ASSISSTANT COMMISSIONER OF INCOME TAX CORPORATE CIRCLE 1 1, CHENNAI vs. M/S EI INSTRUMENTATION PRIVATE LIMITED, CHENNAI

आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the Revenue against the order of the

Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter

referred to as “the Ld.CIT(A)”), Delhi, dated 21.01.2025 for the

Assessment Year (hereinafter referred to as "AY”) 2018-19.

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‘29’ days, for which, the DCIT has filed an affidavit explaining the reason

for delay and has filed application for condoning the delay, to which, the

Ld.Counsel of the assessee didn’t raise any serious objection,

consequently, the delay of ‘29’ days in filing of the appeal stands

condoned; and the appeal filed by the Revenue is taken up for hearing on

merits.

Ld.CIT(A) restricting the addition made on alleged bogus purchases to the

extent of 8.87% of the gross profit (GP).

Company and claims to be engaged in the business of trading electrical

parts, instrumentation and equipments. The assessee is noted to have

filed its Return of Income (RoI) u/s.139 of the Income Tax Act, 1961

(hereinafter referred to as ‘the Act‘) for relevant AY 2018-19 declaring an

income of ₹46,01,420/-, which RoI was reopened by the AO by issuing

notice u/s.148 of the Act, on the basis of information from the Income

Tax Investigation Directorate of Kolkata that one M/s. Barbrik

Consultancy Pvt. Ltd., (in short “M/s. Barbrik“) had indulged in issuing

fraudulent invoices of huge amounts to other entities, in order to facilitate

the beneficiaries of such accommodation bills to suppress their profits.

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And the AO noted in this regard that the assessee had shown to have

claimed expenditure for purchases from M/s. Barbrik in the relevant year

to the tune of ₹1,20,99,998/-. So according to the AO, assessee was a

beneficiary of such fraudulent transaction with M/s.Barbrik. In order to

verify the veracity of the transaction with M/s.Barbrik, the AO issued

show cause notice calling for various details/explanation from assessee.

Pursuant to the notice, the assessee replied vide letter dated 02.02.2023

enclosing payment proof via proper banking channels, ledger with the

respective invoices for transactions done with M/s.Barbrik. Further, filed

copy of the Purchase Register, Statement of Sales, copy of bank account,

etc. However, the AO disbelieved the reply filed by the assessee and was

of the view that the transaction shown by the assessee with M/s.Barbrik

which is a paper entity is nothing but accommodation entry and held it to

be in-genuine in the light of the investigation conducted by the

Investigation Directorate, and also noted that the said company has been

“struck off”. Hence, the AO treated the transaction/purchases shown

from M/s.Barbrik to the tune of ₹1,20,99,998/- as bogus and added it

u/s.69C of the Act i.e. unexplained expenditure.

who didn’t countenance the action of the AO disallowing the entire

purchase consideration of ₹1,20,99,998/- from M/s.Barbrik, and gave

partial relief to the assessee by restricting the addition to profit-element

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from the transaction with M/s.Barbrik i.e. @8.87% of the gross profit to

the tune of ₹10,73,269/- [₹1,20,99,998/- x 8.87%], by taking note that

(i) the AO accepted the entire sales appearing in the financials/books and

(ii) the assessee had filed the relevant documents like Purchase Register,

bank statement reflecting payments made sales bill, GST returns, etc. So

according to the Ld.CIT(A), the impugned action of the AO making the

entire addition of the alleged transaction of ₹1,20,99,998/- was not

justified and relied on the decision of the Hon’ble Gujarat High Court in

the case of CIT v. Simit P. Sheth reported in [2013] 38 taxmann.com 385

(Gujarat), wherein , it was held as under:

In the present case, the Commissioner of Income-tax (Appeals) believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence, therefore, the Commissioner (Appeals) believed the assessee's theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of account.

That being the position, not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee. So much is clear by the decision of this court. In particular, the court has also taken a similar view in the case of CIT v. Vijay M. Mistry Construction Ltd. [2013] 355 ITR 498 (Gu)) and in the case of CIT v. Bholanath Poly Fab (P.)Ltd. [2013] 355 ITR 290 (Guj). The view taken by the Tribunal in the case of Vijay Proteins Ltd. v. Asstt. CIT [1996] 58 ITD 428 (Ahd.) came to be approved.

If the entire purchases were wholly bogus and there was a finding of fact on record that no purchases were made at all, counsel for the Revenue would be justified in arguing that the entire amount of such bogus purchases should be added back to the income of the assessee. Such were the facts in the case of Pawanraj B. Bokadia (supra).

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This being the position, the only question that survives is what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The Commissioner adopted the ratio of 30 per cent of such total sales. The Tribunal, however, scaled down to 12.5 per cent. We may notice that in the immediately preceding year to the assessment year under consideration the assessee had declared the gross profit at 3.56 per cent of the total turnover. If the yardstick of 30 per cent, as adopted by the Commissioner (Appeals), is accepted the gross profit rate will be much higher. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. No question of law in such estimation would arise. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick can be adopted.

