2010 (9) TMI 848 - HC - Income Tax

Addition under Section 69C appellate authority partly allowed the appeal by deleting additions made as such but by sustaining addition of only peak of the purchases - Tribunal on second appeal cancelled the entire additions on the ground that section 69C is not applicable - Held that - It is seen from the assessment orders that AO has accepted the profit arrived under the profit and loss account and only one addition under Section 69C is made. If the addition under Section 69C has lead to disallowance of cost of materials purchased, then the same cannot be sustained. Therefore, the entire account and transactions call for examination before making addition under Section 69C. Further, in view of the fact that the purchase account does not record correct position, it is for the officer to examine the correctness of the other accounts maintained by the assessee. Thus the Tribunal was not justified in allowing the appeals by holding that Section 69C is not applicable. In fact, in our view Section 69C applies to the facts of this case but what we feel is addition under Section 69C when it relates to purchases, the genuineness of which are not doubted should not lead to disallowance of expenditure on purchases - remand the matter to the AO for reconsideration.

Summary

Issues:
Assessment of unexplained expenditure under Section 69C based on cash purchases accounted as credit purchases.

Analysis:
The High Court of Kerala combined appeals against two related assessees involving assessments for different years. The cases revolved around the assessee's business of purchasing, processing, and trading in synthetic perfumes and herbal oil extracts. The Assessing Officer noted discrepancies in the purchases made by the assessee, where cash purchases were accounted as credit purchases without proper documentation. This led to the addition of unexplained expenditure under Section 69C of the Income-tax Act.

The first appellate authority partially allowed the appeal, sustaining only the peak of the purchases as additions. However, the Tribunal, in a second appeal by both parties, canceled the entire additions, contending that Section 69C was not applicable. During the hearing, the Court reviewed the seized records and found that the bought notes supported the Officer's allegations. The bought notes lacked complete supplier addresses, indicating cash purchases made by the assessee on the purchase date itself.

The Court deliberated on whether the Section 69C addition was warranted. The department argued that the assessee failed to explain the expenditure incurred on cash purchases accounted as credit purchases. Conversely, the respondent's counsel asserted that the cash payments were later recorded in the books, albeit not on the purchase date due to cash flow constraints. The Court highlighted the importance of assessing how the assessee managed the cash for these transactions and emphasized the genuineness of the purchases.

The Court observed that while the purchases were initially accounted for as credit purchases, the cash payments were made on the purchase dates, raising questions about the source of later accounted payments. The Assessing Officer's failure to address this discrepancy led to uncertainties regarding the assessee's cash flow and unaccounted income. The Court emphasized the need for a comprehensive examination of the accounts to determine any unaccounted income generated during business operations.

Ultimately, the Court set aside the Tribunal and CIT (Appeals) orders, remanding the matter to the Assessing Officer for a thorough reassessment. The Court directed the Officer to reevaluate the assessments, issue pre-assessment notices, and provide the assessee with a hearing opportunity to address the discrepancies in the purchase accounts and ensure a fair assessment process.