Accepted sales and unrejected books defeat additions for bogus purchases and explained bank deposits

Where sales are accepted, the books of account are not rejected, and no adverse material emerges from remand proceedings, additions for alleged bogus purchases cannot rest on suspicion or an inspector's report alone. The article also notes that cash deposits recorded in regular books and supported by documentary evidence are not unexplained absent any defect in the accounts or contrary material. On that reasoning, both additions were deleted and the appellate deletion was upheld.

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Issues: (i) Whether the addition made on account of alleged bogus purchases was sustainable when the sales were accepted, the books of account were not rejected, and the remand report disclosed no adverse material. (ii) Whether the addition made towards cash deposits in the bank account was sustainable when the deposits were supported by the books of account and documentary evidence.

Issue (i): Whether the addition made on account of alleged bogus purchases was sustainable when the sales were accepted, the books of account were not rejected, and the remand report disclosed no adverse material.

Analysis: The disputed purchases were not supported by any independent material showing that no goods were purchased. The sales corresponding to the purchases were accepted, the books of account were examined but not rejected, and section 145 of the Income-tax Act, 1961 was not invoked. The remand proceedings also did not yield any adverse comment against the assessee's evidence. In these circumstances, the addition based only on suspicion and an inspector's report could not be sustained, particularly when it would produce an abnormal gross profit rate not shown to be consistent with the assessee's business.

Conclusion: The addition for alleged bogus purchases was rightly deleted and the finding is in favour of the assessee.

Issue (ii): Whether the addition made towards cash deposits in the bank account was sustainable when the deposits were supported by the books of account and documentary evidence.

Analysis: The assessee maintained regular books of account, the transactions were recorded therein, and the assessing authority did not point out any defect in those books. The deposits were shown to have been routed through the books and were supported by documents, which were available during assessment as well as in the appellate stage. No material was brought to discredit the explanation or to establish that the deposits were unexplained.

Conclusion: The addition towards cash deposits was not sustainable and the finding is in favour of the assessee.

Final Conclusion: The additions made in assessment could not be sustained on the material available on record, and the appellate deletion of both additions was upheld.

Ratio Decidendi: Where sales are accepted, the books of account are not rejected, and the assessee's explanation is supported by records without adverse remand findings, additions for alleged bogus purchases or explained bank deposits cannot be sustained on conjecture alone.

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