2020 (11) TMI 806 - AT - Income Tax

Unexplained cash credit u/s. 68 - Bogus purchases - estimation of income - HELD THAT - AO has not rejected the books of account of the assessee, but has made the addition towards the bogus purchase. The assessee has also made the payment to the party in the subsequent year which is evident from the payment which fact has been noted by the AO. This is not the case where books of account maintained by the assessee has been rejected and the profit has been estimated - assessee has failed to produce documentary evidences in the form of lorry receipts, way bill receipts, octroi receipts etc. The assessee has failed to substantiate the movement of rice from the rice mill to the assessee. So assessee has not been able to show with the support of evidence that it has purchased the rice from M/s. Standard Rice Mills. However, it is significant to note that sales has been accepted by the AO/ department. Without purchases, there cannot be sales. Possibility of the assessee purchasing/trading of rice from other sources and procuring bills from the accommodation entry provider cannot be ruled out. Therefore, entire alleged bogus purchase made from M/s. Satadal Rice Mill cannot be added in the hands of the assessee - estimation of profit from the sale of rice could be justified. In the rice trading G.P of 3 to 5 % is there during the AY under consideration. Therefore, GP addition of 4% would be sufficient to meet the ends of justice .Four percentage of GP would be just and proper. Therefore, direct the AO to make the GP addition of 4 % in place of the addition of ₹ 25,11,404/-. Appeal of assessee is partly allowed.

Summary

Issues:
1. Addition of unexplained cash credit u/s. 68 of the Income-tax Act, 1961.
2. Rejection of purchases made by the assessee from M/s. Satadal Rice Mill.
3. Assessment of Gross Profit (GP) in lieu of the disputed addition.

Analysis:
1. Issue of unexplained cash credit u/s. 68:
The appellant contested the addition of &8377; 25,11,464 as unexplained cash credit u/s. 68 of the Act. The AO raised concerns regarding the substantial credit balance against a sundry creditor, M/s. Satadal Rice Mill. The appellant failed to substantiate the transactions adequately, leading to the addition. The CIT(A) upheld the AO's decision. However, the ITAT noted that the appellant was a trader in marbles, steel furniture, and rice. The appellant provided evidence of the existence and activities of M/s. Satadal Rice Mill, emphasizing the trade credit nature of the transactions. The ITAT concluded that the addition as unexplained cash credit was unjustified.

2. Rejection of purchases from M/s. Satadal Rice Mill:
The AO disbelieved the purchases of rice amounting to &8377; 25,11,464 from M/s. Satadal Rice Mill, despite accepting the sales figures. The ITAT highlighted the necessity of purchases for sales to occur and noted the absence of documentary evidence supporting the transactions. While the AO did not reject the appellant's books of account, the lack of substantiation for the rice procurement raised doubts. The ITAT acknowledged the accepted sales but emphasized the need for proper documentation of purchases. Considering the circumstances, the ITAT directed the AO to make a GP addition of 4% instead of the disputed amount.

3. Assessment of Gross Profit (GP):
The ITAT justified the GP addition of 4% to account for the unverified purchases from M/s. Satadal Rice Mill. The decision was based on the typical GP range in rice trading during the relevant assessment year. By opting for a GP addition instead of the disputed amount, the ITAT aimed to ensure a fair and reasonable assessment of the appellant's income.

In conclusion, the ITAT partially allowed the appeal, emphasizing the importance of proper documentation and substantiation of transactions to avoid unwarranted additions. The decision highlighted the significance of maintaining accurate records and providing supporting evidence in tax assessments.