Undisclosed investment element in undisclosed purchases upheld. Peak credit rejected

Element of undisclosed investment in undisclosed purchases upheld. Peak credit of purchases rejected. AO to work out number of fund rotations required for achieving undisclosed purchases -ITAT 

ABCAUS Case Law Citation:
ABCAUS 1107 (2017) (01) ITAT

Assessment Year : 2010-11

The Issue for determination:
The issue before the ITAT was if the addition made towards undisclosed investment embedded in the undisclosed purchase on the basis of peak amount of purchase was correct or not?

Brief Facts of the Case:
The assessee in the present case was an individual and had declared income from house property and other source. A search was conducted at different residential and business premises of one business group. The assessee was one of the searched party in the search proceedings. During the course of search and seizure operation, certain documents were seized showing the vouchers for purchase. The assessee claimed the ownership of those papers and calculated undisclosed purchases and offered such purchases for taxes @ 5%.

However, the Assessing Officer (AO) observed that there would certain be an element of capital employed in the aforesaid business of assessee which also needed taxed. Accordingly the AO treated the peak amount of purchase as unexplained investment which was added to the total income of assessee.

Aggrieved, assessee preferred an appeal before CIT(A) and contended that he did not make all the purchase against spot payments and that the purchases were being made on credit and the payments were made after the sale of goods. It was also contended that his business was order based and he used to purchase goods only after receipt of order for the same.

However CIT(A) noticed that the assessee had made the purchases on regular basis which could not have been the case if business of the appellant was order based.  Therefore CIT(A) was of the view that it was unlikely that the assessee would have bought all the goods on credit. Also, the CIT(A) observed that the appellant was not been able to show that he had purchased all the goods on credit and the payments for those were made only on realization of the sale of those goods. Hence, he confirmed the addition made by the AO.

Contentions of the Assessee:
The assessee contended that he vide disclosure petition made u/s 132(4) already made disclosure of purchases and the amount of profit @ 5% on the undisclosed business of assessee had already been offered to tax. As such, there was no requirement to add any amount in the name of undisclosed investment.

Observations made by the Tribunal:
The ITAT observed that there would certainly be some element of undisclosed investment in the undisclosed business of the assessee.

However, according to the Tribunal, the determination of such undisclosed investment was a crucial issue.

It was observed that the lower authorities had taken peak amount of purchase shown by the assessee in the undisclosed business as undisclosed investment on the presumption that the assessee had not brought anything on record the amount invested in the undisclosed business.

However, the Tribunal also observed that the lower authorities had also not brought any concrete material for presuming the peak amount of purchases invested in the undisclosed business of the assessee.

The ITAT opined that the lower authorities before treating the peak amount of purchase as undisclosed investment should have confirmed from the parties both from the buyers and sellers the nature of transaction whether the goods were purchased on credit and the goods were sold on credit. The lower authorities should have enquired the payment pattern both from the supplier and the debtors of the assessee.

The Tribunal did not uphold the basis adopted by the lower authorities for working out the undisclosed investment. However, at the same time the Tribunal was of the view that it could not ignore the fact that there would certainly be some element of investment in the undisclosed business of the assessee.

The Tribunal was of the view that in order to determine such undisclosed investment the lower authorities should take the guidance from the historical financial data of the assessee by taking the amount of investment made by the assessee in the business in relation to purchase and sale of the business.

The ITAT directed that AO to work out the number of rotation of the fund required for achieving the amount of undisclosed purchases.

Held:
ITAT restored the issue to the file of AO for fresh adjudication with the direction to work out the undisclosed investment on the basis of financial data of the assessee.

Element of undisclosed investment in undisclosed purchases

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