Pranav B Prem

The Income Tax Appellate Tribunal (ITAT), Mumbai has dismissed the Revenue’s appeal in a case involving alleged accommodation-entry purchases, marking significant relief for the assessee Sha Tarachand Fojmal and Company. The Tribunal upheld the Commissioner of Income Tax (Appeals) [CIT(A)]’s decision to apply a gross profit rate of 3.41 percent instead of the higher rate of 5.54 percent adopted by the Assessing Officer (AO). The bench comprising Amit Shukla (Judicial Member) and Padmavathy S. (Accountant Member) reiterated the established legal principle that when purchases are treated as non-genuine but the corresponding sales are accepted as genuine, only the profit element embedded in such purchases can be brought to tax and not the entire transaction value. The Tribunal recorded that in such cases the assessee may have sourced goods from the unorganised or grey market at reduced prices, leading to savings in VAT and incidental charges; therefore, taxing the full purchase amount would be excessive and unjustified.

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The assessee, a partnership firm engaged in the trading of aluminium sheets and coils, filed its return declaring income of ₹39.38 lakh for Assessment Year 2011–12. The case was later reopened under Section 147 of the Income Tax Act based on information from the Maharashtra Sales Tax Department alleging that several entities had issued accommodation bills to the assessee without supplying goods. Based on this, the Assessing Officer identified purchases amounting to ₹11.88 crore as being from such suspect sources and, instead of disallowing the entire amount, estimated profits by applying a 5.54 percent GP rate to the said purchases. On appeal, the CIT(A) rejected this approach and noted that the assessee’s declared gross profit rate of 3.41 percent had been consistently accepted by the Department in preceding assessment years. Observing no factual or legal justification for enhancing the rate, the CIT(A) limited the addition by applying the assessee’s own profit margin.

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The Revenue challenged this decision before the ITAT, contending that higher additions were justified in cases of bogus purchases and citing decisions such as PCIT v. Kanak Impex (India) Ltd. and PCIT v. Drisha Impex Pvt. Ltd. However, the Tribunal found that these precedents were distinguishable because they dealt with cases involving entirely fictitious purchases where corresponding sales were also doubtful. In the present matter, the Assessing Officer had himself accepted the sales made by the assessee, thereby establishing that goods were in fact traded and revenue was earned. Applying the ratio laid down by the Gujarat High Court in Simit P. Sheth (356 ITR 451), the Tribunal underscored that once sales are accepted the entire quantum of disputed purchases cannot be disallowed and tax must be confined to the profit embedded in such transactions.

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The ITAT concluded that the CIT(A)’s approach was both legally sound and factually reasonable. It observed that the Revenue had been unable to point to any material flaws in the assessee’s declared GP rate or to justify the higher rate applied by the Assessing Officer. In view of these findings, the Tribunal dismissed the departmental appeal and affirmed the restriction of addition to a gross profit rate of 3.41 percent, bringing a quietus to the dispute.

Appearance

Counsel For  Petitioner: None

Counsel For Respondent: Leyaqat Ali Aafaqui

Cause Title: ITO Versus Sha Tarachand Fojmal And Company

Case No: ITA No.2541/Mum/2025

Coram: Amit Shukla (Judicial Member), Padmavathy S. (Accountant Member)