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2023 (4) TMI 90 - AT - Income TaxBogus purchase made u/s 68 - Whether bogus purchases should be treated as par with the unexplained cash credit under section 68? - HELD THAT - Admittedly, in the given case, the explanation offered by the assessee about the sum found credited in the books of accounts i.e. received on account of bogus sale and immediately transferred against the bogus purchases after retaining commission, was not found unsatisfactory by the AO. The only source of the income was the commission from the bogus transactions of sales and purchases. Thus, to our understanding the provisions of section 68 of the Act cannot be attracted. See Alag Securities (P.) Ltd 2020 (6) TMI 304 - BOMBAY HIGH COURT Assessee being engaged in the circular transactions/ one of conduit in accommodation entries can be made subject to tax based on real income theory. It is for the reason that the assessee was not the beneficiary of the amount received by it on the sales made to the KGN Industries Ltd. As such the amount of sales received by the assessee was utilized against the purchases from M/s Biotor Industries Ltd. There cannot be any addition under section 68 of the Act in the given facts and circumstances for the bogus purchases shown by the assessee. What best can be added in the given facts and circumstances is the real income which has been earned by the assessee. To determine the real income, there is no standard formula prescribed under the provisions of law. We direct the AO to delete the addition made by him. Hence, the ground of appeal of the revenue is hereby dismissed.
Issues Involved:
1. Deletion of additions on account of bogus purchases under Section 68 of the Income Tax Act. 2. Application of principles laid down by the Gujarat High Court in the case of NK Industries Ltd. vs. DCIT. Summary: Issue 1: Deletion of Additions on Account of Bogus Purchases The Revenue challenged the deletion of additions made by the Assessing Officer (AO) under Section 68 of the Income Tax Act for bogus purchases amounting to Rs. 51,78,64,090/- in the case of KFC Industries Pvt. Ltd. for AY 2010-11. The AO had proposed to treat the sales shown by the assessee to KGN Industries Ltd. as unexplained cash credit, based on the findings of a survey that revealed the assessee was engaged in circular transactions and providing accommodation entries. The AO disregarded the assessee's contention that the entire amount received from sales was transferred against purchases from Biotor Industries Ltd., and treated the entire purchase amount as bogus. The CIT-A, however, concluded that the assessee acted merely as a middleman, engaging in circular transactions without any real business activity. The CIT-A found that the amount received from sales was immediately transferred to purchases, and thus, the addition under Section 68 was not sustainable. Instead, the CIT-A allowed only the real income (difference between sales and purchases) to be taxed, confirming an addition of Rs. 14,59,757/- for operating and general expenses. Issue 2: Application of Principles from NK Industries Ltd. vs. DCIT The Revenue argued that the CIT-A failed to apply the principles from the Gujarat High Court's decision in NK Industries Ltd. vs. DCIT, where it was held that the entire transaction being bogus warranted the addition of the entire amount. However, the Tribunal noted that the facts of the present case were different, as the assessee was not the beneficiary of the accommodation entries but merely a conduit. Therefore, the Tribunal held that the principles from the NK Industries case could not be applied. The Tribunal upheld the CIT-A's decision, stating that only the real income (commission from bogus transactions) could be taxed, and that the provisions of Section 68 were not applicable as the explanation provided by the assessee was satisfactory. The Tribunal dismissed the Revenue's appeal, agreeing with the CIT-A's findings and directing the AO to delete the addition. Conclusion: Both appeals by the Revenue were dismissed, with the Tribunal affirming that the real income theory should be applied, and the provisions of Section 68 were not applicable in these cases. The principles from the NK Industries case were deemed inapplicable due to differing facts.
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