2025 (4) TMI 1458 - HC - Income Tax

Addition u/s 68 - bogus purchases - Whether ITAT erred in upholding addition of entire amount of the alleged bogus purchases to the income of the Appellant instead of only gross profit margin embedded in the purchases? - HELD THAT - Assessee s appeal was rejected by the CIT(A) on the basis that the additions were made by the AO u/s 68. Assessment order does not mention that the additions have been made under the said Section. Respondent also earnestly contended that the AO had not made additions under Section 68 of the Act. It is material to note that this was one of the contentions advanced by the Assessee before the learned ITAT but the same was not considered. Further as noted above it was Assessee s case that since its sales as recorded in the books of accounts was accepted some allowance was necessary to be made on account of purchases even if the AO was of the view that the suppliers in question had not supplied goods. Plainly this contention was neither examined by the learned CIT(A) nor learned ITAT. We set aside the impugned order and remand the matter to ITAT to consider afresh. ITAT will examine whether the additions were made under Section 68 of the Act as held by the CIT(A) and if so whether the same are sustainable. ITAT shall also consider the question whether any allowance is required to be made for purchases in the event it is held that the sundry creditors as reflected by the Assessee in the books had not supplied the goods on credit.

1. The core legal questions considered by the Court were:

(i) Whether the Income Tax Appellate Tribunal (ITAT) erred in upholding the application of Section 68 of the Income Tax Act, 1961, regarding alleged bogus purchases;

(ii) Whether the ITAT erred in adding the entire amount of alleged bogus purchases to the Assessee's income instead of only the gross profit margin embedded in those purchases;

(iii) Whether the impugned order passed by the ITAT was perverse.

2. Issue-wise detailed analysis:

Issue 1: Application of Section 68 of the Income Tax Act on alleged bogus purchases

The relevant legal framework centers on Section 68 of the Income Tax Act, which deals with unexplained cash credits and requires the assessee to satisfactorily explain the nature and source of such credits. The AO had treated the increase in sundry creditors as unexplained and alleged that the purchases were bogus, leading to an addition of Rs. 55,54,382/- to the Assessee's income. The AO issued summons under Section 131 to the sundry creditors, but none appeared, and some addresses were found to be nonexistent or incomplete.

The AO's assessment order did not explicitly state that the additions were made under Section 68; rather, the AO disallowed expenses on the basis that they were not wholly and exclusively for business purposes. However, the CIT(A) and subsequently the ITAT proceeded on the basis that the additions were under Section 68.

The Assessee contended that she had furnished all requisite details including PANs, income tax returns of the creditors, and that the identity and creditworthiness of the creditors were not in dispute. The Assessee further argued that since sales revenue was accepted, the purchases could not be wholly disallowed. The Assessee relied on precedents from the Gujarat High Court and Bombay High Court which held that additions under Section 68 require a failure to satisfactorily explain the credit, and that mere non-appearance of suppliers before the AO does not justify additions.

The Revenue's counsel argued that the addition was not under Section 68 but under the general provisions disallowing expenses not incurred wholly and exclusively for business. The Court noted that this contention was not considered by the ITAT and that the CIT(A) had erred in assuming the additions were under Section 68.

The Court emphasized that the ITAT must re-examine whether the additions were indeed made under Section 68 and if so, whether such additions are sustainable in light of the evidence furnished by the Assessee.

Issue 2: Addition of entire amount of alleged bogus purchases instead of only gross profit margin

The Assessee argued that even if the AO doubted the genuineness of the creditors, it was established that purchases were made because sales were recorded and accepted. Therefore, only the gross profit margin embedded in the purchases should have been added back as income, not the entire purchase amount. This approach aligns with the principle that expenses incurred for earning income cannot be wholly disallowed if the corresponding income is accepted.

The Court found that this contention was neither considered by the CIT(A) nor the ITAT. The Court directed the ITAT to examine whether any allowance should be made for purchases in the event it is held that the sundry creditors did not supply goods on credit, thereby ensuring a fair apportionment between genuine and bogus elements.

Issue 3: Allegation of perversity in the impugned order

The Assessee contended that the ITAT's order was perverse for failing to consider the Assessee's submissions and relevant legal precedents. The Court noted that the ITAT did not address the Assessee's key contentions, including the nature of additions and the appropriate quantum of addition.

Given the procedural and substantive lapses, the Court found merit in the contention that the impugned order was not properly reasoned and was liable to be set aside for fresh consideration.

3. Significant holdings:

The Court set aside the impugned ITAT order and remanded the matter for fresh adjudication. The Court directed the ITAT to:

o Examine whether the additions were made under Section 68 of the Income Tax Act and if so, assess their sustainability in light of the evidence provided by the Assessee regarding the identity and creditworthiness of the creditors;

o Consider the Assessee's contention that since sales were accepted, only the gross profit margin should be added back and not the entire amount of purchases;

o Address all contentions raised by the Assessee, including relevant judicial precedents, to ensure a reasoned and comprehensive decision.

The Court explicitly stated: "We clarify that we have not expressed any opinion on the merits of the controversy and all rights and contentions of the parties are reserved."

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