MOHIT AGARWAL,UTTARAKHAND vs. DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE,, HALDWANI

PER SATBEER SINGH GODARA, JM: These assessee’s seven appeals ITA Nos.168, 162 to 167/DDN/2026 for assessment years 2015-16 to 2021-22, arise against the Commissioner of Income Tax (Appeals) [in short, the “CIT(A)”], Lucknow’s-3 orders, all dated 10.01.2026, having DINs and orders no. ITBA/APL/S/250/2025-26/1084634765(1), ITBA/APL/S/250/2025-26/1084634782(1), ITBA/APL/S/250/ 2025-26/1084634794(1), ITBA/APL/S/250/2025-

ITA Nos.168, 162 to 167/DDN/2026

26/1084634813(1), ITBA/APL/S/250/2025-26/1084634830(1), ITBA/APL/S/250/2025-26/1084634845(1), ITBA/APL/S/250/ 2025-26/1084634725(1), involving proceedings under section 147/144 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), respectively. Heard both the parties. Case files perused. 2 It transpires at the outset during the course of hearing that the assessee/appellant seeks to canvass his three identical substantive grounds inter alia challenging validity of the impugned reopening followed disallowance of his purchases as bogus ones in assessment order which stand restricted to 8% in the CIT(A)’s lower appellate discussion. It is in this factual backdrop that we notice that the CIT(A)’s identical detailed discussion under challenge reads as under: “5.1 Ground No. 1 & 2 '1. On the facts and circumstances of the case, the order passed by the learned AO is bad both in the eye of law and on facts. The order passed by Ld. AO needs be annulled. 2. (i) That the Ld. A.O. has erred in law as well as on facts in making the addition only on the basis of borrowed satisfaction. (H) That the addition has been made without any further investigation having been made, only on the basis of presumption. 5.1.1 The above grounds are vague and unsubstantial as ongoing through the facts of the case: it is seen that the appellant case was reopened on the basis of seized material emanating from a search, which specifically contains transaction details allegedly relating to the appellant. The reasons recorded by the AO demonstrate a link between seized material and belief of escapement of income. At the stage of reopening, the AO is only required to form a prima facie belief, not to conclusively establish escapement. The 2 | P a g e

ITA Nos.168, 162 to 167/DDN/2026

case falls under Explanation 2 to section 148, and therefore cannot be held invalid merely because information originated from Investigation Wing. 5.1.2 As discussed above, the case has been reopened on the basis of report of the Investigation Wing. It can be seen that the investigation wing of the department has come to such conclusion only after a detailed verification of the documents found and seized during such operation and only after confronting such documents to the persons from whom the same were recovered. Therefore, the contention of the assessee that the reopening is based on assumption, Conjectures and Surmises is not correct. As regard the investigation carried out by the investigation wing of the department is concerned, it is to submit that the Investigation Wing is a part of the department and the documents unearthed are for the purpose of assessment in the case of the concerned assessee and finding of the Investigation wing are the finding of the department and cannot be said to be finding of some other person. Therefore, it is well within the right of the AO to rely upon the findings of the Investigation wing. Further, it need be borne in mind that the Investigation wing has much more power and resources at their disposal than the AO and it is their function to provide culminated report on such action after in-depth verification of the materials gathered during the action to the AO for ultimate assessment purpose. If the AO cannot rely upon the report of the Investigation wing and has to re-verify or re-examine the findings of the Investigation wing again, then the very purpose of the Investigation wing shall turn out to be futile. Further, there are plethora of judicial pronouncements treating the reopening based on findings of the Investigation Wing of the department as valid. 1 In the case of Phool Chand Bajrang Lal v. ITO [1993] 69 Taxman 627/203 ITR 456 (SC), the hon'ble Supreme Court has held that reassessment proceedings can be started on fresh facts or some information with regard to fact previously disclosed comes into his possession which tends to expose the untruthfulness of those facts and that situations will not be a case of mere change of opinion or drawing of a different inference from the same facts. The Supreme Court has further held that sufficiency of reasons for forming this belief is not for the Court to judge, but it is open to an assessee to establish that there exists fact not belief or that belief was not at all bona fide one. In instant case, reasons assigned for issuance of proposal under section 148 clearly mentions about application of mind by Assessing Officer based on information received from the DDIT and also about verification of PAN details of assessee. 1.1 Case of Phool Chand (Supra) was affirmed by a three Judges Bench of the Supreme Court in State of Uttar Pradesh v. Aryaverth Chawt Udyog (2015) 17 SCC 324/[2015] 53 taxmann.com 66 (SC) and followed in a plethora of decisions. Some of the recent decisions are Principal DIT (Investigation) v. Laljibhai Kanjibhai Mandalia (2022) 16 SCC 139/[2022] 140 taxmann.com 282/288 Taxman 361/446 ITR 18 (SC) and Dy. CITv.M.R. Shah Logistics (P.) Ltd. (2022) 16 SCC 139/[2022] 136 taxmann.com 373/287 Taxman 649 (SC). 2. It is also to mention here that any finding by investigation wing is finding of the Income Tax Department. The Hon’ble Delhi High Court in the 3 | P a g e

