2025 (6) TMI 1533 - AT - Income Tax

Addition u/s 68 as Bogus Purchase - Estimation of income - addition at the rate of 12.50% of the total circular transactions made by the assessing officer based on the alternatively plea taken by the assessee during the assessment proceedings - Counsel stated that the net profit of 0.39% as declared by the assessee duly takes care of the income from the circular trading activities and same is in line with the various decisions of the Hon ble High Court of Gujarat and Ahmedabad ITAT wherein in case of circular trading 0.30% profit margin is upheld to be appropriate HELD THAT - As evident from the audited Profit Loss account of the proprietary concern of the assessee the assessee has earned net profit from trading of Rs. 18, 12, 319/- on sale of Rs. 45, 78, 16, 189/- which works out to 0.39% of the turnover. The net profit of 0.39% as declared by the assessee duly takes care of the income from the circular trading activities and same is in line with the various decisions of the Hon ble Ahmedabad ITAT wherein in case of circular trading 0.30% profit margin is upheld to be appropriate. Accordingly even if the assessing officer s version of circular trading is accepted then also there is no case of the assessing officer for making any such huge and abnormal addition of 12.50% of the total purchases. Such kind of profit margin can never be possible in case of Circular Trading Activities particularly when the AO himself has held the transactions of the assessee are of circular trading for that reliance can be placed on the judgement of Jt. Cit (Osd) Circle-3(1)(1) vs M/S. Pradip Overseas Ltd 2021 (9) TMI 976 - ITAT AHMEDABAD wherein looking to the above facts and finding we do not find any infirmity in the decision of Id. CIT(A) in estimating the disallowance @ 0.30% of circular trading purchases. Also see KFC Exports (P.) Ltd 2025 (1) TMI 1571 - GUJARAT HIGH COURT - Assessee appeal allowed.

Summary

The primary issues considered by the Appellate Tribunal pertain to the validity and correctness of additions made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, in respect of alleged bogus purchases from M/s Ankur Chemfood Ltd during the Assessment Year 2018-19. The core legal questions include:

1. Whether the transactions with M/s Ankur Chemfood Ltd constitute bogus purchases or circular transactions.

2. Whether the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in rejecting the assessee's books of accounts under Section 145(3) without proper identification of defects or prior notice.

3. Whether the addition of 12.5% of the purchase value as unexplained credit under Section 68 is justified, especially when the AO himself accepted the circular nature of transactions.

4. Whether the assessee's extensive documentary evidence substantiating the genuineness of the transactions was duly considered.

5. Whether principles of natural justice were violated by the AO not following mandatory directions under Section 144A of the Act.

6. The applicability of judicial precedents concerning circular transactions versus bogus purchases, and the principle of estoppel in tax proceedings regarding admissions made before the AO.

Issue-wise Detailed Analysis:

1. Nature of Transactions: Bogus Purchases or Circular Transactions?

Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The AO can make additions if the assessee fails to satisfactorily explain the nature and source of sums credited in the books. However, judicial precedents, including the Gujarat High Court's ruling in PCIT v. KFC Exports (P.) Ltd. and ITAT Ahmedabad's decision in Pradip Overseas Ltd, have clarified that circular transactions-where goods or funds move in a loop without genuine economic substance-do not amount to bogus purchases and thus cannot be added under Section 68 as unexplained cash credits. Instead, only the net profit margin arising from such circular trading is taxable.

Court's Interpretation and Reasoning: The AO's own findings acknowledged the circular nature of the transactions involving M/s Ankur Chemfood Ltd and associated entities, highlighting a pattern where funds and goods moved in blocks without actual economic substance. Despite this, the AO treated the entire purchase value as bogus and made an addition of 12.5% of the purchase value under Section 68. The CIT(A) upheld this addition.

Key Evidence and Findings: The assessee produced extensive documentary evidence totaling 1414 pages, including quantitative details, delivery challans, banking transactions, and confirmations from the supplier. The assessee's audited profit and loss account showed a net profit margin of 0.39% on sales largely made from these purchases, which aligns with judicially accepted profit margins in circular trading cases.

Application of Law to Facts: Given the AO's acceptance of circular transactions and the documentary evidence supporting genuine purchase and sale flows, the Tribunal found no justification for treating the entire purchases as bogus. The Tribunal relied on binding precedents that additions under Section 68 are not warranted in cases of circular trading, where the difference between sales and purchases (profit margin) is the relevant taxable income.

Treatment of Competing Arguments: The Revenue argued that the assessee's alternate plea before the AO accepting a 12.5% addition precludes relief. The Tribunal rejected this, citing the principle that estoppel does not apply in tax proceedings and that admissions before the AO can be retracted before appellate authorities. The Tribunal also rejected the Revenue's reliance on cases involving clearly bogus purchases, distinguishing them on facts.

Conclusion: The Tribunal concluded that the transactions were circular rather than bogus, and the addition of 12.5% of purchases was excessive and not justified.

2. Rejection of Books of Accounts under Section 145(3)

Legal Framework: Section 145(3) permits the AO to reject books of account if they are not maintained properly or contain defects. However, the AO must identify specific defects and issue a show cause notice before rejection.

Court's Interpretation: The AO rejected the assessee's books without pointing out specific defects or issuing a show cause notice. The CIT(A) upheld this rejection.

Application to Facts: The Tribunal found that the AO failed to comply with procedural requirements under Section 145(3), thereby rendering the rejection invalid.

Conclusion: The rejection of books was not justified as per statutory requirements.

3. Addition of 12.5% of Purchase Value as Unexplained Credit under Section 68

Legal Framework: Additions under Section 68 require failure to satisfactorily explain the nature and source of credit entries. In cases of circular trading, judicial precedents have held that only the net profit margin is taxable, not the entire purchase value or a fixed percentage thereof.

Court's Reasoning and Findings: The AO's addition of 12.5% was based on alternate plea accepted by the assessee but contradicted by the assessee's documentary evidence and profit margins. The Tribunal emphasized that the 12.5% addition is a judicially recognized ceiling in bogus purchase cases, not a standard for circular transactions.

Application of Law: Given the circular nature of transactions and the net profit margin of 0.39%, the addition of 12.5% was disproportionate and unsustainable.

Conclusion: The Tribunal set aside the addition of 12.5% and allowed the appeal.

4. Consideration of Documentary Evidence Substantiating Genuineness

Legal Framework: The assessee bears the onus to prove the genuineness of transactions. Documentary evidence such as invoices, delivery challans, payment proofs, and confirmations are relevant.

Court's Interpretation: The assessee submitted voluminous documentary evidence, including confirmation affidavits from the supplier, ledger details, and bank statements showing payments. The Tribunal found that the AO and CIT(A) failed to adequately appreciate this evidence.

Application to Facts: The documentary evidence demonstrated actual movement of goods and corresponding sales, negating the claim of bogus purchases.

Conclusion: The Tribunal held that the evidence substantiated the genuineness of transactions.

5. Violation of Principles of Natural Justice due to Non-compliance with Section 144A

Legal Framework: Section 144A mandates certain procedural directions during reassessment proceedings to ensure fairness.

Court's Reasoning: The AO passed the reassessment order without following mandatory directions under Section 144A, which the assessee contended violated natural justice.

Findings: The Tribunal noted this procedural lapse but did not make it a decisive factor in the final outcome, focusing instead on substantive issues.

6. Applicability of Estoppel and Admissions Made Before AO

Legal Framework and Precedents: The Supreme Court and various High Courts have held that estoppel and res judicata principles do not strictly apply in income tax proceedings. Admissions made before the AO can be retracted before appellate authorities if based on mistaken facts or law.

Court's Interpretation: The Tribunal rejected the Revenue's argument that the assessee's acceptance of the 12.5% addition before the AO barred further challenge. It relied on authoritative rulings to uphold the assessee's right to contest the addition at appellate levels.

Conclusion: The Tribunal confirmed that the assessee was entitled to challenge the addition irrespective of prior admissions.

Significant Holdings:

"There is no estoppel in Income Tax Proceedings. There is no concept of estoppel against an assessee in tax proceedings, even if the assessee agreed to an addition earlier, before assessing officer, they can later retract and contest the same."

"Transactions of sale and purchases cannot be treated as cash credit under section 68 of the Act, if they are circular in nature."

"The net profit of 0.39% as declared by the assessee duly takes care of the income from the circular trading activities and same is in line with the various decisions of the Hon'ble Ahmedabad ITAT wherein in case of circular trading 0.30% profit margin is upheld to be appropriate."

"The assessing officer rejected the contention of the assessee for bogus purchases and held that assessee is engaged in circular transaction... It is quite evident that there is a circular transaction made by the assessee along with others without actual movement of salt."

"Judicial discipline demands that once an order has been passed by the Jurisdictional High Court, on particular issue, the Tribunal is duty bound to act in accordance with the same."

Core Principles Established:

• Distinction between bogus purchases and circular transactions is critical; circular transactions do not attract additions under Section 68 as unexplained cash credits except for the net profit margin.
• Extensive documentary evidence substantiating genuineness of transactions must be duly considered before making additions.
• Rejection of books of accounts under Section 145(3) requires identification of specific defects and prior notice to the assessee.
• Admissions or concessions made before the AO are not binding on appellate authorities; estoppel does not apply in income tax proceedings.
• Judicial precedents from jurisdictional High Courts and ITATs are binding and must be followed by the Tribunal.

Final Determinations:

The Tribunal allowed the assessee's appeal, setting aside the addition of 12.5% of purchase value under Section 68. It held that the transactions with M/s Ankur Chemfood Ltd were circular rather than bogus purchases. The Tribunal found that the assessee had substantiated the genuineness of transactions with documentary evidence and that the net profit margin declared was reasonable and consistent with judicial precedents. The rejection of books of accounts under Section 145(3) was invalid due to procedural lapses. The Tribunal also rejected the Revenue's contention regarding estoppel and upheld the assessee's right to contest additions at appellate levels. Consequently, the appeal was allowed, and the assessment order was modified accordingly.