ITAT Mumbai Reaffirms 12.5% Profit Addition on Bogus Purchases in ITO Vs Arvind Ratanchand Jain

Background of the Dispute

The Mumbai Bench of the Income Tax Appellate Tribunal in ITO Vs Arvind Ratanchand Jain dealt with a recurring controversy in income tax assessments – the extent to which alleged bogus purchases can be added to the income of an assessee.

The revenue authorities had treated substantial purchases as non-genuine and sought to add 25% of such purchases to the assessee’s income. The Commissioner of Income-tax (Appeals) [“Ld. CIT(A)”], however, restricted the addition to 12.5%, holding that only the margin or profit embedded in such purchases is taxable. The Tribunal endorsed this approach and dismissed the revenue’s appeals.

The matter related to Assessment Years 2020-21 and 2021-22, where orders were passed under Section 143(3) r.w.s. 144B of the Income Tax Act 1961. The appeals before the ITAT were filed by the revenue against the orders of the NFAC (acting as Ld. CIT(A)) passed under Section 250 of the Act.

Appeals and Procedural Aspects

  • Two appeals were filed by the revenue for A.Y. 2020-21 and 2021-22 against the same assessee.
  • Since both appeals arose from a common factual framework, the Tribunal heard them together and disposed of them by a consolidated order.
  • ITA No.481/Mum/2026, concerning A.Y. 2020-21, was treated as the lead appeal, and the decision therein was applied mutatis mutandis to the other year.
  • On the date of hearing, no one appeared on behalf of the assessee, nor was any adjournment request filed. The Tribunal therefore proceeded ex-parte as far as the assessee was concerned, after hearing the Departmental Representative (Ld. DR) and examining the assessment records.

Revenue’s Grounds of Appeal

The revenue essentially challenged the following findings of the Ld. CIT(A):

  1. Reduction of addition from 25% to 12.5%

    • The Assessing Officer (Ld. AO) had treated purchases totaling ₹54,27,93,837 as non-genuine and made an addition of 25% (₹13,56,98,459).
    • The Ld. CIT(A) restricted this to 12.5% of the same amount (₹6,78,49,229).
    • The revenue argued that the Ld. CIT(A) failed to properly appreciate the detailed reasoning of the Ld. AO.

  2. Non-authentication of purchases from two specific parties

    • The addition related to purchases from:
      • Prakashkumar Vrajlal Soni (PAN: CKGPS6163N), and
      • Ravi Prakashbhai Soni (PAN: EXYPS3536J).
    • The AO had concluded that business purchases from these two suppliers were not authenticated and, therefore, the full 25% addition was justified.
    • The revenue contended that the Ld. CIT(A) did not adequately consider the AO’s adverse findings.

  3. Liberty to modify grounds

    • The revenue reserved the right to add, delete, or modify grounds at the time of hearing.

Key Findings of the Assessing Officer

1. Substantial Increase in Turnover

The AO compared the assessee’s position for A.Y. 2019-20 and A.Y. 2020-21:

  • Up to A.Y. 2019-20, the assessee disclosed no turnover or gross profit.
  • In A.Y. 2020-21, there was a sharp surge in both purchases and sales.
  • This prompted a deeper scrutiny of the assessee’s trading activities, particularly purchases claimed from the aforementioned two parties.

2. Notices and Compliance Pattern

  • Multiple notices under Section 142(1) were issued:
    • 29.06.2021
    • 22.11.2021
    • 08.01.2022
    • 27.01.2022
    • 05.09.2022
  • The assessee did not respond to earlier notices and provided a detailed response only on 12.08.2022 (to a show cause notice dated 14.03.2022).
  • Along with the response, the assessee furnished:
    • Tax Audit Report (Form 3CD) for A.Y. 2019-20,
    • Quantitative details (which were missing earlier), and
    • Supplier-wise ledgers for purchases.

The AO found that the initially available Form 3CD did not contain quantitative details of closing stock, while the later-filed version (dated the same day) included them, raising doubts about the genuineness and timing of documentation.

3. GST Registration Status of Suppliers

From GSTR 2A and related records for A.Y. 2020-21: