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Facts
The Revenue filed appeals against the CIT(A)'s order concerning additions made on account of bogus purchases and disallowance under Section 14A. The assessee, a contract manufacturer for Coca Cola, was found to have made bogus purchases, leading to reassessment proceedings.
Held
The Tribunal upheld the CIT(A)'s order, directing the Assessing Officer to estimate the embedded income on bogus purchases at 6% of such purchases. The disallowance under Section 14A was also dismissed due to the absence of exempt income.
Key Issues
Whether the estimation of profit on bogus purchases by the Assessing Officer was justified, and whether disallowance under Section 14A is permissible without earning exempt income.
Sections Cited
14A, 143(3), 133(6), 147
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Income Tax Appellate Tribunal, DELHI BENCHES ‘E’: NEW DELHI.
Before: SHRIS.RIFAUR RAHMAN & SHRI YOGESH KUMAR U.S.
(Assessment Year: 2019-20) DCIT, Central Circle 15, vs. Enrich Agro Food Products Pvt. Ltd., Delhi Flat No.D-2, Ground Floor & First Floor, Plot No.6, Aurbindo Marg, New Delhi – 110 017. (PAN :AAACE0807C) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri V.K. Aggarwal, AR Shri Harithik Lamba, Advocate REVENUE BY : Shri Shankar Lal Verma, Sr. DR Date of Hearing : 09.09.2025 Date of Order : 26.11.2025 ORDER PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
These appeals are filed by the Revenue against the order of the Learned Commissioner of Income-tax (Appeals)-26, New Delhi [“Ld. CIT(A)”, for short] dated 18.12.2024 for the AYs 2018-19 & 2019-20.
Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order.
We take up the Revenue’s appeal being for AY 2018-19 as lead case to adjudicate the issues under consideration. 3. The Revenue has raised the following three issues in the grounds of appeal :- (i) Deletion of addition of Rs.43,25,530/- to the extent of Rs.10,38,127/- on account of bogus purchases made by the assessee; (ii) Reduction of gross profit margin from 25% to 6% of bogus purchases; (iii) Restricting the disallowance u/s 14A read with Rule 8D to Rs.5,02,400/-.
4. With regard to deletion of addition of Rs.43,25,530/- to the extent of Rs.10,38,127/- and reduction of gross profit margin from 25% to 6% of bogus purchases, the relevant facts are, assessee company is a contract manufacturer of M/s. Coca Cola India for manufacturing/bottling of aerated water / juices / packed drinking water under the brand "Coca Cola”, "Fanta", "Thums Up". Maaza. The reassessment proceeding was initiated on the basis of information received from Investigation Wing indicating that the assessee had made bogus purchases to the extent of Rs.1,73, 02,120 from M/s R K Trading & Co, Bhagwati Enterprises, M/s Rolex Trading Co. and M/s Raohika Enterprises during the relevant Assessment year. Such inference is drawn on the basis of the inquiry Shri Daya Shankar who controls and manage the business concerns, namely, M/s Bhagwati Enterprisers and M/s JMD Trading House Rakesh Agarwal & Co. and this is dealt in paragraph 4 of the AO's order. During the course of assessment proceeding, the assessee has made submissions to support its argument that the purchases are genuine such as copy of the ledger account , copies of tax invoices and "e-way bills” in respect of purchases made from the entities along with all mandatory attachments, copy of date-wise ledger accounts of each parties, copies of register maintained at the gate of the premises wherein each & every goods / material entry at the gate of premises are recorded along with the name of suppliers, copy of quantitative stock register in item-wise maintained by the assessee, copy of bank account in support that the payments for purchases are made through banking channels, copy of Tax Audit indicating the details of quantitative stock item wise, GSTR 1 evidencing the transactions reported by the vendor by uploading the invoices, GSTR 2A evidencing reconciliation of input claimed by the assessee etc. However, to buttress its position on account of genuineness of purchase transaction, assessee also explained the details of working of GST regime in the assessment order. The assessee submitted that after the introduction of GST regime in 2017, the process of purchase/sale transactions are system driven and interconnected. For instance, the buyer GST return. The assessee has also obtained the input tax credit in respect of allege purchases on the basis of their GSTR-1 which is auto-populated. The GST department has also not indicated any discrepancy. Accordingly, it is unwarranted on the part of the AO to draw any adverse inference on these purchases. Additionally, the assessee had submitted further that during the course of assessment made under section 143(3) of the Act in its own case for this assessment year, the Department has not given any adverse finding with regard to purchases made by it.