& • Nickunj Eximp Enterprises Pvt. Ltd v. CIT [ Bombay HC WRIT PETITION NO.2860 OF 2012] • Hon'ble Bombay High Court in the case of PCIT vs. Pinaki D. Panani vide order dated January 18, 2020 • Hon'ble Bombay High Court in the case of Usha Exports v. ACIT vide order dated December 21, 2019 • PCIT v. Jakharia Fabric (P) Ltd. (2020) 429 ITR 323 (Bom- HC) dated 10/02/2020

addition @ 8.87% of the gross profit (supra), the Revenue is before us.

on record. We find that the assessee company had filed its return u/s.139

of the Act offering an income of ₹46,01,420/-, which return was reopened

u/s.147 of the Act based on the information from the Investigation Wing,

(Kolkata) that M/s.Barbrik had indulged in providing fraudulent invoices

for facilitating accommodation entry for entities [like assessee], so that

beneficiary entity could suppress its profits; and since the assessee had

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shown to have booked expenditure using invoices/bills of M/s.Barbrik to

the tune of ₹1,20,99,998/-, the AO recorded his satisfacton that there is

escapement of income, and issued notice u/s.148 of the Act. Pursuant to

the notice of reopening, the assessee is noted to have contested the

allegation and asserted that they had carried out genuine transaction with

M/s.Barbrik; and in order to prove that transaction was genuine had filed

(i) Purchase Register (ii) bank statement evidencing payments through

banking channels (iii) Sales Bill (iv) GST returns (v) ledger with respect to

invoices, etc. However, the AO is noted to have ignored the relevant

documents without alleging any infirmity and had taken adverse view

against the transaction in the light of the report of the Investigation Wing

that (i) M/s.Barbrik was a paper-company and (ii) has been struck-off

from the rolls of Ministry of Corporate Affairs. Consequently, the AO

disbelieved the assertion of the assessee that transaction with M/s.Barbrik

was genuine and disallowed the entire sale consideration given to

M/s.Barbrik and made an addition u/s.69C (unexplained expenditure) of

the entire amount of ₹1,20,99,998/-. On appeal, the Ld.CIT(A) has

restricted the addition to 8.87% of the gross-profit i.e. ₹10,73,269/-

[₹1,20,99,998/- x 8.87%] by inter-alia relying on the decision cited supra

and other decisions. The Revenue has challenged the impugned action of

the Ld.CIT(A) before us and in this regard, it is noted that the Ld.CIT(A)

has restricted the addition [@ 8.87% of the gross profit] since the sales

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shown by the assessee in the profit & loss account has been accepted in

its entirety by the AO, so according to the Ld.CIT(A), the purchases

couldn’t have been entirely disallowed. According to us, the Ld.CIT(A) in

the given facts and circumstances of the case as discussed (supra) erred

by misdirecting himself (i) to presume that without purchases, no sales

could have taken place; and (ii) when the AO has accepted the sales only

the profit element could have been added. The proposition of the

Ld.CIT(A) that when the sales have been accepted by the AO, the

purchases can’t be disallowed, is applicable, when quantity of goods

purchased is not disputed and in such cases, the element of inflation of

cost of purchases is only considered to be added by addition of the extra

profit derived from such transaction [refer the ratio of the decision of the

Hon’ble Gujarat High Court in the case of CIT v. Simit P. Sheth supra].

But in the present case, the question is whether the expenses claimed by

the assessee to the tune of ₹1,20,99,998/- is genuine or not and whether

it is allowable as a deduction being expenditure incurred for the purpose

of business. Hence the Ld CIT(A) erred in relying on the ratio of the

decision in CIT v. Simit P. Sheth supra. Having held so, we agree with the

impugned action of Ld CIT(A) giving relief to assessee, since we don’t

countenance the action of AO making the addition despite assessee filing

relevant documents (supra) to prove the genuineness of the transaction

with M/s.Barbrik. The AO is noted to have taken adverse view against the

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assessee and disallowed the entire transaction amounting to

₹1,20,99,998/-, on the basis of information received from the

Investigation Wing that M/s.Barbrik was involved in facilitating

accommodation entries and that M/s.Barbrik has been “struck off” from

the rolls of the Ministry of Corporate Affairs (MCA). First of all the AO is

found to have discarded the relevant documents filed by the assessee [to

prove the genuineness of the transaction] without assigning any reason

can’t stand the scrutiny of law. Secondly, the AO is noted to have

disbelieved the relevant documents filed by the assessee only on the

basis of information, he received from the Investigation Wing which piece

of evidence has not been confronted with the assessee. So the AO’s

reliance on any adverse material without furnishing a copy of the same to

assessee strikes at the root of the addition made by the AO. Further, it is

brought to our notice that there is no proof that the said company

(M/s.Barbrik) has been “struck-off” from the rolls of MCA in the relevant

AY 2018-19, but the only proof is that GST registration of M/s.Barbrik has

been cancelled w.e.f. 13.05.2019 [i.e. AY 2020-21] which means

impliedly that M/s.Barbrik was enjoying GST registration in the relevant

year i.e. AY 2018-19, and it was not struck off in the relevant year.

Therefore, the basis for making addition u/s.69C of the Act is arbitrary,

which can’t stand the scrutiny of law and therefore, the addition made by

AO is untenable for the reasons stated (supra) and therefore, the AO

ITA No.1554 /Chny/2025 (AY 2018-19) M/s. EI Instrumentation Pvt. Ltd. :: 9 :: erred in making the addition u/s.69C of the Act; and since the assessee is not in appeal against the action of the Ld.CIT(A), we uphold the action of the Ld.CIT(A) restricting the addition to Gross-Profit @ 8.87% is ₹10,73,269/- and dismiss the Revenue Appeal.

Order pronounced on the 07th day of January, 2026, in Chennai.

Sd/- Sd/- (एस. आर. रघुनाथा) (एबी टी. वक�) (ABY T. VARKEY) (S.R.RAGHUNATHA) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 07th January, 2026. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF