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Facts
The assessee, engaged in fabric trading, made purchases totaling Rs. 8,16,24,351/- from certain parties. The Revenue alleged these were bogus purchases and accommodation entries, as no actual goods were supplied. The CIT(A) restricted the addition to 12.5% of the disputed purchases.
Held
The Tribunal noted that the CIT(A) mechanically applied a 12.5% rate without proper examination or considering the investigation wing's findings and the key person's admission of involvement in accommodation entries. The Tribunal found that the CIT(A) failed to give due cognizance to the evidence and deprived the AO of a proper examination.
Key Issues
Whether the CIT(A) was justified in restricting the addition on account of bogus purchases to 12.5%, and whether the AO was deprived of the opportunity to properly examine the issue.
Sections Cited
147, 144, 69C, 131
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Before: SHRI ANIKESH BANERJEE & SHRI PRABHASH SHANKAR
O R D E R PER PRABHASH SHANKAR [A.M.] :- The instant appeals have been preferred by both the assessee and the Revenue which emanate from the appellate order passed by the Ld. CIT(A)/National Faceless Appeal Centre (NFAC), Delhi, [hereinafter referred to as “CIT(A)”] with regard to the assessment order passed under
The Revenue has raised following grounds of appeal :
1. 1. 1. 1. “1. Whether on the facts and circumstance of the case Ld. CIT(A) has justified in restricting the addition made on account of bogus purchase at 12.5% of such bogus purchases, without appreciating the facts that there was no physical delivery of goods and the purchases claimed by the assessee are nothing but accommodation entries.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition u/s 69C to the extent of 12.5% of such bogus purchases as against the entire bogus purchases added by the AO without considering the position of law established by the Hon'ble Apex Court in the case of N.K. Proteins Ltd, which has been recently followed by the Hon'ble Bombay High Court in the case of PCIT-5 vs Kanak Impex (India) Ltd, of 2021 dated 03.03.2025 & PCIT vs Disha Impex Pvt Ltd dated 07.04.2025, that 100% disallowance on bogus purchase is upheld". 2.1 The Assessee has raised following grounds of appeal : “1) On the facts and in the circumstances of the case, the LD CIT(A) erred in upholding disallowance on account of purchases @ 12.5% of 8,16,24,351/- without appreciating full facts of the case and without giving proper opportunity in the matter.”
3. The appeals are against the assessment order , wherein an addition of Rs.8,16,24,351/- was made on account of alleged non-genuine purchases from certain parties suspected to be engaged in issuing accommodation entries. The assessee is engaged in the business of trading in fabrics. During the year under consideration, it made purchases from several parties, including M/s Rathi Style and Textile Pvt. Ltd., M/s Worldstar Fabrics LLP, M/s One World Design Studio Pvt. Ltd., M/s One World Sourcing, and M/s Tissori India Fabrics Pvt. Ltd. As per the information received from the Investigation wing of the Department, M/s. One World Group entities were Luvkesh Textile Industries Pvt. Ltd. involved in bogus purchase and bogus sales transactions wherein no actual goods were supplied/transferred. During the course of search proceedings, based on the evidence gathered and statements recorded, it was established that One World Group entities were involved in bogus purchase and bogus sales transactions wherein no actual goods were supplied/transferred. Shri Urvil Jani in his statement admitted that One World Group Entities were involved in bogus purchase and sales transactions. Shri Gopal Bhatter during his statement has also stated that these companies had no business and were entities for providing accommodation entries. The assessee was provided with a copy of statement recorded from Mr Urvi Jain. Since the assessee had made bogus purchases, it was required by the AO to show cause why the purchases made from the above entities should not be treated as bogus purchases and disallow the same from the expenditure claimed. It was proposed to treat the same as unexplained expenditure u/s 69C of the Act and assessed under the head “Income from Other Sources”. However, the assessee did not file it reply on the date of the hearing. The assessee sought further time to provide information. The request of the assessee for adjournment was rejected. Sri Urvi Jain, director of the above group companies had deposed on oath u/s 131 of the Act., that he never supplied goods and resorted to bogus purchase and sale accommodation transactions. Since, it was conclusively proved that the transactions entered by the assessee were only accommodation entries and there was no physical delivery of goods, Rs.8,16,24,351/- was treated as bogus purchases the expenditure claimed was disallowed and treated as unexplained expenditure u/s 69C of the Act.
