, where the book results stand accepted.

27.

In that background, we accept the contentions so raised by the ld. AR that where the book results have been upheld by the ld. CIT(A), there is no basis for making a protective addition of Rs. 25 lakhs by the ld. CIT(A) to cover any residual, unverifiable VAT component. Further, we have also looked at the VAT differential in respect of Shri Jagannath Steel Company, Shri Vaishnav Alloys Pvt.Ltd. and Guardian Steel Pvt. Ltd. and find that the same have been duly reconciled by the assessee and even on that count, we find that there are no un-reconcilable differences on account of VAT. Therefore, the addition of Rs. 25 lakh sustained by the ld. CIT(A) deserve to be set aside.

28.

In summary, we find that the whole action so undertaken by the Assessing Officer is on account of summarily considering the confirmation received from the respective suppliers which was inclusive of VAT component and the transactions reflected in the books of accounts of the assessee which was exclusive of VAT. In other words, the assessee was following the exclusive method of accounting in compliance with the Accounting Standards, wherein, the purchases

24 ITA Nos. 8674&9148/Mum/2025 Iqbal Abdulaziz Damanwala were shown net of VAT and the VAT is reflected separately in the financial statements and therefore, for the lack of appreciation of the accounting treatment so undertaken by the assessee which is duly supported by the accounting standards, the whole action in terms of rejection of the book results have been undertaken by the Assessing Officer which we find have rightly been set aside by the ld. CIT(A) and the addition so made and sustained by the ld CIT(A) is also directed to be deleted.

29.

In the result, appeal of the Revenue is dismissed and the appeal of the assessee is allowed.

Order pronounced on 22-05-2026

Sd/- Sd/- [RAHUL CHAUDHARY] [VIKRAM SINGH YADAV] JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 22-05-2026 Karishma J. Pawar, SR. PS Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT, Mumbai 5) Guard file

By Order

Dy./Asst. Registrar I.T.A.T, Mumbai

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