2023 (12) TMI 1126 - AT - Income Tax

Estimation of income - unaccounted purchases - grievance of the Revenue is that since the assessee has not properly explained the sources for the cash purchases the decision of the Ld. AO by making an addition u/s. 69A of the Act treating it as unexplained cash holds good and therefore the same may be sustained - HELD THAT - We are of the opinion that the entire unaccounted purchases cannot be treated as income of the assessee and only the profit element should be considered as income for the purpose of computing the tax on sales. Hence, we are inclined to allow 8% on the sales made by the assessee as income of the assessee. Accordingly, the Ld. AO is directed to work out the income of the assessee and tax the same in accordance with law.

Summary

Issues involved:
The appeal by Revenue against the order of Ld. Commissioner of Income Tax (Appeals) regarding addition made u/s 69A of the Income Tax Act, 1961 based on unexplained cash purchases.

Summary:

Issue 1: Addition u/s 69A based on unexplained cash purchases

The case involved the assessee engaged in Trading in Electronic Goods, where a search operation revealed substantial cash sales to the assessee by another company. The Ld. AO treated the cash purchases as unexplained money u/s 69A and assessed the income accordingly. The assessee contended that only the profit element should be taxed, not the entire cash purchases. The Ld. CIT(A) deleted the entire addition, leading to the Revenue's appeal.

Issue 2: Arguments and findings

The Revenue argued that the addition was based on authentic information from the investigation unit, supported by statements of employees and directors of the supplying company. The Departmental Representative emphasized the assessee's acceptance of similar out-of-books sales in previous and subsequent years. However, the Authorized Representative supported the CIT(A)'s decision.

Issue 3: Tribunal's decision

After considering both sides and relevant legal precedents, the Tribunal held that only the profit element from the cash sales should be taxed, not the entire amount. Referring to various court decisions, the Tribunal directed the Ld. AO to tax 8% of the sales as the assessee's income. The appeal by Revenue was partly allowed based on this conclusion.

This judgment highlights the importance of distinguishing between gross receipts and taxable income, emphasizing the need to tax only the profit element in cases of unexplained cash purchases. The decision serves as a reminder of the legal principles governing the taxation of undisclosed income in such scenarios.