2010 (2) TMI 1211 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - We find from the trading and profit and loss account of the assessee for the year ended 31st march, 2005 relevant to the assessment year under consideration, the opening stock and closing stock was shown at ₹ 3.55 lakhs and ₹ 12.37 lakhs respectively. Purchases worth ₹ 67.53 lakhs were made against which the sales of ₹ 66.45 lakhs were reflected. When we consider the quantum of the purchases held by the AO to be bogus vis- -vis the total quantity of sales and closing stock, it becomes clear that some goods were in fact purchased by the assessee which were subsequently sold, as but for the inclusion of such quantity purchased the sale of the quantity declared is not possible. At the same time the AO also brought the inquiry to the logical conclusion that the purchases from these three parties were bogus. In view of the fact that it has been amply established that the purchases recorded in the books of account from these three parties were bogus with a view to suppress the profit, now need to zero in on the correct rate of net profit which could be applied under these circumstances. Therefore, it will be just and fair if the net profit rate of 5% is applied on the goods sold which were allegedly purchased through these parties. We hold that the net profit rate of 5% be applied. On the application of such net profit rate, the effective addition We, therefore, uphold the addition partly 0 This ground is partly allowed. Addition u/s.68 - unexplained deposits cash in bank account - assessee as replied that cash sales was made which amount was deposited in the bank partaly and for remaining amount assessee explained that the same was the earlier withdrawals from the bank itself which was re-deposited - HELD THAT - We find that the cash of ₹ 18,70,000 was deposited by the assessee in his bank account. It is axiomatic that the source of deposit in the bank is always out of cash balance available at the beginning of the day as adjusted with the receipts and payments for the day. There cannot be any question of making addition u/s.68 in respect of entries of deposit in the bank through the regular books of account. We, therefore, order for the deletion of the addition. This ground is allowed. Addition on account of low withdrawals - HELD THAT - Since the AO himself had estimated the total expenses at ₹ 2.33 lakhs and if the above said three amounts of withdrawals are reduced, the remaining amount comes to around ₹ 73,000. it is a question of making estimate of house hold expenses and taking into consideration that the assessee was carrying on business from his residence and had claimed telephone and electricity charges at ₹ 19,364 as business deductions, in our considered opinion, it will be just and fair if the ad hoc addition of ₹ 50,000 is sustained on account of low household withdrawal. We order accordingly. Appeal is partly allowed.

Issues:
1. Addition of &8377; 42,99,845 on account of bogus purchases
2. Addition u/s.68 for a sum of &8377; 3,28,000
3. Addition of &8377; 1,79,000 on account of low withdrawals

Issue 1: Addition of &8377; 42,99,845 on account of bogus purchases

The appellant contested the addition of &8377; 42,99,845 by the Assessing Officer due to alleged bogus purchases. The appellant's business involved resale of Dyechem, with specific transactions under scrutiny. The Assessing Officer issued notices u/s.133(6) to related parties, including M/s.Harshit Enterprises, M/s.Megha Impex, and M/s.Jyoti Enterprises. Responses from these parties, along with subsequent investigations, revealed discrepancies and denials of transactions with the appellant. Despite the appellant's efforts to provide information, the Assessing Officer concluded the purchases were bogus and made the addition under u/s.69C. The Tribunal analyzed the facts, noting discrepancies in the Assessing Officer's conclusions. Considering the trading and profit details, the Tribunal found evidence of actual purchases made by the appellant. It was observed that while purchases from specific parties were deemed bogus, corresponding sales were not disputed by the Revenue. The Tribunal applied a net profit rate of 5% on the alleged bogus purchases, resulting in an upheld addition of &8377; 1,18,826, allowing relief of &8377; 41,81,019.

Issue 2: Addition u/s.68 for a sum of &8377; 3,28,000

The appellant faced an addition of &8377; 3,28,000 u/s.68 concerning cash deposits in the bank account. The Assessing Officer questioned the source of the deposit, despite explanations provided by the appellant regarding cash sales and redeposited amounts. The Tribunal reviewed the situation and emphasized that when cash is deposited through regular books of account, the source can be traced through daily cash balances. In such cases, additions under u/s.68 are unwarranted. Consequently, the Tribunal ordered the deletion of the addition, recognizing the legitimacy of the deposit through recorded entries.

Issue 3: Addition of &8377; 1,79,000 on account of low withdrawals

The final issue pertained to the addition of &8377; 1,79,000 due to low withdrawals for household expenses. The Assessing Officer based this addition on an inquiry report estimating total household expenses. The Tribunal considered the appellant's submissions, highlighting additional withdrawals not initially accounted for. After adjustments and considering the nature of the appellant's business conducted from home, the Tribunal upheld an ad hoc addition of &8377; 50,000 for low household withdrawals. This decision was made to align the estimated expenses with the appellant's business activities and deductions claimed.

In conclusion, the Tribunal partially allowed the appeal, addressing each issue meticulously and providing detailed reasoning for the decisions made.

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