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Judgment
PER S. RIFAUR RAHMAN, AM :
This appeal is filed by the assessee against the order of the Ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)] dated 10.07.2025 for the Assessment Year 2023-24.
Brief facts of the case are, the assessee is an individual, is the proprietor of M/s Vision Marketing Services, is involved in the business of wholesale and retail trade, The assessee filed the return of income for the AY 2023-24 on 21.10.2023 declaring the total income at Rs.71,25,510/-. The case was selected for scrutiny under CASS for verification the outstanding creditors which are more than 50% of the purchases made during the year, low net profit shown and high liabilities compared to low income.
During the assessment proceedings, AO observed that the assessee failed to explain and substantiate certain purchases made from different parties totaling to Rs.6,96,53,133/-. Therefore, notices u/s 133(6) of the Income-tax Act, 1961 (for short ‘the Act’) were issued to 17 parties from whom the purchases were made by the assessee, Out of 17 parties, only 7 parties have made compliance and accepted the transactions with the assessee along with supporting documents and the rest of them have not complied or made submissions. Thus, AO observed that the assessee could not explain the purchases of Rs.6,65,99,343/- from other parties with supporting documents. Therefore, the assessee was show caused to explain why 12% of the above purchases should not be disallowed but the assessee did not respond to the notice.
Though the assessee was granted repeated adjournments, the assessee chose not to respond to the show cause notice. Therefore, AO concluded that the assessee has nothing to admit against such discrepancies and disallowed Rs.79,91,921/- being 12% of purchases claimed of Rs.6,65,99,343/- and treated as undisclosed income from business.
Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi and filed detailed submissions. Ld. CIT (A) after going through the detailed submissions and relying on the decision of Pr. CIT vs. Kanak Impex (India) Ltd. in ITA No.791 of 2021 dated 03.03.2025 sustained the addition.
Aggrieved against the above order, assessee is in appeal before us raising following grounds of appeal :-
“1.That on the facts and in the circumstances of the case and in law, the order passed by the Ld. CIT(A) is bad in law, contrary to facts, arbitrary, and against the principles of natural justice and hence liable to be quashed.
2.That the Ld. CIT(A) has erred in law and on facts in confirming the action of the Ld. AO in making an addition of Rs.79,91,921/- being 12% of the alleged unexplained purchases of Rs.6,65,99,343/-, without appreciating that assessee had duly furnished books of accounts, invoices, confirmations, and ledger copies of the concerned creditors, purchases were fully recorded in the books and payments were made through verifiable banking channels and no discrepancy in stock was pointed out by the AO.
3.That the Ld. CIT(A) has erred in upholding the addition by disregarding the documentary evidence furnished by the assessee such as purchase invoices, account statements, and confirmations and by solely relying upon non-response/partial response to notices u/s 133(6), which are beyond the control of the assessee.
4.That both the Ld. AO and the Ld. CIT(A) failed to establish that the purchases were bogus, non-genuine, or inflated, and no adverse material was brought on record to prove that the goods were not purchased or consumed.
5.That without rejecting the regularly maintained books of accounts u/s 145 of the Act, the Ld. AO was not justified in making addition merely on estimation basis.
6.That the estimation of 12% on alleged unexplained purchases is arbitrary, excessive, and without any cogent basis, ignoring the nature of wholesale and retail trade business where net profit margins are much lower.
7.That the Ld. CIT(A) failed to appreciate that adverse inference could not be drawn merely on account of non-production of delivery challans in absence of any finding that the purchases were fictitious.”
