2012 (9) TMI 121 - AT - Income Tax

Addition on account of unproved purchases - Held that - It is a matter of common sense that there is no possibility of production if there is no raw material. Without input, there could not be any output. Additionally, the assessee has also proved that if the purchases are not taken into account, then the results are going to be unrealistic and the G.P. had to go high rate away from any reasonable percentage. Even if those concerns were bogus parties, but the basic question is that without purchases, there cannot be any manufacturing of sales - in favour of assessee. The computation of undisclosed income even of the block period has to be made u/s. 158BB and as per Explanation annexed to this Section, the total income or loss of each previous year, for the purpose of determination of undisclosed income, be taken as the total income or loss computed in accordance with the provisions of this Act and the only rider is that the same should be without giving effect to set off of brought forward losses or unabsorbed depreciation - the Legislature has made it clear that the undisclosed income is also required to be determined or computed in accordance with the provisions of I.T. Act, so the basic principle of determination of income has to be followed particularly in a case when the income is out of a trading activity of the assessee.

Summary

Issues Involved:
1. Dismissal of Grounds of Appeal No. 3 and 4.
2. Confirmation of addition of Rs. 6,82,460/- by the CIT(A) on account of unproved purchases.
3. Application of Section 40A(3) regarding cash payments exceeding Rs. 20,000/-.
4. Treatment of unproved credit standing in the name of Yogesh Textile Traders.

Detailed Analysis:

1. Dismissal of Grounds of Appeal No. 3 and 4:
The learned counsel for the assessee did not press Ground of appeal No. 3, and the learned D.R. had no objection. Accordingly, Ground of appeal No. 3 was dismissed as not pressed. Ground of appeal No. 4, being general in nature, was also dismissed.

2. Confirmation of Addition of Rs. 6,82,460/-:
The assessee challenged the order of the CIT(A) in confirming the addition of Rs. 6,82,460/- made by the AO on account of unproved purchases from M/s. Yogesh Textile Traders. The AO initially made the addition in the order passed u/s. 143(3) on 02-01-2001. The CIT(A) had deleted the addition, but the Tribunal restored the matter back to the CIT(A) for fresh adjudication. The AO contended that the amount shown in the name of Yogesh Textile Traders was not used to make payments to unregistered dealers and that the outstanding credit of Rs. 3,00,510/- was not considered as unproved credit separately. The AO also noted that letters sent to the parties were returned, the Sales-tax No. quoted was incorrect, and payments were made through bearer cheques or cash, collected by the assessee herself.

The CIT(A) upheld the AO's decision, noting discrepancies in the bank statements and concluding that the assessee failed to prove the purchases. The CIT(A) observed that the payments were made through bearer cheques or cash, and the amounts credited to the account of Yogesh Textile Traders were immediately withdrawn. The CIT(A) concluded that there was systematic planning to inflate purchases and upheld the AO's addition.

Upon appeal, the Tribunal considered the submissions of both sides and referred to similar cases, including the decision of the Pune Bench in the case of Gopal Pulse Processor Pvt. Ltd., where similar additions were deleted. The Tribunal found that disallowance of the purchases would result in an unrealistic gross profit rate of 84.84%, which is not feasible. The Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of Rs. 6,82,460/-.

3. Application of Section 40A(3):
The AO submitted that the payments claimed to have been made to Yogesh Textile Traders were in cash in excess of Rs. 20,000/-, attracting the provisions of section 40A(3) of the I.T. Act. However, since the CIT(A) confirmed the addition on account of purchases being bogus, he did not consider the alternate contention about unexplained credit and the application of section 40A(3) as infructuous.

4. Treatment of Unproved Credit:
The AO noted that the outstanding credit of Rs. 3,00,510/- standing in the name of Yogesh Textile Traders was not considered separately as unproved credit since the entire purchases were treated as unproved. The CIT(A) did not address this issue separately since he upheld the addition on account of bogus purchases.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the addition of Rs. 6,82,460/-. The Tribunal emphasized that disallowance of the purchases would lead to an unrealistic gross profit rate, and the purchases should be accepted as genuine. The appeal was partly allowed, and the decision was pronounced in the open court on 20th June 2012.