ITA Nos.168, 162 to 167/DDN/2026

case of AGR Investments Ltd. vs. Addl. CIT (Del) 333 ITR 146 held that that where Assessing Officer had specific information from office of DIT (Investigation) as regards transactions entered into by assessee company with a number of concerns which had made accommodation entries and they were not genuine transactions, it could be said that there was material on basis of which notice under section 148 could be issued 2.3 Thus, on the strength of subsequent information, action under Section 147 r/w.148 of the Act can be initiated subject to fulfilment of the statutory conditions. 3. It is further pertinent to mention here that in the case of CIT vs. Nova Promoters & Finlease (P) Ltd (ITA No. 342 of 2011) dated 15.02.2012, the Hon'ble Delhi High Court, held that as long as there is a 'live link' between the material which was placed before the Assessing Officer at the time when reasons for reopening were recorded, proceedings u/s 147 would be valid. The Court also held- “We are aware of the legal position that at the stage of issuing the notice u/s 148 the merits of the matter is not relevant and the Assessing Officer at that stage is required to form only a prima facie belief or opinion that income chargeable to tax has escaped assessment." 3.1 Furthermore, in the case of Jyoti Goyal vs ITO (ITA No. 1259/Del/2010), the Hon'ble ITAT Delhi held that: "As regards the other contentions of the assessee that the reopening was done in a mechanical manner without application of mind, we find there is nothing on record to support such a contention. There is a live link between the information which was available with the Assessing Officer and his formation of belief that income has escaped assessment. Sufficiency of such information cannot be gone into while deciding the issue of validity or reopening. The Assessing Officer can also not make enquiries as no proceedings were pending before him for the relevant assessment year. In the above view of the matter, we are in agreement with the finding of the Ld. CIT (A) that the reopening of assessment u/s 147 of the Act was valid." In view of the above case laws and the material available on record, it is evident that there is a "Live Link" between the material available on record and the escaped income, as mentioned in the above case laws. 5.1.3 It is also pertinent to mention here that at the time of the reopening of the assessment, the AO is required to form a reasonable belief on some material but sufficiency or correctness of such material could not be considered at this stage of proceedings as held by the Hon’ble Supreme Court in the case of Raymond Woollen Mills Ltd. v. Income-tax Officer [1999] 236 ITR 34 (SC). In Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 the Supreme Court has held in categorical terms that at the stage of issuance of notice for reopening of assessment, the Court is only to see whether there was prima 4 | P a g e

ITA Nos.168, 162 to 167/DDN/2026

facie material on the basis of which department could reopen the case and not the sufficiency or correctness of material to be considered. 5.1.4 Therefore, the contentions of the appellant that the AO accepted the report of the Investigation Wing mechanically and that such notice should have been issued on the ground of “Reasons to Believe” and not on the ground of “Reasons to Suspect” is neither tenable nor acceptable. If the facts of instant case are tested in light of aforementioned rulings of the Supreme Court, it is clear that the DDIT has forwarded the information to the Assessing Officer, who in turn, verified PAN details of appellant assessee, recorded reasons in terms of section 147 and thereafter issued notice to him under section 148. Hence, it cannot be said that at the stage of issuance of notice, there was no prima facie material for reasons to belief that income escaped assessment. Consequently, no force is found in submission of the petitioner and it is hereby repelled. 5.1.5 The statutory notices were issued from time to time to the appellant after obtaining necessary approval from the competent authority. The AO has passed the order as per the procedure prescribed under the Act and the order passed by AO is justified. Therefore, the plea of the appellant is not tenable; consequently rejected. Hence, the ground(s) of appeal no.1 & 2 are hereby dismissed. 5.2 Ground No. 3 3. The Ld. A.O. has erred in law as well as on facts in making the addition of Rs. 71,35,426/-u/s 69C as unexplained expenditure ignoring the fact that the assessee has no dealing with M/s Ravindra Oil and Ginning Mills and books of account of the assessee were audited. 5.2.1 During the assessment proceedings, the AO observed that during search in the case of M/s Ravindra Oil Group, ‘Sanjeev Tally’, a parallel set of books, was seized which recorded actual sales and purchases. As per the seized data, in the books of the searched group, sales aggregating to Rs. 71,65,676/- were recorded in the name of the appellant as “Ganpati Hid”. The official books of M/s Ravindra Oil & Ginning Mills showed nil sales to the appellant. The ledger entries in Sanjeev Tally’ showed cash payments, which were not recorded in the appellant's books. The appellant denied transactions but failed to explain the source of cash payments reflected in seized material. The appellant has denied having any such transactions and has relied on audited books of account, absence of bills, transport documents and the fact that the name appearing in seized data is “Ganpati Hid" and not “Ganpati Grain Store”. The AO has noted that the expenditure was incurred but not explained, therefore the same was to be held as unexplained expenditure u/s 69C. Accordingly, addition of Rs. 71,35,426/- was made. 5.2.2 During the appellate proceedings the appellant has submitted the written submissions alongwith the supporting documentary evidence to substantiate its claim. The appellant has submitted that:

