The Income Tax Appellate Tribunal, Delhi, has clarified that the return of goods in a jewellery business negates the classification of a purchase as a fictitious accommodation entry under Section 69C of the Income-tax Act, provided verifiable documentation supports the return. The ruling reinforces that tax authorities cannot treat entire purchase amounts as bogus when part of the stock is demonstrably returned and the remainder is linked to verified sales.
Background & Facts
The Dispute
The appellant, Santosh Gulati, operates a jewellery business under the name Shree Jewellers. During the Assessment Year 2017-18, the Assessing Officer (AO) initiated proceedings under Section 147 of the Income-tax Act, 1961, based on intelligence from the Directorate of Income Tax (Investigation) that the assessee had received accommodation entries through fictitious purchases from M/s J.P. Jewellers, a concern linked to Mohit Garg, a known entry operator. The AO alleged that purchases amounting to Rs.86,18,315/- were fabricated to inflate expenses and reduce taxable income.
Key Facts
- The assessee filed original return of income on 07.11.2017 declaring income of Rs.14,72,080/-
- On 03.11.2016, the assessee returned jewellery worth Rs.60,18,405/- to J.P. Jewellers citing design and quality issues
- The return was recorded in the stock ledger and accounted for in the books
- The remaining jewellery worth Rs.26,00,000/- was retained, recorded in stock, and subsequently sold
- Payment for the retained stock (Rs.26,00,000/-) was made via account-payee banking channels
- VAT credit was claimed and allowed by VAT authorities for the transactions
- The assessee maintained a stock register with inward and outward entries matching the purchases and sales
- The AO did not dispute the sales figures or the source of sale proceeds
- The AO rejected the return of goods claim, calling the bills "cooked" and the return "delayed"
Procedural History
- 07.11.2017: Original return filed for AY 2017-18
- 2020-21: Investigation initiated by DDIT (Inv.), Unit-7(4), Delhi
- 10.05.2021: Revised return filed by assessee, declaring same income as original return
- 2021: Notices under Sections 143(2) and 142(1) issued; documents submitted
- 2022: AO passed order under Section 147, making addition of Rs.86,18,315/- under Section 69C
- 10.10.2025: Ld. CIT(A) deleted Rs.60,18,405/- as returned goods and added only 15% gross profit (Rs.3,90,000/-) on Rs.26,00,000/- retained stock
- 26.05.2026: ITAT Delhi dismissed Revenue’s appeal, upholding CIT(A)’s order
Relief Sought
The Revenue sought to restore the original addition of Rs.86,18,315/- under Section 69C, arguing that the entire transaction was a fictitious accommodation entry. The assessee sought confirmation of the CIT(A)’s order, which allowed relief on the returned portion and limited the addition to 15% gross profit on the retained stock.
The Legal Issue
The central question was whether the return of goods amounting to Rs.60,18,405/-, supported by contemporaneous stock records and banking evidence, can negate the classification of the corresponding purchase as a fictitious accommodation entry under Section 69C, and whether the addition of gross profit on the retained stock is the appropriate remedy when sales are accepted but supplier genuineness is in doubt.
Arguments Presented
For the Appellant (Revenue)
The Revenue contended that the entire purchase of Rs.86,18,315/- from J.P. Jewellers was part of a shell network used for accommodation entries, as established in the investigation against Mohit Garg. It argued that the return of goods after two months was implausible and a post-hoc fabrication. The Revenue relied on the AO’s finding that the bills were "cooked" and that no independent verification of the supplier was possible. It submitted that the CIT(A) erred in accepting the return claim and in limiting the addition to 15% gross profit, which was arbitrary and not supported by law.
For the Respondent (Assessee)
The assessee submitted that the return of goods was documented in the stock register, supported by accounting entries, and consistent with trade practices in the jewellery industry, where designs are previewed and returned. Payment for the retained stock was made through banking channels, and VAT credit was availed and allowed. The assessee relied on CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. to argue that rejection of supplier verification does not automatically render purchases bogus when the assessee has produced invoices, bank records, and stock ledgers. The assessee further accepted that the gross profit margin on the retained stock should be adjusted upward to 15% as a reasonable compromise.
The Court's Analysis
The Tribunal examined the nature of the transaction and the evidentiary standard required under Section 69C, which permits addition where income is inferred from unexplained investments or expenditures. The Tribunal noted that the AO had not disputed the sales or the source of sale proceeds, which were recorded and taxed. The Tribunal emphasized that the doctrine of consistency applies: if the income from sale of goods is accepted, the corresponding purchase cannot be treated as fictitious without logical inconsistency.
"If the Assessing Officer's contention - that the purchases are bogus - is to be accepted, then a logical question arises: how can stock alleged to be never purchased be sold and generate taxable income?"
The Tribunal upheld the CIT(A)’s appreciation of evidence: the return of Rs.60,18,405/- was documented contemporaneously in the stock register and supported by accounting entries. The delay of two months was deemed reasonable in the context of jewellery trade, where design approval cycles are common. The Tribunal further held that the mere fact that the supplier was under investigation did not, by itself, invalidate the transaction where the assessee had discharged its burden of proof.
Regarding the retained stock of Rs.26,00,000/-, the Tribunal agreed with the CIT(A) that while the supplier’s genuineness could not be fully established, the assessee had demonstrated the receipt of goods, payment via banking channels, and subsequent sale. In such circumstances, the appropriate remedy under Section 69C is not to add the entire purchase value, but to disallow the cost and add the gross profit margin, as the income from sale is already accounted for. The Tribunal found 15% gross profit to be reasonable, given the assessee’s own submission of a 11% historical margin and the nature of the jewellery business.
The Tribunal also noted that the AO had not conducted any independent inquiry or granted opportunity for cross-examination, which further weakened the Revenue’s case.
The Verdict
The Revenue’s appeal was dismissed. The ITAT Delhi upheld the CIT(A)’s order dated 10.10.2025. The addition of Rs.86,18,315/- under Section 69C was reduced to Rs.3,90,000/-, representing 15% gross profit on the retained stock of Rs.26,00,000/-. The return of goods amounting to Rs.60,18,405/- was fully accepted, and no addition was made in respect thereof. The order was confirmed in its entirety.
What This Means For Similar Cases
Return of Goods Can Neutralize Fictitious Purchase Allegations
- Practitioners must document returns with contemporaneous stock ledger entries, accounting entries, and communication records
- A delay in return does not automatically invalidate the claim if trade practices justify it
- The burden shifts to the Revenue to prove fraud or fabrication, not merely non-verification of supplier
Gross Profit Addition Is the Correct Remedy When Sales Are Accepted
- Where sales are taxed but supplier genuineness is doubtful, the entire purchase amount cannot be added under Section 69C
- The appropriate adjustment is to disallow the cost of goods sold and add the gross profit margin
- Historical GP ratios of the assessee can be used to determine a reasonable margin
Supplier’s Investigation Alone Is Not Sufficient for Disallowance
- The mere fact that a supplier is under investigation or is a "shell" entity does not render all transactions with it fictitious
- The assessee’s own documentation - bank statements, stock registers, invoices, VAT records - must be evaluated independently
- Nikunj Eximp remains binding: acceptance of sales precludes rejection of corresponding purchases without logical contradiction
