Entire Purchase Amount cannot be Disallowed when Sales accepted and Stock Records maintained: ITAT restricts Bogus Purchase addition to 5% [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) restricted a bogus purchase addition to 5% and ruled that the Assessing Officer (AO) cannot treat the entire purchase amount as non-genuine when the corresponding sales have been accepted and the quantitative movement of goods was fully reconciled.

Mukesh Hirachand Sanghvi (assessee) filed cross-appeals against the order of the CIT(A) for Assessment Year 2010-11 regarding additions made on account of alleged bogus purchases.

For the Assessment Year 2010-11, the AO received information from the Investigation Wing and the Sales Tax Department indicating that twenty-six dealers were engaged in issuing accommodation purchase bills without the actual supply of goods. The AO noted that the assessee had allegedly made purchases totaling ₹5,68,98,134 from these parties.

The assessment was reopened under section 147 of the Act. During the proceedings, the assessee furnished exhaustive evidence, including purchase invoices, delivery challans, bank statements showing payments via account payee cheques, and item-wise stock registers.

The AO issued notices under section 133(6) to the parties, which were returned unserved. Relying on this and the Sales Tax Department data, the AO concluded the purchases were not genuine. While the AO did not dispute that the corresponding sales were recorded, he estimated the profit element by applying a gross profit rate of 25% on the purchases.

Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the rejection of the books of account but restricted the addition by applying a reduced gross profit rate of 12.5%. Aggrieved by the CIT(A)’s order, both the assessee and the Revenue appealed to the ITAT.

The 2025 Income-tax law—mapped line-by-line to what you already know. Click here

The assessee challenged the rate and argued the issue was covered by the Tribunal’s orders in his own case for earlier years, where additions were restricted to 5%. On the other hand, the Revenue supported the AO's original 25% rate.

The two-member bench comprising Amit Shukla (Judicial Member) and Arun Khodpia (Accountant Member), observed that the AO had not doubted the sales or found discrepancies in the quantitative stock tally.

The bench noted that payments were made through regular banking channels and the transactions were duly recorded. It observed that the information from the Sales Tax Department merely indicated a default in depositing VAT, which does not conclusively prove goods were not received.

Relying on the precedent set in the assessee's own case for Assessment Years 2011-12 and 2012-13, the tribunal concluded that consistency and judicial discipline required a similar view for the current year.

The tribunal held the estimation of profit at 5% of the alleged bogus purchases would adequately meet the ends of justice. It ruled that since the mandatory records were maintained and sales were accepted, the addition must be restricted. The appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed.