2012 (5) TMI 686 - AT - Income Tax

Summary

Issues Involved:
1. Bogus Purchases from Fictitious Concerns
2. Payment of Commission Outside Books of Accounts
3. Gross Profit (GP) Rate Discrepancy
4. Unaccounted Transactions Reflected in Loose Papers

Summary:

1. Bogus Purchases from Fictitious Concerns:
The assessee firm, a member of the Kulkarni Group, was engaged in trading iron scrap. During a search and seizure operation, it was found that the firm had floated seven fictitious concerns to show purchases from them. The assessee contended that these concerns were created for accounting convenience due to the nature of their suppliers, who were petty hawkers. The Assessing Officer (AO) noted that a substantial part (63.18%) of the assessee's purchases was from these fictitious concerns and rejected the books of accounts, estimating the income. However, the CIT(A) held that the purchases were genuine and necessary for the sales made, thus no undisclosed income could be brought to tax on this account. The Tribunal upheld this view, emphasizing that without purchases, sales could not have been made.

2. Payment of Commission Outside Books of Accounts:
The AO added an amount of Rs. 7,39,273/- as unaccounted expenditure on commission, based on statements from suppliers who mentioned receiving commissions. The CIT(A) disagreed, stating that any presumed commission payment would be neutralized by an equivalent allowable amount u/s 37(1). The Tribunal agreed with the CIT(A), noting that the AO's addition was based on presumption without concrete evidence.

3. Gross Profit (GP) Rate Discrepancy:
The AO compared the GP rate of the assessee with that of M/s. Oberoi Traders and found it lower, leading to an addition for suppressed GP. The CIT(A) found this comparison inappropriate due to differences in business nature and market conditions. The Tribunal supported this view, noting that the assessee's GP rates were reasonable and consistent with market prices, thus no adverse inference could be drawn.

4. Unaccounted Transactions Reflected in Loose Papers:
The AO identified unaccounted transactions from loose papers seized, leading to an addition of Rs. 11,93,729/- as unexplained transactions. The CIT(A) accepted this amount as representing unexplained transactions. The Tribunal concurred, noting that the entries in the seized papers indicated amounts due from the assessee and that the peak amount of Rs. 11,93,729/- was reasonable for addition.

Final Judgment:
The Tribunal determined the undisclosed income of the assessee at Rs. 12.50 lakhs, reducing the CIT(A)'s determination of Rs. 15 lakhs and the AO's estimation of Rs. 1 crore. The appeals by both the assessee and the Revenue were partly allowed.