At the time of hearing, ld. AR of the assessee submitted that the AO has fully accepted the sales declared by the assessee and has not rejected the books of account. He further submitted that no cogent material or evidence was brought on record to demonstrate that the purchases recorded in the books are non-genuine or bogus and the gross profit declared by the assessee has not been found to be abnormal. He submitted that in absence of rejection of books of account, the trading results declared by the assessee deserve to be accepted and the Assessing Officer cannot make arbitrary additions merely on the basis of non-response of certain third parties. Further, he submitted that once the sales have been accepted by the Department, the purchases forming part of such sales cannot be disregarded or treated as bogus. He further submitted that the transactions are fully discharged through banking channels. He submitted that the assessee had also produced ledger accounts of all suppliers, which clearly demonstrate that the purchases were duly recorded in the regular books of account, transactions were supported by purchase invoices, the outstanding balances represent normal trade creditors arising in the ordinary course of business and, the creditors have been subsequently paid in full through banking channels. He submitted that these documentary evidences clearly establish the genuineness of the transactions, and therefore the purchases cannot be treated as non-genuine merely on suspicion or conjecture. Further he submitted that the assessee is engaged in a trading business where margins are generally low and in such circumstances, applying a 12% profit rate on purchases is commercially unrealistic and disproportionate to the nature of the business. He submitted that without prejudice, even assuming without admitting that the addition sustained by the learned CIT(A) is upheld, the effective profit margin would become disproportionately high compared to the declared gross profit by the assessee and the assessee had gross profit of 3.27% for the relevant F.Y. 2022-23, which is broadly consistent with the gross profit of 4.30% declared in the immediately preceding year. He submitted that in such circumstances, the estimation of 12% profit on alleged purchases is wholly unrealistic and excessive, as it would result in an artificially inflated profit margin that is completely inconsistent with the trading results of the assessee’s business, which clearly demonstrates that the impugned addition is arbitrary and therefore deserves to be deleted. He relied on the decision of CIT vs Nikunj Eximp Enterprises Pvt. Ltd. (2015) 372 ITR 619 (Bom) and ITO vs Shri Bhavik Jayant Gandhi [ITA Nos.1534, 1535 & 1536/MUM/2020].
He further submitted that the judgment in Pr. CIT Vs Kanak Impex (India) Ltd. relied upon by the learned CIT(A) is clearly distinguished in the following judicial precedents:
ITO Vs Khimchand Okchand Bhansali (2025] 174 taxmann.com 148 (Mumbai - Trib.)
M/s. Cone Craft Paper Pvt. Ltd. vs PCIT (ITAT Delhi) ITA No.3592/Del/2025
He submitted that the facts of the present case is entirely different from that in Kanak Impex, and accordingly the reliance placed on the said judgment by the learned CIT(A) is unsustainable in law.
On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observed that assessee was show caused to assess Rs.79,91,921/- (12% of Rs.6,65,99,343) whereas the assessee did not respond. We observed that ten parties, who have purchased, have not responded to the notices u/s 133(6) of the Act, therefore, the AO could not verify the genuineness of the purchases. We further observed that the assessee is engaged in trading business and sales were accepted against the purchases and without purchases, the assessee could not have achieved. Further we observed that the AO has fully accepted the sales declared by the assessee and has not rejected the books of account. We observed that in absence of rejection of books of account, the trading results declared by the assessee deserve to be accepted. We further observed that the transactions are fully discharged through banking channels.
Further we also observed that the assessee is engaged in a trading business where margins are generally low and in such circumstances, applying a 12% profit rate on purchases is commercially unrealistic and disproportionate to the nature of the business and the assessee had declared gross profit of 3.27% for the relevant F.Y. 2022-23 and gross profit of 4.30% declared in the immediately preceding year.
However, we observed that the genuineness of the purchases would inter alia also include explanation with regard to the source for paying for such purchases. Explaining the source of purchases would be one of the prime considerations for concluding whether the purchases have been made from accounted or unaccounted sources and to test the veracity of transaction being only accommodation entry. It is well settled and undisputed that the onus of proving any genuineness of the expenditure claimed as deduction is on the assessee. The primary onus is on the assessee to discharge his burden to prove the purchases, which an assessee has claimed as a deduction under the Income Tax Act for arriving at the taxable income. Further, we also observed that the decision in the case of Pr. CIT Vs Kanak Impex (India) Ltd. relied upon by the learned CIT(A) is distinguishable in the facts and circumstances of the case and in view of the judgments (supra) relied upon by ld. AR.
In view of our above discussion, we observed that disallowance of 12% of the purchases is excessive, thus it is deemed appropriate in the larger interest of justice and in all fairness that we restrict it to 5% which is line with the gross profit declared by the assessee of 3.27% in the present year and 4.30% declared in the immediately preceding year and would be just and proper with a rider that the same shall not be treated as a precedent. Necessary computation shall follow as per law. We order accordingly and the grounds raised by the assessee are partly allowed.
In the result, the appeal filed by the assessee is partly allowed.