ITAT Delhi on Bogus Purchases: Profit Rate Reduced to 8%

Headnote:

The ITAT Delhi held that although the assessee failed to substantiate purchases from five entities alleged to be “bogus,” a 100% disallowance or a 12.5% estimated profit was excessive. Since sales were not disputed and the assessee operated in the yarn trading business, the Tribunal applied a reasonable profit estimation and directed the Assessing Officer to compute income at 8% of the alleged bogus purchases, partly allowing the appeal. The order of the CIT(A) sustaining 12.5% estimation was modified.

Background:

The assessee is a HUF running the business “Love Kush Yarn.”

Return filed for AY 2018-19 declaring ₹7,11,350.

Assessment reopened u/s 147 r.w.s. 144 & 144B based on information that the assessee made bogus purchases of ₹4,65,88,878 from:

M/s Shree Balaji Wooltex

M/s Radha Kanheya Export

M/s Sri Rameshwaram International

M/s Soni Textiles

M/s Shree Bankey Bihari Enterprises

Assessee claimed GP improved from 0.51% (AY 17-18) to 0.77% (AY 18-19).

Assessee did not respond to notices u/s 148 or 142(1); AO proceeded ex-parte, rejected books u/s 145(3), and estimated profit @ 12.5% of alleged bogus purchases.

CIT(A) upheld AO’s addition.

Court’s Observations:

Assessee remained absent; appeal heard ex-parte.

Purchases from five parties could not be verified; parties did not appear before AO.

CIT(A) correctly held purchases were not genuine, supported by assessee’s own claim that one Rajesh Mittal issued fake invoices to evade GST.

However, total disallowance or high profit estimation is not justified because:

Sales were accepted.

Profit must be estimated on a reasonable basis.

In similar “accommodation entry/bogus purchase” cases, profit estimation is preferred.

Tribunal held that considering facts, without creating any precedent, a profit rate of 8% was fair and reasonable.

Decision

The Tribunal partly allowed the appeal.

The Assessing Officer is directed to:

Apply 8% profit rate on the bogus purchases of ₹4.65 crore.

Order pronounced on 04.11.2025.

Legal Provisions Discussed:

Section 147 – Income escaping assessment

Section 144 / 144B – Best-judgment assessment

Section 145(3) – Rejection of books of account

Section 148 / 142(1) – Reopening notice & enquiry

Principles on estimation of income in bogus purchase matters (jurisprudence)

Citation: 2025:ITATDEL:1593

Case: Suraj Narang (HUF) v. ITO, Ward-1, Panipat

Court: Income Tax Appellate Tribunal, Delhi ‘G’ Bench

Coram: Shri Satbeer Singh Godara (Judicial Member) & Shri Naveen Chandra (Accountant Member)

Date of Decision: 04 November 2025

ITA No.: 1593/DEL/2024 (AY 2018-19)