4. In the subsequent appeal, the assessee agitated the above addition claiming the purchases to be genuine. It was submitted that the assessee ordered goods in December 2017 from M/s Worldstar Fabrics LLP, M/s One World Design Studio Pvt. Ltd, M/s One World Sourcing, and M/s Tissori India Fabrics Pvt. Ltd, and sold the same to Platinum Textiles Pvt. Ltd in the same month, according to customer requirements. However, the materials were either not received by the customers to their satisfaction or were not delivered within the stipulated time, and were therefore returned by Platinum Textiles Pvt. Ltd in March 2018. As a result, it returned the goods to the aforementioned parties in March 2018 and reversed the input tax credit on purchases made from these parties in March 2018. Therefore, it had purchased the materials from these parties and subsequently returned them, meaning that there were effectively no net purchases from these parties. Thus, there was no basis for any addition. Further, the assessee also purchased materials from M/s Rathi Style and Textile Pvt. Ltd and sold the same to Choudhary Garments. The assessee was solely a trader/commission agent. The materials were not consumed by it, rather, whatever was purchased was sold and it received only commission or a rate difference. The assessee in its submissions, contended that all purchases were made through banking channels and were supported by proper invoices and reflected in the GST portal (Form 2A). It was further submitted that in some cases, the goods were returned due to disputes in quality and rates, and such reversals were also appropriately accounted for. The sales made against these purchases had not been doubted by the AO.
Luvkesh Textile Industries Pvt. Ltd. 4.1 The ld.CIT(A) observed that the assessee was a trader and not a manufacturer. Therefore, the purchases made were directly linked to sales, and if sales had been accepted, it was not justified to disallow the entire purchases without corresponding evidence of fictitious sales or stock inflation. The Hon’ble Bombay High Court in the case of Mohammad Haji Adam & Co. has held that where sales were not disputed and purchases are suspected to be from nongenuine parties, only a reasonable percentage of the purchases can be disallowed to account for the possible inflation of purchase cost or loss of revenue through accommodation entries. Similar views have been endorsed in various High Court and Tribunal decisions. Considering the facts and circumstances of the case, and in the interest of natural justice, he was of the opinion that an addition @ 12.5% of the disputed purchases would reasonably cover the possible inflation of purchase cost and suppression of profits. Accordingly, the addition was restricted to 12.5% of Rs.8,16,24,351/-, which amounts to Rs.1,02,03,044/- and the balance addition of Rs.7,14,21,307/- was directed to be deleted.
Before us, both the sides have objected to the action of the ld.CIT(A).The ld.DR contended that he allowed substantial relief to the assessee without appreciating the facts of the case properly and also without taking into account the ratio laid down in the case of N.K. Proteins P.Ltd (supra) by the hon’ble Apex Court as also decision of jurisdictional High Court in Kanak Impex and Drisha Impex wherein under similar situations, entire unproved purchase could be added to the income. The ld.AR on the other hand claimed that the entire purchase was made through banking channels and no Luvkesh Textile Industries Pvt. Ltd. addition could be made on percentage basis restricting the addition to 12.5%.The ld.CIT(A) has not considered the facts of the case in correct perspective.
We have carefully perused the records and heard the rival submissions. We find that the assessee during the assessment proceedings was supplied with the statements of the key person Sri Urvi Jain who had admitted indulging in accommodation entry activity where no goods were transacted in reality and only book entries were made. The ld.AR has not thrown any light on such non compliance. We further note that before the ld.CIT(A) ,the assessee made a written submission claiming that the transactions were made through banking channels and necessary GST. were also paid.It is evident that the ld.CIT(A) did not call for any report from the AO and suo motu applied a rate of 12.5% on the alleged bogus purchases following a jurisdictional High Court solely on the version of the assessee. Such action on the part of the ld.CIT(A) is not appreciated. He failed to take due cognizance of the findings of the Investigation wing and also the admission of the key person of indulging in accommodation entry activity and the assessee company was found to be the beneficiary of such dubious transactions. He mechanically applied a rate of 12.5% without giving any findings qua the conclusion drawn by the AO. We are of the considered opinion that the matter needs to be duly examined by the AO who was deprived of this opportunity during assessment proceedings by the assessee due to non compliance.
Luvkesh Textile Industries Pvt. Ltd. 6.1 We accordingly deem it proper to set aside the appellate order and remand the entire issue to the file of the AO to decide the matter afresh after allowing due opportunity of hearing to the assessee who, in turn, would make necessary compliance before the AO without fail. In the result the both the appeals are allowed for statistical purposes.
Order pronounced in the open court on 27.01.2026.