The AO, on the other hand, rejected the above submissions and observed at paragraph 4.1.10 to 4.3 of the order. As evident from the paragraph 3.6.7, the AO had issued notices under section 133(6) of the Act to M/s Bhagwati Enterprises and also to Shri Daya Shankar to ascertain the veracity of the claim made by the assessee. However, the notices were returned un-served. Further, the AO had not made any inquiries in the case of other parties, such as, M/s R, K Trading & Co, Ridhika Enterprises and M/s Rolex Trading Co. Apparently, no other independent inquiries have been made by the AO and the adverse inferences are made in para 4.1.11 of assessment order.
Based on the findings that the purchases are bogus, Assessing Officer proceeded to estimate the GP @ 25% of the disputed purchases by ITAT, Hyderabad in the case of Bharatram vs. ACIT, dated 28.07.2020. Accordingly, the AO had disallowed 25% of bogus purchases of Rs.1,73,02,120/- amounting to Rs.43,25,530/-.
Aggrieved assessee preferred an appeal before the ld. CIT (A) and filed detailed submissions. After considering the detailed submissions, ld CIT (A) held as under :- “6.5 ………. ………………….. 6.10 Accordingly, the estimation is required to made on the basis of the prevailing market condition of comparable cases or the previous history of the assesses. The prevailing market condition would mean the profit margin that a third-party trader dealing with similar items during identical period would earn. The previous history of the assessed would mean the book results that are shown by the assesses from year to year. Further, in the instant case, this is the second round of assessment. In the first round of assessment made under section 143(3) read with Section 147 of the Act, the AO had not found out any infirmity In the purchases and book results were accepted. In view of the above facts and legal positions it would be ideal that the embedded profit on such purchases is estimated as per the prevailing books result of the appellant. As per the details furnished by the appellant during this proceeding, the average gross profit margin and net profit margin for FY 2017-18 and FY 201g-19 relating to AY 2018-19 and AY 2019-20 as per the books of account is around 24% and 4.25% respectively. 6.11 The Courts have also taken the similar view. For instance, the Mumbai Tribunal in the case of Poeatial Nathalal Shah vs. Assistant Commissioner of Income Tax, 10(2), confirmed the profit @ 3% on bogus purchases by stating that “now when the sales of the assessee had not been doubted and dislodged by the AO, therefore, it could safely be gathered that the assessee had purchased the goods under consideration, though not from the aforementioned dummy concern from whom bogus bills have been taken, but from certain unidentified parties operating in the open /grey market. We are further of the view that the CIT (A) had rightly appreciated that the addition in the hands of the assessee was liable to be restricted only to the extent of the profit element which was embedded in making of purchases from the open/grey market.”
The Jurisdictional Delhi ITAT in the case of ACIT circle 22(1) New Delhi vs. M/s. Sanvik Engineers India Pvt, Ltd. bearing ITA 3201/DEL/2016 dated 30.05.2019 held that “Since in the instant case the Assessing Officer has not disturbed the sales and has not rejected the books of accounts, therefore, the entire amount of bogus purchases as alleged cannot be added to the total income of the assessee and the addition has to be restricted to the extent of the G.P. Rate on purchases at the same rate of other genuine purchases. The assessee in the paper book page 54 has given the calculations of such GP rate at 9.96% . We therefore set aside the order of the CIT (A) and direct the Assessing Officer to restrict the addition to the extent of G.P. rate on purchases at the same rate of other genuine purchases. The Assessing Officer is accordingly directed to restrict the addition to 9.96% of alleged bogus purchases as against Rs.1,58,47,973/- added by him subject to verification of the GP so computed by the assessee in the paper book. The appeal filed by the revenue is accordingly partly allowed. Further, the Hon'ble Bombay High Court in another case of PCIT vs. Mohammed Hazi Adam & Company 103 taxmann.com 459 (Bom.) held that “So far as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the lack that the said sales had admittedly been recorded in the regular books during Financial Yeah 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefrom, even if 6 % gross profit is taken in to account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result or which profit comes to 5.66 %. Therefore, considering 5.66% of Rs.3,70,78,127/- which comes to Rs.20,98,621.