2025 (10) TMI 213 - AT - Income Tax

GST returns alone insufficient for addition under Section 69C; gross profit fixed at 5% on admitted purchases

ITAT (DEL) held that higher sales shown in a third party's GST return alone did not justify addition under s.69C. On verifying ledgers and books, ... Estimation of income - addition on account of unexplained expenditure u/s 69C - GST return of third-party showing higher sales by the supplier - CIT(A) has taken liberal view and restricted the addition by calculating ad-hoc G.P. rate at 12.5% on the purchase - HELD THAT:- verified the ledger account of M/s Jai Bhagwani Sales and also books of account of the Assessee produced along with the other documents in the paper book and found that the Assessee made purchase of Rs. 30,42,821/- and not of Rs. 76,10,580/-. We are of the considered opinion that merely because the third party sales declared wrong sales before the GST, that cannot be a sole basis to make addition in the hands of the Assessee. Considering the above facts and circumstances and also looking into the business of the Assessee, we modify the order of the Ld. CIT(A) and direct the A.O. to estimate the GP rate at 5% on the admitted total purchase. Appeal of the Assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition under the provision relating to unexplained cash/credits/expenditure (section 69C) can be sustained against the taxpayer solely on the basis of third-party GST return information showing higher sales by the supplier. 2. Whether the Assessing Officer and the Commissioner (Appeals) correctly quantified the addition by treating the entire alleged purchases as bogus and, if not, proper method for estimating gross profit (GP) and computing the addition where part of purchases is admitted by the taxpayer. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Reliance on third-party GST information to hold purchases bogus and sustain addition u/s 69C Legal framework: The addition was made under the unexplained expenditure/credit provision (section 69C) which requires that the expenditure/credit is unexplained or not satisfactorily accounted for by the assessee. The Assessing Officer may rely on material to conclude purchases are bogus, but the assessment must be founded on evidence related to the assessee. Precedent treatment: No prior decisions were cited in the judgment; the Court did not follow or overrule any specific precedent. Interpretation and reasoning: The Tribunal examined the assessee's books, purchase bills and ledger account for the disputed supplier and found the assessee's books showed admitted purchases of Rs. 30,42,821 rather than the Rs. 76,10,580 alleged on the basis of the supplier's GST returns. The Tribunal reasoned that incorrect or inflated sales declared by a third party in GST filings cannot be the sole basis to treat the assessee's purchases as bogus unless there is independent material impeaching the genuineness of the assessee's records. Ratio vs. Obiter: Ratio - An addition under section 69C cannot be sustained solely on third-party GST disclosures where the assessee has produced books of account, purchase bills and bank statements corroborating its claim; such third-party misreporting does not automatically render the assessee's purchases bogus. Obiter - The Tribunal's observations that the Assessing Officer should verify input tax credit and related GST aspects before making an addition are ancillary guidance. Conclusion: The Assessing Officer's addition based exclusively on the supplier's GST returns was not sustainable to the extent it exceeded the admitted purchases shown in the assessee's books. Issue 2 - Quantification of addition and estimation of GP rate on admitted purchases Legal framework: Where part of the expenditure or purchases is admitted or satisfactorily explained, the authority estimating the taxable income must adopt a reasonable and justifiable basis to compute the addition - typically by applying a GP rate to the admitted purchases/sales to quantify unaccounted profit or unexplained expenditure. Precedent treatment: No authority was invoked; the Tribunal assessed reasonableness based on documentary material and the business profile. Interpretation and reasoning: The Assessing Officer treated the entire alleged purchases (Rs. 76,10,580) as bogus and made a full addition. The Commissioner (Appeals) accepted the existence of documents but nonetheless applied an ad-hoc GP rate of 12.5% on the disputed purchase, restricting the addition to Rs. 9,51,322. The Tribunal examined the ledger and books, concluded that admitted purchases were Rs. 30,42,821, and held that neither the AO's full addition nor the CIT(A)'s 12.5% imposition on the higher alleged figure was correct. Considering the nature of the business and the documentary evidence, the Tribunal modified the computation and directed the Assessing Officer to estimate GP at 5% on the admitted purchases of Rs. 30,42,821. Ratio vs. Obiter: Ratio - When purchases are admitted in the assessee's books, the proper approach is to estimate GP on the admitted purchase amount using a reasonable GP percentage derived from facts and business profile; arbitrary extension of additions to amounts not reflected in the assessee's records is impermissible. Obiter - The characterization of the CIT(A)'s 12.5% as a 'liberal view' is evaluative commentary supporting the Tribunal's corrective direction. Conclusion: The Tribunal reduced the taxable addition by (a) rejecting the AO's reliance on inflated third-party GST figures to the extent they contradicted the assessee's records, and (b) directing the AO to apply a 5% GP rate on the admitted purchases of Rs. 30,42,821 to quantify the addition. Cross-reference The conclusions on Issue 1 directly inform Issue 2: because the Tribunal found the supplier's GST declaration could not supplant or nullify the assessee's corroborated books, the base for quantification was limited to the admitted purchase figure, on which a reasonable GP rate (5%) was applied.