5 | P a g e

ITA Nos.168, 162 to 167/DDN/2026

i) The appellant has no dealing whatsoever with M/s Ravindra Oil & Ginning Mills or its sister concerns. ii) The name appearing in seized data is “Ganpati Hid", whereas the appellant’s concern is “Ganpati Grain Store"; no nexus has been established. iii) Books of account are audited u/s 44AB, no defect has been pointed out therein. The AO has not rejected the books of accounts. iv) The AO has not disputed the ales turnover of the appellant. v) No bills, transport receipts, payment proof, or statements of searched persons were supplied, violating principles of natural justice. vi) Section 69C is wrongly invoked as no expenditure has been incurred by the appellant. 5.2.3 I have carefully considered the assessment order, written submissions, supporting documentary evidences submitted by the appellant and it is noted that the appellant is carrying trading business. The following facts emerged: i) It is not disputed that the seized ‘Sanjeev Tally' clearly demonstrated sales by Ravindra Oil Group outside regular books, which implies corresponding purchases by buyers. ii) It establishes that transactions outside regular books were carried out by the searched party and that the appellant is alleged to be one of the buyers doing out of books transactions in the present year. In the later years the appellant has made recorded and unrecorded both kind of transactions with the same party. 5.3 Purchases are not income 5.3.1 It is a fundamental and well-settled principle of income-tax law that purchases represent expenditure or cost of goods and do not constitute income by themselves. Income-tax is levied on profits and gains, and not on turnover or cost. 5.3.2 The Hon’ble Supreme Court in Laichand Bhagat Ambica Ram v. CIT (1959) 37 ITR 288 (SC) has held that income-tax proceedings must be based on real income and not on suspicion, conjectures, or gross figures divorced from commercial reality. 5.3.3 By adding the entire amount of unrecorded purchases as income, the AO has effectively assumed a 100% profit margin, which is commercially unrealistic and legally impermissible. 5.4 Nature of the transactions: suppressed business activity

6 | P a g e

ITA Nos.168, 162 to 167/DDN/2026

5.4.1 On a careful appreciation of facts, it is evident that: Purchases were actually affected from an identified party. Payments were partly made through cheque, evidencing genuineness of trade. The goods so purchased were sold in the market. What is suppressed is recording of turnover, not the existence of transactions. The infirmity lies not in the existence of transactions, but in their non-recording in the regular books of account. 5.4.2 The case, therefore, is not one of fictitious or sham purchases, but one of suppressed or parallel trading activity, wherein both purchases and corresponding sales have been kept outside the books. 5.5 Inapplicability of section 69C to tax entire purchases 5.5.1 Section 69C applies where an assessee incurs expenditure and fails to explain the source thereof. 5.5.2 In the present case, the cash purchases are directly linked to unrecorded cash sales forming part of the same trading cycle. Once such a nexus is established, the source of expenditure stands explained through business receipts, though unrecorded. 5.5.3 In such circumstances, section 69C cannot be invoked to tax the entire expenditure. At best, only the profit element embedded in such transactions can be brought to tax, after allowing for telescoping. 6. Only Profit on Suppressed Turnover is Taxable 6.1.1 The Hon'ble Gujarat High Court in CIT v. President Industries (2002) 258 ITR 654 (Guj) has categorically held that entire sales cannot be treated as income, and that only the profit element embedded in such sales can be brought to tax. 6.1.2 This principle squarely applies to cases of suppressed turnover arising from unrecorded purchases and sales. 6.1.3 Even in cases involving alleged bogus purchases, which are far more serious in nature, courts have consistently restricted additions to the profit element. 6.2.1 The Hon'ble Gujarat High Court in CIT v. Simit P. Sheth (2013) 356 ITR 451 (Guj) upheld restriction of addition to the profit margin embedded in such purchases, rejecting addition of the entire purchase value. 6.2.2 Similar views were taken in CIT v. Sanjay Oilcake Industries (2009) 316 ITR 274 (Guj). 6.2.3 If even in bogus purchase cases entire additions are impermissible, a fortiori, in the present case of genuine but unrecorded purchases and sales, addition of entire purchases is wholly unsustainable. ITAT Jaipur in Nikhil Garg v. ITO (2022) 95 ITR 92 deleted 100% sales addition on

7 | P a g e

ITA Nos.168, 162 to 167/DDN/2026

unrecorded trading, taxing only profit element. ITAT Chandigarh in Baljinder Kumar v. DCIT held S.69C inapplicable to explained trading activity. 7. Estimation of Suppressed Turnover and Profit 7.1 Suppression of purchases and sales vitiates: 1 Turnover, 2 Cost of goods sold, 3 Stock figures, 4 Gross profit, and 5 Net profit. 6 .1.1 Further, suppressed business operates under a different economic and compliance model, involving cash efficiencies and cost savings. Therefore, profitability of suppressed turnover cannot be equated with recorded business. Suppressed turnover generally yields higher net margins due to: a) Avoidance of statutory levies, b) Reduced compliance costs, c) Cash-based efficiencies. 7 .1.2 In the absence of any finding of abnormal stock variation or inflation of closing stock, it is reasonable to infer that the suppressed turnover is equivalent to the value of unrecorded purchases, on the presumption that the goods purchased were sold during the year. 7.2 Section 44AD provides a statutory presumption of net profit @ 8%, reflecting legislative recognition of reasonableness of such margin where books are unreliable. Though section 44AD may not directly apply, this rate aligns with judicial precedents where 8% has been upheld as a balanced and non-punitive measure for suppressed or unrecorded turnover. For instance; in the case of Deepak Mittal v. ACIT (ITAT Delhi, order dated March 23, 2018), the assessee offered taxation on unrecorded sales by applying an 8% profit rate, which was accepted as reasonable by the Hon’ble ITAT. 7.2.1 Hon’ble courts have consistently held that statutory presumptive rates can be safely used as guiding benchmarks for estimation. 8% lies at the lower end of judicially accepted net profit rates, thereby balancing Revenue interests and fairness. Adoption of 8% thus represents a conservative, legally sanctioned, and commercially realistic estimate. 8. Conclusion: In view of the foregoing discussion, judicial precedents, and principles governing estimation of income, it is held as under: 1. The addition made by the Assessing Officer by treating the entire value of unrecorded purchases as undisclosed income is deleted. 2 . The case is held to be one of suppressed turnover arising from unrecorded purchases and corresponding sales, and not of fictitious or sham transactions. 3 . The suppressed turnover is estimated at 71,35,426/- being the value of unrecorded purchases. 4 . The net income on such suppressed turnover is estimated @ 8%, having regard to statutory benchmarks, judicial guidance, and commercial reality. 5. Accordingly, the addition is sustained only to the extent of 5,70,834. representing 8% of suppressed turnover. 8 | P a g e

ITA Nos.168, 162 to 167/DDN/2026

6 .2 The Assessing Officer is directed to recompute the total income accordingly. Thus, the ground of appeal no. 3 is partly allowed.”

9 | P a g e

ITA Nos.168, 162 to 167/DDN/2026

could hardly dispute that this assessee is engaged in wholesale grain business etc. not carrying such a huge profit margin. Nor the learned CIT(A) has quoted any marketing comparable(s) in the very segment as well. We thus deem it appropriate keeping in mind the assessee’s line of business that a lumpsum GP @ 2.5% qua his alleged bogus purchases would be just and proper with a rider that the same shall not be treated as a precedent. Necessary computation shall follow as per law. No other ground or argument has been pressed before us. 6. These assessee’s seven appeals ITA Nos.168, 162 to 167/DDN/2026 are partly allowed in above terms. A copy of this common order be placed in the respective case files. Order pronounced in the open court on 26th May, 2026 Sd/- Sd/- (MANISH AGARWAL) (SATBEER SINGH GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 27th May, 2026. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

10 | P a g e