Unaccounted Purchases in absence of discrepancy in stock records cannot be added to total income as unexplained investments

Brief of the case:

The ITAT Bangalore in the case of M/s Sai Bhagwan Traders vs. ITO held that unaccounted purchases cannot be added to the total income as unexplained investments when there was no discreoency found in stock records. In such a case addition only to the extent of a reasonable gross profit rate on alleged unaccounted purchases is justified.

 Facts of the case:

• Assessee an individual was engaged in manufacturing of deolied cake and refined oils filed its return on 30.10.2007 of income declaring a total income of Rs. 2,43,310/-. A survey took place in the business premises of the assessee on 02.11.2006.
• During the course of survey, department people found some loose sheets reflecting details about certain cash purchases made by assessee. Such purchases were made from 37 parties of which 25 parties were served summons u/s 131 by the AO to confirm the purchases made from them.
• AO informed that all such persons confirmed that goods were sold by them to the assessee on cash basis. But the books of the assessee as on the date of survey did not reflect these transactions.
• AO not convinced by the assessee’s explanation held that cash purchases of Rs.2,15,05,353/- as unexplained investment u/s.69 of the Act and made an addition thereof.

• On appeal before CIT(A) , CIT(A) observed that out of the total sum of Rs.2,15,05,353/-, added as unexplained investment sums of Rs.42,63,036/- and Rs.5,01,531/- were duplicate bills. Further, sum of Rs.20,18,690/- was to be excluded since on cross examination alleged supplier had denied any sale to the assessee. CIT (A) also directed exclusion of Rs. 16,54,143/- for a reason that the concerned thirteen parties never appeared nor confirmed any sales to have been made by them to the assessee.

• After all such adjustments the balance sum of Rs. 1,30,68,163/- could only be considered as unaccounted purchases. But the unaccounted purchase could not be treated as income in its entirety.
• According to him only a fair and reasonable estimate of the gross profit could be applied for arriving at the income. Accordingly he held that 6% of the sum of Rs.1,30,68,163/-, alone could be considered as profit on the alleged unaccounted purchases. He therefore restricted the addition to 6% of Rs.1,30,68,163/-.
• Aggrieved by such order of CIT(A) , revenue is in appeal before ITAT.

Contention of the Assessee:

• It was contended that details in the loose sheets was not of any cash purchases made by the assessee rather it was of the persons who brought the material to the assessee for weighment. Assessee was charging a commission @1% on the sale of such goods in its role as a commission agent.

• Assessee also submitted that the commission from these transactions were accounted and correctly shown in its books.
• Further, it was submitted that at the time of survey there was no discrepancy in the stock of goods with the assessee. Had there been unrecorded purchases which were not sold, there should have been discrepancy in the stock. Once the stock was found correct, it was wrong to come to a conclusion that loose sheets represented notings of any cash purchases.
• Therefore, no addition can be made considering such purchases as unexplained investments.

Contention of the Revenue:

• The learned counsel for the revenue argued that loose sheets found during the survey was having all the details like purchase, , name of the seller, commodity, quantity and price etc. which clearly indicate that the details were of the cash purchase transactions made by the assessee.
• Such purchases were never recorded in the books of account of the assessee. It means that they were nothing but unexplained investment made by the assessee for purchase.
• Since assessee was not able to show the source for funds used for these purchases the amount was rightly added u/s.69 on account of unexplained investment.
• Further, the stock discrepancy i.e. physical vis a vis books could not be detected as the unaccounted purchases might have been stocked somewhere else.

 Issue before the ITAT:

Whether the unaccounted purchases can be added to the total income even if the stock records tallied on the day of survey?

 Held by ITAT Bangalore:

• Revenue has not disputed the argument of the learned counsel for the assessee that no discrepancy was found in stock on the date of survey. If it is presumed that the loose sheets were really details of purchases made by the assessee not recorded in his books of accounts then definitely on the date of survey there should have been mismatch in stock recorded in books vis a vis physical one.
• It is because it is not possible that assessee held all the purchased stock with it without effecting any sales. But since there was no discrepancy in stock, obvious conclusion is that whatever was purchased was sold by the assessee.
• Assessee was continuously purchasing and selling and therefore successive purchases would have been financed by the sales of the earlier purchases. In such situation at the most only first purchase made in October 2006 can be considered as an unexplained investment.
• Further, the argument of the revenue that stock might have been kept elsewhere, there is nothing on record to indicate any other place of business for the assessee other than the one which was surveyed.
• Thus, to consider the whole of the purchases as unexplained investment would be plainly wrong. In such a situation the tribunal concurred with the action of CIT(A) who by relying on the decision of ITAT Ahmedabad in the case of ITO v. Gurubachansingh J. Juneja [(1995) 55 ITD 75] made addition of 6% (gross profit rate) on unaccounted purchases.

In result the appeal of revenue was dismissed.