Brief of the Case
ITAT Ahmadabad held In the case of Mukesh Ashmal Bokadia vs. ITO that AO is not justified to make addition on account of purchases as this is not the situation because books of account have not been fully rejected, none of the parties has previously been proved as bogus, part of payments made towards the purchases have already been allowed by the Assessing Officer and no specific working has been made by the Assessing Officer to treat a particular purchase from a supplier as bogus purchase. Further the outstanding purchases at the end of the year have been subsequently paid by banking channel and nothing contrary to this fact of payment by banking channel has been brought on record before us.
Facts of the Case
The assessee carries on business as sole proprietor in the name of M/s. Manak Steel which deals in trading of metals. Return of income for A.Y.2007-08 was filed by assessee on 31st October, 2007 declaring total income of Rs.2,83,520/-. Assessee’s case was selected for scrutiny and notice u/s 143(2) of the Act was issued on 22.08.2008. Assessee has shown total turnover at Rs.4,46,60,566/-, gross profit at Rs.5,64,828/- and net profit at Rs. 2,94,202/-. Assessee’s books of account are audited u/s.44AB of the Income Tax Act and quantitative details have been maintained by the assessee. On going through the balance sheet of assessee’s business concern M/s. Manak Steel, Assessing Officer came through the list of sundry creditors having 11 names totaling to Rs.3,34,56,223/-. In absence of confirmation letters from the alleged sundry creditors, Assessing Officer took a view that as the assessee had failed to prove the identity of sundry creditors and genuineness of transactions carried out with these parties, he therefore invoked the provisions of Section 69C of the Income Tax Act and consequently book result of the assessee were partly rejected and sundry creditors of Rs.3,34,56,223/- shown in balance sheet as on 31.03.2007 were added to the total income of the assessee by treating them as a fake liability.
Contention of the Assessee
The ld counsel of the assessee submitted that Assessing Officer has made the addition by invoking Section 69C of the Act on account of unexplained expenditure whereas CIT(A) sustained the addition by invoking Section 68 by treating the unexplained sundry creditors as unexplained credits. CIT(A) has held in his order that provisions of Section 69C of the Act are not applicable in this case because Section 69C covers expenses not recorded in the books and the addition in respect of bogus expenses could be made u/s.37(1) of the Act. However, CIT (A) deemed fit to apply Section 68 for unexplained credits.
Contention of the Revenue
The ld counsel of the revenue supported the order of lower authorities.
Held by CIT (A)
CIT (A) gave relief to the assessee to the extent of Rs.24,15,407/- relating to credit balance appearing in the name of one of the 11 parties named as M/s. K.S.B. Enterprise and sustained the remaining addition of Rs.3,10,40,816/- made by the Assessing Officer.
Held by ITAT
It is clear in this case that in the year under appeal, assessee has shown total turnover of Rs.4,46,60,566/- and purchase of Rs.4,31,84,151/-. Assessing Officer has not raised any doubt on the sales turnover of the assessee and nor has challenged the gross profit of the assessee. Assessing Officer made complete addition of sundry creditors liability appearing in the balance sheet as on 31.03.2007. Also during course of assessment proceedings, on the basis of addresses provided by assessee, Assessing Officer sent letters u/s133(6) to the all parties. But, in reply to the letters , some of the parties were reported to have left the place of business, some refused to accept the letter and some were shown as not known. Due to this very reason, Assessing Officer made addition u/s.69C of the Act treating it as unexplained expenditure. During appellate proceeding before the CIT(A), copies of ledger accounts for F.Y. 2006-07 and 2007-08 of all the 11 parties along with copies of bank statements, purchase bills and quantitative details were filed by the assessee and thereafter remand report was called for from the Assessing Officer and the same was furnished on 15.02.2012 and after examining the same, CIT(A) accepted the sundry creditor of Rs.24,15,407/- as genuine appearing in the name of M/s. K.S.B. Enterprise and confirmed the balance addition of Rs.3,10,40,816/-.
From the perusal of assessment order, it is clear that Assessing Officer has allowed purchases to the tune of Rs.1,15,84,527/-, which were paid to various parties from whom assessee made purchases during the year. After the payment of Rs.1,15,84,527/- outstanding balance remained to be paid on 31st March, 2007, which means that Assessing Officer has treated all these parties as genuine suppliers to whom some payments have been made during the year. If in any case, Assessing Officer had come to a conclusion that certain supplier is a bogus party, then the complete purchases made from such bogus suppliers should have been disallowed by him.
In the present case, Assessing Officer has allowed the purchases to the extent they have been paid and disallowed the purchases to the extent which have not been paid. Assessing Officer ought to have appreciated the fact that assessee has submitted the ledger account of all the 11 parties for the relevant assessment year as well as for the next financial year during which balance payment of the outstanding liabilities were made through bank.
Further, on one hand, Assessing Officer is accepting the sales turnover of the assessee, sundry debtors receivable as on 31.03.2007, gross profit, stock records and has not brought out any irregularity in the books of account and on other hand, has made addition for unexplained sundry creditors of Rs.3,34,56,223/- [addition sustained to Rs.3,10,40,816/- by ld. CIT(A) ] thereby making a situation, in which gross profit declared by assessee at 1.26% will rise to approximate 70% which is practically not justifiable.
In various judicial precedences, normally, when the Assessing Officer treats the purchase as bogus purchase or when the books of accounts are rejected, then gross profit rate is estimated at a little higher rate to cover up the situation of bogus purchases appearing in the books of account of the assessee. However, in the case under appeal, this is not the situation because books of account have not been fully rejected, none of the parties has previously been proved as bogus, part of payments made towards the purchases have already been allowed by the Assessing Officer and no specific working has been made by the Assessing Officer to treat a particular purchase from a supplier as bogus purchase and further the outstanding purchases at the end of the year have been subsequently paid by banking channel and nothing contrary to this fact of payment by banking channel has been brought on record before us.
Accordingly, appeal of the assessee allowed.