2004 (6) TMI 236 - AT - Income Tax

Tax Appeal Partially Upheld: ITAT Modifies Additions for Unaccounted Cash Purchases, Recognizes Need for Fair Assessment.

The ITAT partially allowed the Revenue's appeal, modifying the addition of Rs. 27,39,410 for cash purchases from unaccounted sources in the iron and steel ... Addition of purchases in cash from unaccounted sources - gross profit - examination of genuineness of transactions - HELD THAT:- We find undisputed sale of Rs. 28,17,207. The assessee declared GP of Rs. 94,740. The calculation of GP comes to 3.36 per cent. The undisputed fact is that the AO has accepted that the assessee maintained quantity details in respect of material purchased and sold. Inventory of closing stock filed is also not in dispute. If the addition made by the AO is on account of purchases of Rs. 27,39,407, the total GP comes to Rs. 28,34,147 (27,39,407 + 94,740). The GP calculation on this estimation of profit comes to 100.6 per cent. We find that such GP is not possible in such a trade of the assessee. On the basis of facts, at the most it, can be presumed that the assessee did not make purchases from parties but made from other unregistered dealer and got benefit of margin of purchases from unregistered dealer. We find that to that extent an estimation of profit can be made which will be fair and reasonable under the facts and circumstances of the case. Therefore, for the above purposes we estimate Rs. 50,000 and accordingly the order of the CIT(A) is modified and the addition to the extent of Rs. 50,000 is sustained and balance addition of Rs. 26,89,407 is deleted out of the total addition made of Rs. 27,39,407. In the result, the appeal of the Revenue is partly allowed. Issues involved: Addition of purchases in cash from unaccounted sources, interpretation of provisions of s. 69C, calculation of gross profit, examination of genuineness of transactions.Addition of purchases in cash from unaccounted sources: The appeal concerned the addition of Rs. 27,39,410 for purchases in cash from unaccounted sources in the trading business of iron and steel. The AO observed discrepancies in parties, non-existence of some, and encashment of cheques by partners or relatives. The AO concluded unaccounted funds were used for purchases, treating it as income from other sources. However, the CIT(A) deleted the addition, emphasizing the need for deduction of such expenditure under s. 69C until the law is amended.Interpretation of provisions of s. 69C: The CIT(A) held that if the AO adds unexplained purchases as income under s. 69C, deduction for incurring such expenses must be allowed. The CIT(A) emphasized the importance of correctly interpreting the Act until any amendments are made, directing the AO to provide the deduction, resulting in the deletion of the addition of Rs. 27,39,410.Calculation of gross profit: The CIT(A) found that the assessee had fulfilled obligations to prove the genuineness of purchases, receipt of goods, and sales. The AO's estimation of profit led to a GP calculation of 100.6%, deemed unrealistic for the trade. It was noted that purchases from specific parties were not proven, suggesting purchases from unregistered dealers. An estimation of Rs. 50,000 was deemed fair and reasonable, leading to the sustenance of an addition of Rs. 50,000 and deletion of the remaining Rs. 26,89,407 from the total addition.Examination of genuineness of transactions: The parties from whom purchases were made were not found in existence, raising doubts on the genuineness of transactions. The CIT(A) emphasized the need for the AO to provide deductions for expenses incurred on purchases, ensuring a fair assessment of the situation.In conclusion, the appeal by the Revenue was partly allowed, with the addition of purchases in cash from unaccounted sources being modified and reduced based on the estimation of fair profit under the circumstances of the case.