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2022 (7) TMI 175 - AT - Income TaxAddition u/s 68 - large increase of sundry creditors during the year - AO doubted the genuineness of the trade creditors shown by the assessee in the balance sheet on account of the purchases made by the assessee - HELD THAT - Entire business affairs reported by the assessee is in accordance with the normal practice followed and therefore, it appears that the assessee is engaged in showing these transactions which the AO considered as only as paper entries with alleged sundry creditors without any real purchase and sales. Therefore, the book results shown by the assessee do not reveal the correct state of affairs and business results. When the AO has clearly made out a case of non genuine purchase made by the assessee then instead of making the addition U/s 68 of the Act the income of the assessee ought to have been estimated after rejecting the books of accounts and applying appropriate and reasonable rate of GP/NP. It is a regular practice of the assessee to show that the purchases on credit and then settlement of account by showing the sales to the same trade creditors who have supplied the goods to the assessee. Therefore, in the facts and circumstances of the case we are of the view that when the assessee s books of account are not reflecting the correct affairs and book results are not rejected at most the income of the assessee is required to be estimated after rejecting the books of accounts. This is view taken by us is based on the decision of Hon ble Bombay High Court in the case of PCIT Vs. Mohmmad Haji Adam Co. 2019 (2) TMI 1632 - BOMBAY HIGH COURT As the assessee has not placed the details of the profit of its regular business turnover via a vis the turnover of these bogus entry provider purchase and sales. The said details may be verified by the assessing officer and the AO is directed to add appropriate rate of profit in these transactions. Accordingly, we set aside this matter to the record of the AO to estimate the income of the assessee on the basis of the turnover shown by applying a proper and reasonable basis being GP/NP rate. Accordingly Ground No. 1 is partly allowed.
Issues Involved:
1. Addition of Rs. 17,31,09,008/- under Section 68 of the Income Tax Act, 1961. 2. Addition of Rs. 42,904/- on account of interest income. Issue-wise Detailed Analysis: 1. Addition of Rs. 17,31,09,008/- under Section 68 of the Income Tax Act, 1961: The primary issue revolves around the addition of Rs. 17,31,09,008/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, treating the sundry creditors as unexplained credits. The AO noted a significant increase in sundry creditors and issued notices under Section 133(6) to verify the genuineness and creditworthiness of the creditors. These notices returned unserved, leading the AO to doubt the existence of the creditors and the genuineness of the transactions. The assessee argued that the addition under Section 68 was inappropriate as it pertains to trade credits and not cash credits. The assessee provided confirmations, PAN details, and other documents to establish the identity and creditworthiness of the creditors. The AO, however, remained unconvinced, noting that the liabilities were settled through the sale of the same goods to the creditors, which raised doubts about the transactions. The AO treated the sundry creditors as bogus liabilities and added the amount to the assessee's income as unexplained credits. The CIT(A) upheld the AO's decision. The Tribunal observed that the assessee's practice of purchasing on credit and settling accounts through sales to the same creditors was a regular business practice. The Tribunal noted that the AO did not reject the assessee's books of accounts or the sales figures in the subsequent year, which included the settlement of these creditors. The Tribunal held that instead of making an addition under Section 68, the AO should have estimated the income after rejecting the books of accounts and applying an appropriate GP/NP rate. The Tribunal referred to the decision of the Hon'ble Bombay High Court in the case of PCIT Vs. Mohmmad Haji Adam & Co., which supported the view that only the profit element in respect of unverifiable purchases should be added. Accordingly, the Tribunal set aside the matter to the AO to estimate the income of the assessee on the basis of the turnover shown by applying a proper and reasonable GP/NP rate. Ground No. 1 was partly allowed for statistical purposes. 2. Addition of Rs. 42,904/- on account of interest income: The second issue pertains to the addition of Rs. 42,904/- on account of interest income. During the hearing, the learned counsel for the assessee stated that this ground was not pressed. The Department raised no objection to this. Consequently, Ground No. 2 was dismissed as not pressed. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal directed the AO to re-estimate the income by applying an appropriate GP/NP rate after rejecting the books of accounts, while the ground related to the addition on account of interest income was dismissed as not pressed. The order was pronounced in the open court on 30/06/2022.
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