ACIT,CIRCLE -20(1),MUMBAI, MUMBAI vs. UTKARSHA VIVEK PARKAR, MUMBAI

On the basis of the said information, the Assessing Officer recorded reasons to believe that income chargeable to tax had Utkarsha Vivek Parkar escaped assessment within the meaning of section 147 of the Act and accordingly issued notice under section 148 dated 21.03.2018.In response to the notice issued under section 148, the authorised representative of the assessee vide letter dated 05.04.2018 requested that the original return filed on 28.09.2011 be treated as the return filed in response to the said notice. The assessee subsequently filed the return electronically on 14.08.2018 declaring income of Rs. 27,38,940/- 5. During the reassessment proceedings, the Assessing Officer issued statutory notices under sections 143(2) and 142(1) and called for details regarding the alleged purchases from the aforesaid parties. The assessee furnished certain submissions including ledger accounts of the suppliers and purchase details. The Assessing Officer, however, observed that the parties from whom purchases were claimed had been identified by the Sales Tax Department of Maharashtra as hawala operators providing accommodation bills without actual supply of goods. The Assessing Officer further noted that the assessee had failed to furnish documentary evidence such as delivery challans, transport receipts, weighment slips, octroi receipts, or stock register entries evidencing receipt of goods. In order to verify the genuineness of the purchases, the Assessing Officer issued notices under section 133(6) to the said suppliers. However, the notices were returned by the postal authorities with remarks such as “Left” and “Not Known”, and the Inspector deputed for field verification could not locate the parties at the addresses Utkarsha Vivek Parkar provided. According to the Assessing Officer, despite granting sufficient opportunity, the assessee failed to produce the alleged suppliers or substantiate the genuineness of the purchases. The Assessing Officer held that the purchases claimed from the said parties were not genuine and were merely accommodation entries used to inflate expenditure and suppress profits. The Assessing Officer therefore concluded that the assessee had obtained accommodation entries in the form of bogus purchase bills and treated the entire amount of Rs. 28,28,113/- as unexplained expenditure under section 69C of the Act. The said amount was added to the total income of the assessee. Consequently, the total income was assessed at Rs. 55,67,060/-. Penalty proceedings under section 271(1)(c) were also initiated separately.

After examining the material available on record and considering the judicial precedents cited by the assessee, the CIT(A) held that where sales are accepted and purchases are recorded in the books of account, it would not be appropriate to disallow the entire purchases. The appellate authority observed that in such cases only the profit element embedded in the Utkarsha Vivek Parkar alleged bogus purchases could be brought to tax. Accordingly, the CIT(A) restricted the addition to 12.5% of the alleged bogus purchases, thereby granting partial relief to the assessee.

Being aggrieved by the relief granted by the CIT(A), the Revenue has preferred the present appeal before us and has raised following grounds of appeal:

The appellant craves to leave to add amend or alter modify or delete any of the grounds of appeal taken above.

The learned AR also drew our attention to the fact that in the assessee’s own case for Assessment Year 2009–10, on similar facts involving alleged hawala purchases, the Assessing Officer had restricted the addition to 12.5% of the purchases. It was therefore submitted that applying a different yardstick in the year under consideration for identical facts was unjustified.

Accordingly, it was contended that when the sales have been accepted and the purchases are duly recorded in the books of account, the entire purchases cannot be disallowed and at best only the profit element embedded in such purchases, if any, can be brought to tax.

On the other hand, the learned Departmental Representative (DR) strongly relied upon the findings recorded by Utkarsha Vivek Parkar the Assessing Officer in the assessment order. The learned DR further submitted that the Ld. CIT(A) erred in restricting the addition merely to the profit element embedded in such purchases despite recording findings that the purchases were not proved. In this regard, the DR relied upon the recent judgments of the Hon’ble Bombay High Court in Principal Commissioner of Income-tax v. Kanak Impex (India) Ltd.[2025] 172 taxmann.com 283 (Bombay) andPrincipal Commissioner of Income-tax v. Drisha Impex (P.) Ltd.[2025] 173 taxmann.com 571 (Bombay).The learned DR therefore submitted that in light of the aforesaid judicial precedents of the Hon’ble jurisdictional High Court, the action of the Assessing Officer in treating the entire purchases as unexplained expenditure under section 69C of the Act was justified.

We have carefully considered the rival submissions of both the parties and perused the material available on record including the assessment order, the order of the Ld. CIT(A) and the documents placed before us. The short issue which arises for our consideration in the present appeal is whether the Ld. CIT(A) was justified in restricting the disallowance on account of alleged bogus purchases to 12.5% of the purchases amounting to Rs. 28,28,113/- as against the addition of the entire amount made by the Assessing Officer under section 69C of the Act.

