The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) stated that if both purchases and corresponding sales are fake, the entire purchase value cannot be added to income without accounting for the profit element arising from the transactions.
Judicial Member Anubhav Sharma and Accountant Member Sanjay Awasthi partly permitted the appeal of HSB Home Solutions Ltd for AY 2012-13, carrying the reopening of the assessment and asking the assessing officer to apply a 5% gross profit rate to the turnover rather than adding the complete purchase value. The Tribunal said that-
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“We find force in the Ld. AR’s contention that the profit shown from such allegedly bogus transactions has not been considered and the sales would appear to be considered genuine if we simply go by the logic that has been adopted by the Ld. AO, in that out of bogus sales and purchases only the purchases have been treated adversely.”
The case emerged from a survey performed in the matter of Ashok Kumar Gupta and others, during which Gupta allegedly acknowledged furnishing the accommodation entries for fake purchases and sales via his proprietary concern, Gayatri Maa Enterprise. HSB Home Solutions Ltd. was among the entities named with such entries.
The original assessment was completed on March 29, 2014, under section 143(3) of the Income Tax Act, 1961, which outlines the process for scrutiny assessments. The Tribunal determined that the relevant transactions had not been thoroughly analysed during the original assessment.
Thus, it kept the reopening, carrying that the forthcoming survey material furnished adequate data for the assessing officer to form a belief that income had not undergone assessment. Because of inappropriate examination, the reopening could not be regarded as a mere revision of opinion.
Based on the merits, the Tribunal determined that the assessing officer had chosen an inconsistent method by deeming the purchases and sales as fake while adding the complete purchase value to the company’s income.
HSB Home Solutions Ltd. had revealed Rs 13.34 lakh as profit from the business, which had been inappropriately factored into the addition.
The Bench said that the actual profit part emerging from the transactions needs to be analysed rather than considering the entire purchase value as undisclosed income.
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It denies the claim of the company that the transactions must be accepted as genuine only because the payments had been coursed via banking channels.
HSB Home Solutions Ltd. did not prove the physical movement of goods/ bona fides of the parties from whom the purchases were allegedly made. Thus, it discovered that the transactions could not be accepted as genuine only on the grounds of banking records. It said that-
“It is a trite position that an assessee needs to establish the bona fides of the transactions that have an impact on the assessable income.”
Despite that, the ITAT considered the revenue’s method of taxing the complete purchase to be wrong. It referenced the decision of the Gujarat High Court in Prathana Gems, where an addition of fake purchases had similarly been restricted to a percentage of the disputed transactions.
Taking into account the details of the case, it determined that a gross profit rate of 5% was a reasonable and conservative estimate. Therefore, it instructed the Assessing Officer (AO) to apply this rate to the total business turnover of Rs. 5,94,91,966 and to give credit for the profit already reported by HSB Home Solutions Ltd. The Bench concluded:
“…considering the totality of facts and circumstances of the case, we deem it fit to apply a gross profit rate of 5% on the turnover of business (Rs.5,94,91,966/-) and direct the ld. AO to work out the gross profit through this formula. The Ld. AO would give the benefit of the profit already disclosed by the assessee.”
As a result, the ITAT partially allowed the appeal, affirming the reopening of the assessment while limiting the addition to the estimated profit rather than the entire amount related to the allegedly bogus purchases.
| Case Title | M/s HSB Home Solutions Ltd. vs. ACIT |
| Case No. | ITA No.6520/DEL/2025 |
| Assessee by | Shri Balwant Singh |
| Revenue by | Shri Ashok Gautam |
| Delhi ITAT | Read Order |
