Only Profit, Not Full Purchases Taxable: ITAT Reduces Alleged Bogus Purchase Addition from 25% to 12.5%

The ITAT Mumbai dismissed the tax authorities’ appeal concerning how much income should be added when purchases are considered doubtful or non-genuine. The tribunal held that in cases related to alleged bogus purchases, only the profit portion in such purchases should be taxed, not the full amount. Consequently, it reduces the 25% addition of total alleged purchases to 12%.

The income tax authorities had filed two appeals before the ITAT Mumbai, pertaining to the Assessment Years 2020-21 and 2021-22, challenging two orders dated November 24, 2025, and November 27, 2025, respectively, passed by the CIT(A), NFAC Delhi, under Section 250 of the Income Tax Act 1961. Both these orders favoured the assessee, Arvind Ratanchand Jain.

It was noticed by the tax authorities that the assessee had made purchases amounting to Rs 54.27 crore from two parties, having PAN: CKGPS6163N and EXYPS3536J, respectively, whose GST registrations were cancelled. Along with this, there were several other issues, including a lack of proper transport details, a mismatch in bank transactions, and signs of circular trading. In conclusion, the tax authorities considered these purchases as non-genuine and made an addition of 25% of the total purchases, i.e., Rs 13.56 crore, to the assessee’s income.

The aggrieved assessee filed an appeal before the CIT(A), which, when the case was analysed, partly disagreed with the tax authorities’ decision. It noted that despite the supplier looking suspicious, the tax authorities had accepted the declared sales of the assessee. Therefore, the entire purchase amount cannot be treated as fake.

The CIT(A) relied on an earlier ruling of the Honourable Gujarat High Court, in the case of Simit P. Sheth (supra), which held that in the cases concerning alleged bogus purchases, only the profit portion of such purchases should be taxed, not the full amount. As a result of the aforementioned findings, the CIT(A) reduced the impugned addition from 25% to 12.5% of the purchases. i.e., Rs 6.78 crore.

The income tax authorities thereafter filed two appeals challenging the decision of the CIT(A). When the tribunal analysed the case, it endorsed the CIT(A)’s ruling and held that when sales are accepted, purchases cannot be completely denied. Only a reasonable profit element should be added. Since 12.5% is a commonly accepted rate in such cases and, additionally, the tax authorities failed to provide concrete reasons to increase it, the Tribunal upheld the CIT(A)’s decision. As a result, the tax authorities’ appeal was dismissed, and the reduced addition was confirmed.