Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has upheld that where sale is genuine, purchase cannot be bogus else if purchases disallowed what will happen to the corresponding sales being shown?

Case Details:
ITA No. 1442/Kol/2012 : Asstt. Year : 2007-2008
ITO (Appellant) vs Puspal Kumar Das (Respondent)
Date of Order: 10-12-2015

Brief Facts of the Case:
The assessee was a supplier of stationery items to M/s. CESC Ltd. which he purchased from various parties in the market. During the course of assessment proceedings the Assessng Officer (AO) issued notices under section 133(6) to various parties in order to verify their transactions of sales by them to the assessee which will be corresponding Purchases by the Assessee. The AO noticed certain discrepancies which could not be satisfactorily explained by the Assessee. On Inspector’s visit at the addresses of nine parties, the parties could not be traced, two parties had shown lesser amount of purchases and notice u/s 133(6) could not be served on two parties at the addresses given by the assessee. After considering the explanation provided by the assessee, the A.O. held that these transactions totaling to Rs.10,14,942/- were bogus.

The assessee preferred an appeal before CIT(A) and submitted that the above addition had been made as bogus purchases by the AO without considering the fact that the goods were either sold to CESC Ltd. which is the only party to whom the assessee had supplied goods and that these goods were appearing in the closing stock as per Stock Register and without these purchases it would not have been possible for the assessee to sell these goods. It was further submitted that that addition was made without giving adequate opportunity to the assessee.

The CIT(A) posed the question as to how if the purchases are being disallowed to the extent of Rs.10,14,942/- what will happen to the corresponding sales being shown. The CIT(A) therefore held that the AO was not justified in considering the entire purchases as bogus from these nine parties. The CIT(A) also observed that it was the other parties who were suppressing their sales. However, since the assessee is disclosing more purchases, there is no justification for the above addition. The CIT(A) held that the AO at best could have rejected the books and estimated income of the assessee but he has not done so. Adding the entire sales as income could give absurd results. The CIT(A) accordingly deleted the addition so made.

Important Excerpts from ITAT Judgment
We have given a very careful consideration to the rival submissions. It is clear from the order of the CIT(A) and the evidence on record that there was no valid basis to treat the entire purchases as bogus as was done by the AO. If purchases are being disallowed to the extent of Rs.10,14,942/- what will happen to the corresponding sales being shown. The CIT(A) therefore was right in concluding that the A.O. was not justified in considering the entire purchases as bogus from these nine parties. The fact that the other parties avoided notices u/s 133(6) of the Act could be because they were not disclosing sales made to the Assessee in their books of accounts. The AO at best could have rejected the books and estimated income of the assessee but he has not done so. Treating the entire purchases as bogus and making addition would result in absurd results in that the entire sale proceeds would get taxed as income. In the given facts and circumstances of the case, the addition made was rightly deleted by the CIT(A).

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