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. According/y, the said question is answered partially In favour of the assessee and partially in favour of the revenue." The ITAT Tribunal, in the matter of Murtuaa Abdul Gaffar Khan vs. National Faceless Appeal Centre (NFAC) bearing dated 15.03.2024 held that "However as held by the honourable Bombay High Court in case of Mohmd. Haji Adam & company (supra) where sales are not disputed, no discrepancy between purchases shown by the assessee and the sales declared, only the addition should be restricted to the extent of bringing the gross profit on purchases at the same basis of other genuine purchases. On this mandate, it was found that assesses has given the quantitative sales corresponding to the quantitative purchases, which is from alleged bogus suppliers. The resultant gross profit from alleged bogus purchase and sales is 5.0969%. The gross profit ratio without alleged bogus purchase and corresponding sales is 5.407%, which will result into addition of 0.3% of alleged bogus purchases of Rs.1,15,86, 557/- which would be minisucule. Looking at the miniscule amount of addition to be retained, we find it a reasonable and just to delete the addition and allow the appeal of the assessee.” 6.12 In the instant case, the appellant has shown average gross profit margin for AY 2018-19 and AY 2019-20 at 24% which includes alleged bogus purchase and corresponding sales. In the light of the above discussions on facts and legal position, If the gross profit margin is enhanced to additional 6% for these bogus/unverified purchases (so as to bring the gross profit margin to 30% for these bogus/unverified purchases being the aggregate of gross profit margin of 24% as per the books of accounts plus additional 6% on account of unverified purchases), it would meet the ends of justice. 6.13 Accordingly, the AO is directed to estimate of the embedded income at the rate of 6% of such bogus/unverified purchases and recompute the addition as above Hence, this ground appeal is partly allowed.”
Aggrieved against the above order, Revenue is in appeal before us.
At the time of hearing, ld. DR of the Revenue brought to our notice detailed findings of Assessing Officer and accordingly relied on them.
On the other hand, ld. AR of the assessee reiterated the submissions made before the ld. CIT (A) and heavily relied on the findings of the ld. CIT (A).
10. Considered the rival submissions and material available on record. We observed that based on the information received, the purchases declared by the assessee were found to be bogus purchases. At the same time, we observed that assessee has already declared the sales and also recorded alleged bogus purchases, however the Assessing Officer observed that as the material have been received, entire bogus purchases cannot be treated as undisclosed income and accordingly, only profit element embedded in the bogus purchases is required to be added as undisclosed income and adopted 25% as the embedded profit element. However, we observed that Hon’ble High Court has considered similar issues and they held that in case of bogus purchases, only certain percentages has to be sustained as income of the assessee considering the actual benefit earned by the assessee in such transactions. We observed that ld. CIT (A) has already estimated the embedded income at the rate of 6% of such bogus/unverified purchases based on the observation that the assessee had already declared 24% of GP in the impugned assessment years and direct to recompute the addition which, in our opinion, is fair and reasonable. Accordingly, we uphold the order of the ld. CIT (A) on this issue and dismiss the ground raised by the Revenue.
11. With regard to restricting the disallowance u/s 14A read with Rule 8D, the Assessing Officer made a disallowance of Rs.16,90,507/-, however ld.
CIT (A) after going through the submissions and various case laws relied upon by the Assessing Officer as well as by the assessee restricted the disallowance to Rs.1,200/- only vide his findings in para 8.8 of the impugned order.
Considered the rival submissions and material available on record. We observe that no disallowance could be made u/s 14A if no exempt income was earned by the assessee. In this case also, assessee has not earned any exempt income. We observed that the Hon’ble Courts have consistently held if there is no exempt income, no disallowance can be made. Accordingly, we dismiss the ground raised
by the Revenue.
13. With regard to appeal for the AY 2019-20, since the facts are exactly similar to AY 2018-19 our above findings in AY 2018-19 are applicable mutatis mutandis in Assessment Year 2019-29. Accordingly, the appeal filed by the Revenue for AY 2019-20 is dismissed.
14. To sum up : both the appeals filed by the Revenue are dismissed. Order pronounced in the open court on this 26th day of November, 2025.