SUN DIAM,MUMBAI vs. INCOME TAX OFFICER, WARD-25(3)(4), MUMBAI-JURISDICTIONAL AO- ACIT/DCIT, CIRCLE-32(1), MUMBAI, MUMBAI

Briefly stated, the assessee had filed its return of income for the year under consideration declaring total income of Rs.6,42,751/-. Subsequently, the assessment was reopened under section 147 of the Act on the basis of information received in respect of accommodation entries allegedly provided by concerns belonging to the Bhanwarlal Jain Group. In the course of reassessment proceedings, the Assessing Officer noticed that the assessee had recorded purchases aggregating to Rs.52,35,845/- from certain concerns stated to be belonging to the said group. The Assessing Officer, on the basis of the information and material available on record, held that the purchases were not genuine and that the assessee had procured the goods from the grey market and obtained accommodation bills in respect thereof. Since the corresponding sales had been recorded by the assessee, the Assessing Officer proceeded to estimate the profit element embedded in such purchases. While discussing the nature of the transactions, the Assessing Officer himself observed that the gross profit margin in such cases, particularly in the case of a petty dealer purchasing goods from the grey market, would not be more than 8%. However, while computing the addition, the Assessing Officer adopted a profit margin of 25% of the disputed purchases and accordingly made an addition of Rs.13,08,961/-. The assessee carried the matter in appeal before the learned JCIT(A), who upheld the action of the Assessing Officer and sustained the addition.

During the course of hearing before us, the learned Authorised Representative (ld.AR) of the assessee submitted that the Assessing Officer himself, in the assessment order, had observed that the gross profit margin in such transactions would not be more than 8%. However, without assigning any reason for departing from the said observation, the Assessing Officer proceeded to adopt a profit margin of 25% of the disputed purchases. It was submitted that there was no justification for adopting such a higher rate and, therefore, the profit element, if any, ought to be estimated at a reasonable percentage. The learned Departmental Representative (ld.DR), on the other hand, relied upon the order of the learned JCIT(A) and supported the addition made by the Assessing Officer.

We have considered the rival submissions and perused the material available on record. The dispute before us is essentially with regard to the quantum of profit element to be brought to tax in respect of the purchases of Rs.52,35,845/- treated by the Assessing Officer as non- genuine. It is evident from the assessment order that the Assessing Officer himself, while discussing the nature of the transactions, observed that the gross profit margin in the case of a petty dealer purchasing goods from the grey market would not be more than 8%. However, while making the addition, the Assessing Officer adopted a profit margin of 25% of the disputed purchases. We find that no specific reason has been assigned by the Assessing Officer for adopting 25% as against the margin of 8% referred to by him in the assessment order.

In this context, we may refer to the decision of the Hon'ble Bombay High Court in the case of PCIT v. Mohammad Haji Adam & Co., reported in 103 taxmann.com 459. In the said case, the issue before the Hon'ble High Court was with regard to the addition on account of purchases treated as bogus, where the corresponding sales had not been disputed by the Revenue. The Hon'ble High Court held that when the purchases were held to be bogus but the corresponding sales were accepted, the entire amount of such purchases could not be added as income of the assessee. The Hon'ble High Court observed that the profit element embedded in such purchases was required to be brought to tax. For this purpose, the gross profit rate on the disputed purchases was required to be compared with the gross profit rate on the other genuine purchases, and the addition was to be restricted to the additional profit element, if any, arising on account of such purchases.

The aforesaid principle has also been considered and applied by the Coordinate Bench of this Tribunal, Mumbai, in the case of Sumermal Kisturchand Sheth v. ITO, in ITA No. 4787/Mum/2025 along with C.O. No. 260/Mum/2025, dated 21.05.2026. In that case also, the issue related to estimation of profit element in respect of purchases treated as non-genuine. The Coordinate Bench, after considering the factual position and the judgment of the Hon'ble Bombay High Court in Mohammad Haji Adam & Co. (supra), held that the addition was required to be restricted to the profit element embedded in the disputed purchases. The Coordinate Bench noted the gross profit disclosed by the assessee in the relevant year and the surrounding years and observed that the assessee's disclosed gross profit rate was consistent with the nature of its business. It further noted that adoption of a substantially higher rate would result in a gross profit which was not realistically attainable in the line of business carried on by the assessee. Having regard to the overall facts and circumstances, the Coordinate Bench reduced the profit element adopted by the learned CIT(A) from 12.50% to 5%.The principle laid down in Mohammad Haji Adam & Co. (supra) is clearly relevant to the facts of the present case. What is required to be brought to tax is the profit element, if any, embedded in such purchases.

In the present case, the Assessing Officer himself has made an observation that the gross profit margin in the case of a petty dealer purchasing goods from the grey market would not be more than 8%. Having recorded such an observation, the Assessing Officer has not assigned any reason for adopting a profit margin of 25% while computing the addition. There is thus no material basis apparent from the assessment order for adopting a rate substantially higher than the margin referred to by the Assessing Officer himself.

At the same time, having regard to the finding of the Assessing Officer that the assessee had obtained accommodation bills and had procured the goods from the grey market, we are of the view that the issue cannot be resolved by deleting the addition in its entirety. The appropriate course, consistent with the principle laid down by the Hon'ble jurisdictional High Court in Mohammad Haji Adam & Co. (supra), is to estimate the profit element embedded in the disputed purchases.

Having regard to the totality of the facts and circumstances of the present case, the observation of the Assessing Officer himself regarding the margin in the grey market, the fact that the corresponding sales have not been disturbed, and the principle laid down by the Hon'ble Bombay High Court in Mohammad Haji Adam & Co. (supra), as applied by the Coordinate Bench in Sumermal Kisturchand Sheth (supra), we are of the considered view that adoption of 5% of the disputed purchases as the profit element would be fair and reasonable. The adoption of the same rate as considered by the Coordinate Bench in the aforesaid case would, in our view, provide a reasonable basis for estimation in the facts of the present case and would meet the ends of justice.

Accordingly, the Assessing Officer is directed to restrict the addition in respect of the disputed purchases of Rs.52,35,845/- to 5%, in place of 25% adopted by him. The assessee shall accordingly be entitled to consequential relief.

In the result, the appeal of the assessee is partly allowed.