ITAT Mumbai Rules Full Addition for Bogus Purchases, Rejects 8% Estimation
Tribunal Strengthens Revenue’s Hand Against Accommodation Entries
Landmark Ruling Clarifies Section 69C Treatment of Bogus Transactions
By Our Legal Reporter
New Delhi: December 12, 2025:
In a significant judgment, the Income Tax Appellate Tribunal (ITAT) Mumbai has held that once purchases are found to be bogus, the entire amount must be added back to taxable income, rejecting the practice of restricting additions to a mere percentage of the purchase value. This ruling, delivered in the case of ACIT vs. Romil Diam, is expected to have far-reaching implications for businesses and tax authorities dealing with fake invoices and accommodation entries.
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Background of the Case
The Assessing Officer (AO) had disallowed purchases worth ₹2.14 crore made by the assessee from entities identified as part of the Rajendra Jain Group, known for providing accommodation entries. The AO treated the entire purchases as bogus.
However, the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the addition to 8% of the purchase value, arguing that only the profit element should be taxed. The Revenue challenged this before the ITAT, contending that once purchases are proven bogus, partial additions are unsustainable.
ITAT’s Ruling
The ITAT sided with the Revenue, ruling that:
- Entire bogus purchase amount must be added back under Section 69C (unexplained expenditure).
- Estimating profit margins (like 8%) is inappropriate when the genuineness of purchases is disproven.
- The burden lies on the assessee to prove the authenticity of purchases with invoices, delivery evidence, and supplier details.
This ruling aligns with the Bombay High Court’s decision in PCIT vs. Kanak Impex, which held that once purchases are bogus, the entire claim must be disallowed.
Legal Context: Section 69C
Section 69C of the Income-tax Act deals with unexplained expenditure. If an assessee cannot explain the source or genuineness of expenditure, the entire amount is taxable. Courts have clarified that bogus purchases fall squarely under this provision.
The ITAT ruling reinforces that partial disallowance or profit estimation is not permissible when purchases are proven fake.
Implications for Businesses
This judgment has major implications:
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- Stricter scrutiny: Businesses must maintain proper documentation for all purchases.
- No relief through profit estimation: Earlier, many assessees argued for additions restricted to profit margins, but this ruling close that door.
- Deterrent effect: The ruling discourages use of accommodation entries and fake invoices.
- Higher tax liability: Companies caught with bogus purchases face full disallowance, significantly increasing taxable income.
Revenue’s Perspective
Tax authorities have long argued that restricting additions to a percentage of bogus purchases undermines enforcement. The ITAT ruling strengthens their hand, ensuring that fraudulent transactions are fully taxed.
Expert Views
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Tax professionals note that while the ruling is harsh, it is consistent with judicial precedents. The Bombay High Court and other tribunals have repeatedly emphasised that bogus transactions cannot be legitimised by estimating profit margins.
Conclusion
The ITAT Mumbai’s ruling in ACIT vs. Romil Diam marks a turning point in the treatment of bogus purchases. By rejecting the 8% estimation method, the Tribunal has reinforced the principle that entire bogus expenditure must be disallowed.
This decision strengthens the Revenue’s fight against fake invoices and accommodation entries, while sending a clear message to businesses: maintain transparency and documentation or face full tax consequences.
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