When books of accounts are accepted, can the Assessing Officer still tax “profit” on alleged bogus purchases again?
In a recent decision, the ITAT Delhi Bench ‘C’ delivered an insightful order in the case of Kritika Jain vs. ITO, offering clarity on reopening validity, bogus purchase additions, and double taxation of profit elements.
Case in Brief
The assessee, engaged in the business of lubricants and rubber goods, had shown purchases of ₹65,60,000 from M/s Gupta Trading Company, alleged to be a bogus supplier based on an Investigation Wing report.
The AO reopened the case u/s 147, accepted sales as genuine, but treated purchases as non-genuine, adding ₹8,20,000 (12.5%) as profit on bogus purchases u/s 69C.
The CIT(A) upheld the addition, leading to the present appeal before the ITAT.
Factual Background
The case originated from an Investigation Directorate report which identified certain parties engaged in issuing accommodation bills for commission.
One such name — Manjeet Singh (Proprietor, Gupta Trading Company) — was listed as a hawala operator, and the assessee was found to have recorded purchases from him.
Despite the assessee’s explanation that:
- All payments were made through banking channels,
- Goods were duly recorded in books, and
- Corresponding sales were offered to tax, the AO disallowed 12.5% of such purchases, assuming inflation of expenses.
- The CIT(A) dismissed the appeal, affirming the AO’s conclusion that “no actual goods were supplied.”
Issues Before the Tribunal
- Whether reopening of assessment u/s 147 was valid based on third-party investigation data.
- Whether profit @12.5% on alleged bogus purchases can be taxed when sales are accepted and books are not rejected.
- Whether such addition leads to double taxation of the same income already reflected in P&L Account.
Tribunal’s Findings
The Bench comprising Shri Satbeer Singh Godara (JM) and Shri Avdhesh Kumar Mishra (AM) examined both legal and factual aspects:
On Reopening: Valid and Justified
The ITAT held that there was prima facie material in the form of the Investigation Report suggesting escapement of income.
Citing Raymond Woollen Mills Ltd. (236 ITR 34) and Aravali Infrapower Ltd. (SC), it ruled that adequacy of material is irrelevant at the stage of reopening — what matters is existence of a “reasonable belief.”
“When the AO has sufficient material to infer escapement, reopening cannot be said to lack application of mind.”
On Notice under Section 143(2): Properly Issued
The Tribunal noted that the assessee had been duly served with notice dated 28.08.2023, hence no procedural defect existed.
On Addition for Bogus Purchases: Relief Granted
The Tribunal observed that:
- The books of account were never rejected,
- The sales derived from those purchases were accepted as genuine, and
- The income embedded in those sales had already been taxed.
Therefore, taxing an additional 12.5% profit on the same purchases would amount to double taxation.
However, acknowledging the element of probability and compromise by the assessee’s counsel, the ITAT restricted the addition to ₹4,00,000 out of ₹8,20,000, granting relief of ₹4,20,000.
Takeaway for Professionals
This order reiterates practical principles that every tax practitioner and appellate professional should remember:
1. Reopening must have “reason to believe”, not proof of escapement.
Once prima facie material exists (like an Investigation Wing report), reopening cannot be quashed for sufficiency.
2. Books not rejected → limited scope for estimation.
When books are accepted and sales are taxed, further addition on presumed profits is unsustainable.
3. Avoiding Double Taxation.
Profit already embedded in sales cannot be re-taxed under section 69C. Only incremental benefit — if any — can be taxed.
4. Fairness in Estimation.
The Tribunal’s pragmatic approach (restricting addition to ₹4 lakh) shows that tax justice is about balance — not arithmetic.
For downloading the full judgement –
Mehul