ITAT Ahmedabad: AO Cannot Treat Recorded Sales as Bogus Without Verification; Orders 9% GP Recalculation

April 8, 2026 : The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench has held that additions under Section 68 of the Income Tax Act, 1961 cannot be sustained merely on the basis of unverified information, particularly where sales are duly recorded in the books of account and not rejected by the Assessing Officer (AO).

The ruling came in Shri Bhumika Strips Private Limited v. ITO (ITA Nos. 1362, 1363 & 1364/Ahd/2025), where a Bench comprising Vice President Dr. B.R.R. Kumar and Judicial Member T.R. Senthil Kumar adjudicated appeals arising from reassessment proceedings for Assessment Years 2014–15, 2015–16 and 2016–17.

As per the order, the assessee, a stainless steel manufacturer, had declared sales of ₹2.12 crore for AY 2014–15. Based on inputs from the Investigation Wing, the AO alleged that the assessee had availed accommodation entries from certain entities and treated ₹1.60 crore as unexplained cash credits under Section 68.

A key factor relied upon by the AO was the cancellation of VAT registration of one of the parties, M/s Kabra and Company. However, the Tribunal noted that no effort was made to verify the date of such cancellation. It further recorded that the said entity continued business under GST and had filed returns as recently as April 2025, undermining the AO’s conclusions.

Importantly, the Tribunal observed that the AO had neither rejected the books of account nor disputed the entirety of the sales. In such circumstances, treating the entire transaction value as unexplained income was held to be contrary to settled legal principles.

Referring to Gujarat High Court precedents, the Bench reiterated that where sales are recorded and accepted, only the profit element embedded in such transactions can be brought to tax, not the gross sale amount.

On examining financial data, the Tribunal noted (as reflected on pages 5–6 of the order) that the assessee’s net profit ranged between 0.6% and 1.26%, while the gross profit averaged around 9%. Based on this, it held that applying a gross profit rate of 9% on the disputed transactions would meet the ends of justice.

Accordingly, the Tribunal directed the Jurisdictional Assessing Officer to recompute income by applying a 9% gross profit rate across all three assessment years, after granting an opportunity of hearing to the assessee. The appeals were allowed for statistical purposes.