Entire amount of undisclosed purchases can not be added as profit. In absence of information on sales, only profit element can be taxed – ITAT

Entire amount of undisclosed purchases can not be added as profit. In absence of information on sales of such purchases only profit element can be taxed – ITAT

ABCAUS Case Law Citation:
ABCAUS 1181 (2017) (03) ITAT

Assessment Year : 2007-08
Date/Month of Pronouncement: March, 2017

Brief Facts of the Case:
The assessee hshown purchases for Rs. 1,52,55,960/- from one party (hereinafter ‘sundry creditor’). However, on confirmation u/s 133(6) of the Income Tax Act,1961 (‘the Act’)  it was transpired that the sundry creditor had made total sales of Rs. 1,67,42,048/-. Thus a difference of Rs.14,86,088/- was observed by the Assessing Officer (‘AO’)  and accordingly he called upon the assessee to explain the aforesaid difference in the amount of purchase shown by the assessee. However, the assessee denied the claim of such purchases from the party. The assessee further submitted that no payment was made to the party against such purchases. However, the AO during the assessment proceedings verified the necessary details provided by MUS, such as sales bills, vouchers, stock registers and output VAT and accordingly opined that the sale made by the sundry creditor is genuine. Finally, the AO treated the undisclosed purchases of Rs. 14,86,088/- as undisclosed income of the assessee along with the profit element which was worked out to Rs. 21,548/- only.

Aggrieved, assessee preferred an appeal before the CIT(A). The assessee submitted that two sales bills shown in the books of accounts of the sundry creditors in the name of the assessee were not purchased by the assessee. The supporting documents submitted by sundry creditor such as sales bills and copy of challans were false documents. The assessee, however, requested to the CIT(A) to set aside the matter to the ITO for further verification. However, the CIT(A) disregarded the contention of the assessee and confirmed the order of the AO.

Contentions of the Appellant assessee:
Before the Tribunal, the assessee re-iterated the submission as made before CIT(A). It was also submitted that he had been purchasing the goods from sundry creditor throughout the year. All the purchases were made on credit basis and the payment was made subsequently depending upon the availability of the funds.. Alternatively, it was submitted that since the goods were purchased on credit basis which reflects that no undisclosed funds were invested by the assessee in the impugned purchases. Therefore, at the most, only the profit element of Rs.21,548/- can be added to the total income of the assessee.

Observations made by the Tribunal:
The Tribunal observed that issue was related to the addition made on account of undisclosed purchases and the profit attributable to such purchases.

The ITAT observed that the goods were purchased on credit basis. As there was outstanding credit balance in the books of the assessee, in the name of creditor.

The ITAT observed that the lower authorities had not brought anything on record about the sales made by the assessee of such undisclosed purchases. It opined that it is presumed that the sales of the goods had been duly recorded in the books of the assessee, then undisclosed purchases will automatically become the income of the assessee in its entirety.  The lower authorities presumed that the undisclosed purchases had been sold without recording the same in the books of accounts. In such a situation, the entire amount of undisclosed purchases could not be added to the total income of the assessee.

Moreover, the Tribunal observed that the lower authorities had ascertained only the undisclosed purchases and that too on third party confirmation. They had not brought anything on record about the sales of undisclosed purchases.

The ITAT opined that in the absence of any information about the sales of undisclosed purchases, the entire amount of purchase could not be treated as undisclosed profit of the assessee but the only profit element. Therefore, the question of making addition of investment in such undisclosed purchases did not arise.

Held:
ITAT restricted the disallowance to Rs. 21,548/- being the profit element of the undisclosed purchases.