Bogus Purchase Disallowances Must Be Restricted to Gross

Bogus Purchase Disallowances Must Be Restricted to Gross Profit Ratio If Books of Account Are Accepted

Issue

Whether the Assessing Officer (AO) can disallow the entire amount of alleged bogus purchases when the overall books of account, sales figures, closing stock, and quantitative details have been accepted without invoking Section 145(3) to reject the accounts.

Facts

Assessee’s Business: The assessee was engaged in the trading of bullion and jewellery and filed a return declaring an income of ₹16.88 lakhs for AY 2017-18.
Books and Audits: The accounts were fully audited, and the assessee maintained complete books of account alongside meticulous quantitative details.
Transaction Recording: The impugned jewellery purchases of ₹1.92 crores were fully incorporated into the books. Part of it was reflected in actual sales of ₹53.89 lakhs (inclusive of gross profit), and the remaining part was accounted for in the closing stock valued at ₹1.49 crores.
External Validation: The quantitative details submitted by the assessee were accepted without objection by the VAT authorities.
AO’s Assessment: The AO completed the assessment under Section 143(3), making an addition of ₹1.92 crores by treating the entire jewellery purchases as bogus, resulting in a total assessed income of ₹2.09 crores.
Procedural Omission: While making the addition, the AO accepted the books of account as a whole and did not invoke Section 145(3) to formally reject them.

Decision

On Total Disallowance: Held, no (partly in favor of the assessee). The AO cannot disallow the entirety of the purchases if the corresponding sales and closing stock generated from those purchases are accepted as genuine.
On Quantum of Addition: Held, yes. It is settled law that when books of account are not rejected, any disallowance regarding alleged bogus purchases must be confined strictly to the element of embedded profit. The AO was directed to adopt the average gross profit ratio of the preceding five years and recompute the income accordingly.

Key Takeaways

No Rejection, No Total Disallowance: If an AO accepts the sales and closing stock figures, they cannot simultaneously treat the entire corresponding purchase amount as non-existent. To disrupt the trading account entirely, the AO must first legally reject the books of account under Section 145(3).

The Profit Element Rule: In cases where documentation for suppliers is found deficient but the physical matching of stock and sales is verified (and accepted by other bodies like the VAT department), judicial precedent mandates taxing only the estimated savings or gross profit margin earned from procuring goods from alternative/unverified markets.

Past Performance Benchmark: The standard and reasonable mechanism to quantify additions in accepted-book scenarios is to apply the historical average gross profit rate (e.g., the preceding five years) to the disputed turnover, rather than making arbitrary, high-pitched additions.

IN THE ITAT DELHI BENCH ‘A’

Vineet Agarwal

ACIT-2^*

Sudhir Kumar, Judicial Member
and Manish Agarwal, Accountant Member

IT Appeal No. 8836 (DELhi ) of 2025
[Assessment year 2017-18]

JUNE 5, 2026

Piyush Kaushik, Adv. for the Appellant. Ajay Kumar Arora, Sr. DR for the Respondent.

ORDER

Sudhir Kumar, Judicial Member.- This appeal is filed by the Assessee against the order of Ld. CIT(A-3), Lucknow dated 28-10-2025 for the Assessment Year 2017-18 on the following grounds:-

That on the facts and circumstances of the case and in the law the CIT(A) has manifestly erred in sustaining disallowance of Rs. 1,92,47,792/- on account of purchases of jewellery as made by the AO by alleging the same to be in the nature of bogus purchases.

That on the facts and circumstances of the case and in the law the CIT(A) has manifestly erred in sustaining disallowance of Rs. 1,92,47,792/- on account of purchase of jewellery when as a matter of fact the said purchases have been incorporated in sales to the extent of Rs. 53,88,946/- inclusive of gross profit and in the closing stock to the extent of Rs. 1,48,74,451/- and that the quantitative details with respect to purchase of jewellery have also been accepted by the concerned VAT authorities and the books of accounts of assessee having also been accpepted by the AO in the course of assessment proceedings.

That on the facts and circumstances of the case and in the law there can be no disallowance of Rs. 1,92,47,792/- on account of purchases of jewellery as made by alleging the same to be in the nature of bogus purchase when the sale and closing stock emanating from the same have been duly accepted by the AO alongwith the books of accounts as furnished by the assessee in the course of assessment proceedings.

