ITAT Ahmedabad Invalidates Reassessment for Failing to Meet Rs 50 Lakh Threshold – GP Addition on Alleged Bogus Purchases Removed Due to Double Taxation
Overview of the Tribunal Decision
The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, delivered a significant ruling in the matter of Centurion Laboratories Pvt. Ltd. Vs ACIT, wherein the Tribunal quashed the entire reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961. The primary ground for quashing was that the alleged escaped income fell below the statutory monetary limit of Rs 50 lakh as mandated under Section 149(1)(b) of the Act. Additionally, on substantive merits, the Tribunal found that the addition made by estimating gross profit on purported bogus purchases constituted impermissible double taxation and was unsupported by independent verification.
Factual Matrix of the Case
Background of the Assessee Company
Centurion Laboratories Pvt. Ltd., a private limited company, operates in the pharmaceutical sector, specifically engaged in manufacturing and trading pharmaceutical products. For Assessment Year 2019-20, the company filed its return of income on 14-10-2019, declaring nil total income after adjusting brought forward losses from earlier assessment years.
Initiation of Reopening Proceedings
The Assessing Officer (AO) initiated reopening proceedings based on intelligence received from the Investigation Wing. The allegation centered on the assessee having obtained accommodation entries totaling Rs 4,09,76,267 from M/s Gensis Health Care [Proprietor of Rakeshkumar & Sons, HUF], which was claimed to be an entity providing bogus purchase entries.
An order under Section 148A(d) was passed on 30-03-2023, followed by issuance of reassessment notice under Section 148 dated 30-03-2023. The assessee did not initially file a return in response to the notice. Subsequently, a notice under Section 142(1) was issued on 08-11-2023 with detailed questionnaires. The assessee responded comprehensively and filed the return of income on 24-11-2023 in compliance with the Section 148 notice.
Show Cause Notice and Proposed Addition
A show cause notice dated 19-02-2024 was issued to the assessee, proposing to estimate bogus purchase income at 13.85% of the total transaction value. The notice stated:
"During the course of the inquiry conducted by the Deputy Director (Inv), Panipat, Haryana in the case of M/s Gensis Health Care, Prop Rakeshkumar and Sons, HUF, having PAN- AAVHR4942P, it is found that your company has taken accommodation entry of Rs.4,09,76,267/- in the guise of purchase from M/s Gensis Health Care during the financial year 2018-19. Even though you have submitted various evidence in support of such claim of purchase from M/s Gensis Health Care, you have not been able to explain the fact since M/s Gensis Health Care is found to be a bogus entity providing accommodation entry, controlled and managed by Rakeshkumar & Sons, HUF, having PAN: AAVHR4942P and as such the particular bills of purchase are bogus and not verifiable. Therefore, the amount of purchase that your company has claimed on the basis of the bills raised by M/s Gensis Health Care is not acceptable as the bills are unverifiable and the amount of claim of purchase made by you cannot be accepted as sacrosanct and correct claim of deduction. You have declared a gross profit rate of 13.85% in the audited report submitted by you for the assessment year under consideration. You are, therefore, requested to kindly show cause as to why the claim of deduction of Rs.56,75,210/- on account of purchase, computed at the rate of 13.85% of Rs 4,09,76,267/-, by accepting bogus accommodation entry of purchase from M/s Gensis Health Care, shall not be disallowed as bogus purchase on being added back to your total income and shall also not be brought to tax accordingly."
Assessee's Response Highlighting GST Component
The assessee submitted a detailed reply pointing out a crucial computational error. The total transaction value of Rs 4,09,76,267 included Integrated Goods and Services Tax (IGST) at 18% amounting to Rs 62,50,617. This IGST component was not debited to the purchase account but was separately accounted for under Input Tax Credit in the books of account.
The actual purchase amount debited to the purchase account stood at Rs 3,47,25,650 only. Applying the gross profit rate of 13.85% on this figure, the alleged escaped income worked out to Rs 48,09,503, which falls below the Rs 50 lakh threshold prescribed under Section 149(1)(b).
The assessee contended:
"First of all we would like to draw your kid attention that our case is selected for scrutiny may be considering the escaped income more than Rs.50,00,000/- for the year under review. Your good-self had issued show cause notice for proposed variation for Rs.56,75.210/- on account of purchase, computed at the rate of 13.85% of Rs.4,09,76,267/-, In this connection we would like to state and clarify that total transaction of Purchase made from M/s. Gensis Health Care comes to Rs.4,09,76,267/- as per invoices issued by the party which includes IGST (@18% amounting to Rs.62,50,617/ which is not a part of purchase and not debited to purchase a/c in our audited books of account. We have debited Rs.3,47,25,650/- to Purchase a/c and Rs.62,50,617/- in ITC IGST 18% considering GST Liability to be paid during the year under review as Input Tax Credit. (Copy of Bill wise statement of purchase with bifurcation of Purchase & GST attached along with copy of Ledger a/c of ITC IGST @ 18% from our audited books of accounts are attached herewith vide Annexure-1. Considering the above facts, according to us the total variation comes to Rs.48,09,503/ on account of purchase, computed at the rate of 13.85% of Rs.3.47,25,650/-. Accordingly escaped income is below Rs.50,00,000/- and as per the provisions of the Act the proceedings is required to be drop. So requested to drop the said proceedings for the year under review under intimation to us in writing."
Documentary Evidence Submitted
On the merits of the transactions, the assessee submitted comprehensive documentation including:
- Bank statements evidencing payments made to M/s Gensis Health Care through RTGS/NEFT
- Purchase orders with complete details
- Tax invoices issued by the supplier
- E-way bills containing date, time, and vehicle registration numbers
- Goods receipt records maintained in regular course of business
Assessment Order
Despite the assessee's submissions, the AO proceeded to make an addition of Rs 48,09,503, representing 13.85% gross profit on the alleged bogus purchases of Rs 4,09,76,267 (though the correct base should have been Rs 3,47,25,650), and raised a tax demand accordingly.
First Appellate Proceedings Before CIT(A)
Appeal and Condonation of Delay
The assessee challenged the reassessment order before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi. However, there was a delay of 88 days in filing the appeal.
The delay was explained through a notarized affidavit stating that email communications were being sent to the address of Shri Ambalal Patel mentioned in Form No. 35. However, he resigned from the company with effect from 01-04-2025 due to his advanced age (72 years). His resignation was intimated to the Registrar of Companies in Form No. DIR-12 on 29-04-2025. The CIT(A) order dated 10-06-2025 was not noticed by the company until the tax auditor discovered it while reviewing the Income Tax portal. The appeal was subsequently filed on 27-11-2025.
The Tribunal, being satisfied with the genuine reasons stated in the affidavit and relying upon the Hon'ble Gujarat High Court judgment in the case of Vareli Textile Industries -Vs.- CIT 284 ITR 238, condoned the delay of 88 days.
CIT(A)'s Findings and Dismissal
The CIT(A) dismissed the appeal both on jurisdictional grounds and on merits. The relevant observations were:
"5.6.1. I have carefully considered the grounds of appeal, submissions made by the appellant and assessment order. The appellant has challenged the disallowance of Rs. 48,09,503/- on account of alleged bogus purchases from M/s Genesis Health Care. As recorded by the Assessing Officer (AO), the said entity was found to be a bogus concern engaged in providing accommodation entries and was linked to a network controlled by Rakeshkumar & Sons HUE. The investigation revealed that no genuine business activity was carried out by the supplier, and the so-called purchases were paper transactions devoid of actual delivery of goods. The AO disallowed the gross profit component embedded in such purchases after noting the lack of any confirmations, delivery evidence, or independent verification.