Only nominal amount of profit can be earned in circular trading: Gujarat HC
Bogus Purchase v. Circular trading
The assessment was Reopened on account of unexplained purchases from A. The AO noticed that an inquiry by investigation wing was carried out in various parties, A, B, C, D(Assessee) reflecting that X amount is received in the bank account by B from A and on the same date exact same amount was transferred to the bank account of C. C has transferred to D(assessee). A pattern of chain of transactions were noticed between A, B, C and D. Assessee explained the nature of transactions with various documentation and stated nominal profit has been earned. The AO rejected the contention of the assessee and held that assessee is engaged in circular transaction and estimated profit @ 12.5% of total purchase.
Findings by court
The revenue argued that since the addition is restricted to 12.50% of bogus purchases, therefore no further relief shall be given to assessee. The court held that the assessee can claim before the Ld. CIT(A) or before the Tribunal that he wrongly accepted the addition at the rate of 12.5% before the AO, and can request that the addition be deleted or reduced. There is no estoppel in Income Tax Proceedings, In fact there is no concept of estoppel against an assessee in tax proceedings, the assessee can later retract and contest the same. Assessee can provide case law, which is favouring to him, or evidence that lower margins or lower additions are justified or no additions are warranted, the Tribunal can accept the same. AO has himself accepted that assessee is in Circular Transactions.
The court further highlighted the difference between circular trading and bogus purchases. Assessee has submitted exhaustive details w.r.t. purchases, therefore it is not the case of bogus purchases.
The assessee declared net profit @ 0.39%, the appeal is allowed by following the Hon’ble Guj. HC decision in the case of PCIT v. KFC Exports (P.) Ltd. [2025] 172 taxmann.com 157 (Gujarat) stating that only nominal amount of profit can be earned in circular trading.
The copy of the order is as under:
