2016 (5) TMI 1288 - AT - Income Tax

Addition restricted at 2% of turnover - Held that - We find that the ld.CIT(A) while deciding the issue in favour of assessee has given a finding that though the AO has doubted the purchases but has not brought on record any instance of bogus or inflated purchase and has also not doubted the sales figure disclosed by the assessee. He has further given a finding that Paper Mill Association had fixed the price for purchases of waste-paper from the traders and, therefore, the scope of manipulated sales price was not established and there was no evidence to conclude that waster-paper supplier have higher gross margin on sales only because their purchases are from small type vendors. He has further given a finding that 15% margin of profit is not possible in the case of assessee. He has further given a finding that Central Circle Surat had completed the assessment of small traders by estimating the Gross Profit and had considered the gross profit rate between 0.5% to 0.75% on similar facts as that of assessee. He thereafter after considering the Gross Profit and Net Profit ratio shown by the assessee, estimated the Net Profit at 2% as against 1.10% disclosed by the assessee.. Before us, Revenue has not brought any material on record to controvert the findings of ld.CIT(A). Looking to the totality of the facts of the present case, we do not see any reason to interfere with the order of the ld.CIT(A). Thus, this ground of Revenue is dismissed. Unexplained sundry creditors - Held that - We find that the ld.CIT(A) while deleting the addition has given a finding that the credit balance pertains to three companies and during subsequent year, the money was paid to the vendors. He has further given a finding that it is not the case of unexplained credit, but a case of trade balance/credits at the end of the financial year. Before us, Revenue has not brought any material to controvert the findings of the ld.CIT(A). We therefore find no reason to interfere with the order of ld.CIT(A). Thus, this ground of Revenue is also dismissed.

Summary

Issues Involved:
1. Restriction of addition by adopting Net Profit (NP) at 2% of the turnover instead of disallowance of 15% of total unregistered dealer (URD) purchases.
2. Deletion of addition on account of unexplained sundry creditors.

Detailed Analysis:

1. Restriction of Addition by Adopting NP at 2% of Turnover:
The Assessing Officer (AO) noticed that the assessee had made purchases of waste-paper from unregistered dealers amounting to ?2,50,73,632/-. The assessee failed to produce purchase bills, leading the AO to believe that 15% of these purchases were inflated and unverifiable, resulting in a disallowance of ?37,61,045/-. The Commissioner of Income Tax (Appeals) [CIT(A)] partially granted relief by directing the AO to adopt NP at 2% of the turnover instead of the disallowance made by the AO. The CIT(A) noted that the AO had not provided any evidence of bogus or inflated purchases and had not doubted the sales figures. The CIT(A) also considered similar cases where a lower gross profit (GP) rate was applied and concluded that a 15% margin was unrealistic for the waste-paper trading business. Thus, the CIT(A) directed the AO to adopt a 2% NP rate, which was upheld by the ITAT as the Revenue could not provide any material to counter the CIT(A)’s findings.

2. Deletion of Addition on Account of Unexplained Sundry Creditors:
During the assessment proceedings, the AO disallowed ?22,29,345/- as unexplained credits due to the assessee's failure to furnish confirmations from the creditors. The CIT(A) reversed this disallowance, noting that the credit balances pertained to trade credits that were paid off in the subsequent year. The CIT(A) highlighted that the AO should have verified the veracity of these trade credits before making the disallowance. The ITAT upheld the CIT(A)’s decision, agreeing that the credits were trade balances paid in the subsequent year and not unexplained credits. The Revenue could not provide any evidence to contradict the CIT(A)’s findings.

Conclusion:
The ITAT dismissed the Revenue’s appeal and the assessee’s cross-objection, upholding the CIT(A)’s decisions on both issues. The NP rate was correctly adjusted to 2%, and the addition for unexplained sundry creditors was rightly deleted.