At the outset, it is noted that the Assessing Officer had treated the purchases made from certain parties as non-genuine on the basis of information received from the Sales Tax Utkarsha Vivek Parkar Department regarding alleged hawala dealers. During the course of assessment proceedings, the assessee was required to substantiate the genuineness of the purchases. According to the Assessing Officer, the assessee failed to produce the parties and the notices issued under section 133(6) remained unserved. On this basis, the Assessing Officer concluded that the purchases were not proved and proceeded to disallow the entire purchases amounting to Rs. 28,28,113/- by invoking the provisions of section 69C of the Act. However, the Ld. CIT(A), after examining the material on record, noticed that the assessee had recorded the purchases in the books of account and the same were reflected in the trading results. The Ld. CIT(A) further observed that the sales declared by the assessee had not been doubted by the Assessing Officer. In such circumstances, the Ld. CIT(A) held that although the purchases from the concerned parties could not be fully verified, the entire purchases could not be disallowed since the corresponding sales were accepted. Accordingly, the Ld. CIT(A) restricted the addition to 12.5% of the alleged bogus purchases, representing the possible profit element embedded in such purchases.

After considering the facts of the case, we find ourselves in agreement with the view taken by the Ld. CIT(A). It is an undisputed position on record that the sales declared by the assessee have not been rejected by the Assessing Officer. Once the sales are accepted as genuine, it necessarily follows that the assessee must have procured goods for effecting such sales. In Utkarsha Vivek Parkar such circumstances, the entire purchases cannot be treated as non-genuine. What can at best be inferred is that the assessee might have procured the goods from the grey market and obtained accommodation bills from the alleged parties in order to regularise the transactions in the books of account. In such situations, the judicial view consistently taken is that only the profit element embedded in such purchases can be brought to tax.

The trading results of the assessee placed on record also support the above conclusion. The assessee has disclosed sales of Rs. 3,71,90,972/- with a gross profit of Rs. 1,31,58,153/-, resulting in a gross profit rate of 35.38%, which is higher than the gross profit rate of 27.34% declared in the immediately preceding year. The net profit declared during the year is Rs. 28,38,943/-, representing a net profit rate of 7.63%, which is comparable with the preceding year. If the entire purchases of Rs. 28,28,113/- are added back, the gross profit would increase to 42.98% and the net profit would rise to 15.23%, which appears to be disproportionately high considering the nature of business carried on by the assessee. These facts clearly indicate that the addition of the entire purchases would result in unrealistic trading results.

We also note that in the assessee’s own case for Assessment Year 2009–10, on similar facts involving alleged hawala purchases, the addition was restricted to 12.5% of the purchases.

The learned Departmental Representative has placed reliance on the recent judgments of the Hon’ble Bombay High Court in the case of Principal Commissioner of Income-tax v. Kanak Impex (India) Ltd. (supra) and Principal Commissioner of Income-tax v. Drisha Impex (P.) Ltd.(Supra) to contend that the entire purchases should be disallowed. We have carefully examined the ratio of the aforesaid decisions. In the case of Kanak Impex (India) Ltd., the Hon’ble High Court held that where the assessee had completely failed to appear before the Assessing Officer during reassessment proceedings and had failed to produce any evidence to establish the genuineness of the purchases or the source of expenditure, the addition of the entire purchases under section 69C was justified. However, the facts of the present case are materially different. In the present case, the assessee has recorded the purchases in the books of account and the corresponding sales have been accepted by the Assessing Officer. The dispute is not regarding the existence of sales but only regarding the identity and genuineness of the suppliers. Therefore, the inference drawn by the Ld. CIT(A) that the assessee might have procured goods from the grey market and obtained accommodation bills cannot be ruled out. In such circumstances, the entire purchases cannot be treated as unexplained expenditure. Similarly, in the case of Drisha Impex (P.) Ltd., the Hon’ble Bombay High Court upheld the addition of Utkarsha Vivek Parkar the entire purchases primarily on the ground that the assessee had failed to prove the purchases before all the authorities and there were categorical findings regarding the involvement of the assessee in accommodation entry transactions. The Court held that once the purchases were found to be bogus and the assessee failed to establish their genuineness, the appellate authorities were not justified in merely estimating the profit element.

In the present case, however, the facts are distinguishable. Firstly, the sales declared by the assessee have not been rejected. Secondly, the purchases are duly recorded in the books of account and form part of the trading account. Thirdly, the trading results of the assessee indicate a reasonable gross profit rate which is even higher than the preceding year. Therefore, the factual matrix of the present case does not warrant the extreme conclusion of disallowing the entire purchases. On the contrary, the approach adopted by the Ld. CIT(A) is in consonance with the well-settled judicial principle that in cases of unverifiable purchases, the addition should be restricted to the profit element embedded in such purchases. Such an approach strikes a balance between the possibility of purchases from the grey market and the fact that the corresponding sales have been accepted.

Considering the entirety of the facts and circumstances of the case, we are of the view that the Ld. CIT(A) has adopted a reasonable and pragmatic approach in restricting the addition to 12.5% of the alleged bogus purchases. We therefore find no Utkarsha Vivek Parkar infirmity in the order of the Ld. CIT(A).Accordingly, the order of the Ld. CIT(A) is upheld and the grounds raised by the Revenue are dismissed.

In the result appeal filed by the Revenue is dismissed.