Tribunal directs reassessment after rejecting accounts, sets aside income addition under Section 68.

The Tribunal partly allowed the appeal filed by the assessee, directing the Assessing Officer to re-estimate the income by applying an appropriate GP/NP rate after rejecting the books of accounts. The addition under Section 68 of the Income Tax Act was set aside, and the Tribunal referred to a High Court decision supporting the view that only the profit element in unverifiable purchases should be added. The ground related to the addition on account of interest income was dismissed as not pressed.

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Issues Involved:
1. Addition of Rs. 17,31,09,008/- under Section 68 of the Income Tax Act, 1961.
2. Addition of Rs. 42,904/- on account of interest income.

Issue-wise Detailed Analysis:

1. Addition of Rs. 17,31,09,008/- under Section 68 of the Income Tax Act, 1961:

The primary issue revolves around the addition of Rs. 17,31,09,008/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, treating the sundry creditors as unexplained credits. The AO noted a significant increase in sundry creditors and issued notices under Section 133(6) to verify the genuineness and creditworthiness of the creditors. These notices returned unserved, leading the AO to doubt the existence of the creditors and the genuineness of the transactions. The assessee argued that the addition under Section 68 was inappropriate as it pertains to trade credits and not cash credits. The assessee provided confirmations, PAN details, and other documents to establish the identity and creditworthiness of the creditors.

The AO, however, remained unconvinced, noting that the liabilities were settled through the sale of the same goods to the creditors, which raised doubts about the transactions. The AO treated the sundry creditors as bogus liabilities and added the amount to the assessee's income as unexplained credits. The CIT(A) upheld the AO's decision.

The Tribunal observed that the assessee's practice of purchasing on credit and settling accounts through sales to the same creditors was a regular business practice. The Tribunal noted that the AO did not reject the assessee's books of accounts or the sales figures in the subsequent year, which included the settlement of these creditors. The Tribunal held that instead of making an addition under Section 68, the AO should have estimated the income after rejecting the books of accounts and applying an appropriate GP/NP rate. The Tribunal referred to the decision of the Hon'ble Bombay High Court in the case of PCIT Vs. Mohmmad Haji Adam & Co., which supported the view that only the profit element in respect of unverifiable purchases should be added.

Accordingly, the Tribunal set aside the matter to the AO to estimate the income of the assessee on the basis of the turnover shown by applying a proper and reasonable GP/NP rate. Ground No. 1 was partly allowed for statistical purposes.

2. Addition of Rs. 42,904/- on account of interest income:

The second issue pertains to the addition of Rs. 42,904/- on account of interest income. During the hearing, the learned counsel for the assessee stated that this ground was not pressed. The Department raised no objection to this. Consequently, Ground No. 2 was dismissed as not pressed.

Conclusion:

The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal directed the AO to re-estimate the income by applying an appropriate GP/NP rate after rejecting the books of accounts, while the ground related to the addition on account of interest income was dismissed as not pressed. The order was pronounced in the open court on 30/06/2022.

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