The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that where an assessee’s sales are accepted and the books reflect corresponding transactions, the entire value of alleged bogus purchases cannot be added to income. Instead, only the profit element embedded in such purchases can be brought to tax. 

The bench of Sanjay Garg (Judicial Member) and Narendra Prasad Sinha (Accountant Member) restricted the addition to 8% of the alleged bogus purchases amounting to ₹50.33 lakh, granting substantial relief to the taxpayer. 

The assessee, an individual engaged in the business of trading in ferrous and non-ferrous metals under the proprietary concern Vinay Enterprises, came under scrutiny after the Income Tax Department received information through the Insight Portal. According to the Department, the assessee had purchased goods from five entities allegedly engaged in providing accommodation entries through bogus invoices.

Based on this information, the assessment was reopened. The Assessing Officer (AO) concluded that purchases aggregating to ₹50,33,695 from the identified entities were non-genuine and added the entire amount to the assessee’s taxable income. The Commissioner (Appeals) upheld the addition, prompting the assessee to approach the Tribunal. Pruthvi Singh Solanki.pdf

Before the Tribunal, the assessee contended that the authorities had wrongly treated genuine purchases as bogus without properly appreciating the documentary evidence produced during assessment proceedings.

The appeal also asserted that the Department had not rejected the books of account. The corresponding sales were never disputed. Stock records and material consumption were accepted. The department relied on third-party statements without allowing cross-examination, violating principles of natural justice. Mere discrepancies in transport documents or allegations against suppliers could not justify disallowance of the entire purchases in the absence of independent evidence showing that no goods were actually received. Pruthvi Singh Solanki.pdf

The Tribunal observed that the assessee was a trader and not a manufacturer, making the acceptance of sales a significant factor.

It noted that the department had accepted the corresponding sales. No shortage of stock was detected. There was no finding that purchases had been made from undisclosed sources. Payments were made through banking channels and duly recorded in the books of account.

The Tribunal stated that once sales are accepted in the case of a trader, it necessarily follows that purchases must also have been made to facilitate those sales. Therefore, the entire purchase value cannot be treated as unexplained income. Pruthvi Singh Solanki.pdf

The Bench reiterated the settled judicial principle applicable in cases involving alleged accommodation entries for purchases.

It observed that, at the highest, the possibility could be that the assessee procured goods from the grey market at lower prices and obtained accommodation bills from alleged bogus suppliers to suppress profits.

In such circumstances, what can legitimately be brought to tax is only the profit element embedded in those purchases, and not the entire purchase value.

The Tribunal emphasized that this principle has consistently been followed by courts in similar cases involving alleged bogus purchases. Pruthvi Singh Solanki.pdf

During the course of hearing, counsel for the assessee fairly submitted that an addition equivalent to 8% of the disputed purchases could reasonably represent the suppressed profit embedded in the transactions. The Departmental Representative also accepted that estimating the profit element at 8% would be reasonable.

Accepting the consensus between both sides, the Tribunal restricted the addition to 8% of ₹50,33,695, instead of sustaining the entire disallowance.

Accordingly, the appeal was partly allowed.

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Read More: JURISHOUR | TAX LAW DAILY BULLETIN : 24 June, 2026