That without prejudice in any manner to the foregoing grounds of appeal, it is claimed in the alternative that even in a situation of disallowance of purchases by alleging the same to be bogus purchases (though the same has been seriously disputed by the appellant / assessee in the facts of present case) the maximum disallowance which can be sustained in the hands of the appellant/ assessee would be confined to the gross profit ratio as held in several authoritative rulings on the subject.

2. Brief facts of the case are that the assessee is an individual carrying trading business of bullion and jewellery and enjoys the business income besides income from house property and interest income. The accounts of the assessee were audited u/s. 44B of the Income Tax Act, 1961. Assessee submitted during the assessment proceedings all the books of accounts alongwith quantitative details duly maintained by the assessee. The books of accounts including quantitative details as submitted before the AO from time to time have been accepted by the AO and not rejected by invoking the provision of section 145(3) of the Act. Further the quantitative details with respect to purchases etc. have also been accepted by the concerned VAT authorities. The return of income was e-filed on 19.9.2017 showing total income of Rs. 1688080/-. The AO completed the assessment u/s. 143(3) on income of Rs. 20935870/- after making addition of Rs. 19247792/- for bogus purchases against which the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) upheld the action of the AO by dismissing the appeal of the assessee. Aggrieved, assessee is in appeal before us.

3. Ld. AR submitted that Ld. CIT(A) has erred in sustaining disallowance of Rs. 1,92,47,792/- on account of purchase of jewellery when as a matter of fact the said purchases have been incorporated in sales to the extent of Rs. 53,88,946/- inclusive of gross profit and in the closing stock to the extent of Rs. 1,48,74,451/- and that the quantitative details with respect to purchase of jewellery have also been accepted by the concerned VAT authorities and the books of accounts of assessee having also been accepted by the AO in the course of assessment proceedings. It was the further submission that there can be no disallowance of Rs. 1,92,47,792/- on account of purchases of jewellery as made by alleging the same to be in the nature of bogus purchase when the sale and closing stock emanating from the same have been duly accepted by the AO alongwith the books of accounts as furnished by the assessee in the course of assessment proceedings. It was further submitted that once the books of accounts have been accepted and more particularly the figures of sales and closing stock have also been accepted then the maximum disallowance which can be made with respect to alleged bogus purchase would be confined to the gross profit ratio.

4. Ld. DR relied upon the orders of the authorities below.

5. We have heard both the parties and perused the records. Before us, during the hearing, Ld. AR to support his aforesaid contentions has filed a small paper book containing pages 1-70 of the compilation of following case laws:

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Decision of ITAT Raipur Bench in the case of Balaji Rice Industries v. ITO (Raipur – Trib.).

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Decision of Gujarat High Court in the case of Pr. CIT v. Rakesh Kailashchand Jain (Gujarat)

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Decision of Gujarat High Court in the case of Pr. CIT v. Mohit Pukhraj Kawdiya 481 ITR 318 (Gujarat)

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Decision of Gujarat High Court in the case of Vijay Trading Co. v. ITO (Gujarat)

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Decision of Delhi ITAT in the case of Dy. CIT v. Sharp Mint Ltd. (Delhi – Trib.)

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Decision of Mumbai ITAT in the case of Indravadan Hanjarimal Jain v. Dy. CIT (Mumbai – Trib.).

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Decision of Surat ITAT in the case of Dy. CIT v. Center Point Gems (P.) Ltd. 208 ITD 213 (Surat – Trib.).

5.1 It is an admitted fact that disallowance of Rs. 1,92,47,792/- was made on account of purchase of jewellery, however, the said purchases have been incorporated in sales to the extent of Rs. 53,88,946/- inclusive of gross profit and in the closing stock to the extent of Rs. 1,48,74,451/- and that the quantitative details with respect to purchase of jewellery have also been accepted by the concerned VAT authorities and the books of accounts of assessee having also been accepted by the AO in the course of assessment proceedings. It is settled law that that once the books of accounts have been accepted and more particularly the figures of sales and closing stock have also been accepted then the maximum disallowance which can be made with respect to alleged bogus purchase would be confined to the gross profit ratio. Accordingly, in the interest of justice, we direct the AO to adopt the average of GP for the last five years and accordingly re-compute the income of the assessee.

6. In the result the appeal of the assessee is partly allowed.

Order pronounced in the open court on 05-06-2026.