Krishnasamy Sendilkumar Vs ITO (ITAT Bangalore)
Bangalore ITAT: Entire Bogus Purchases Cannot Be Added When Sales Are Accepted; Only Profit Element Taxable
The Bangalore ITAT held that the entire value of alleged bogus purchases cannot be treated as income where the corresponding sales have been accepted, and only the embedded profit element can be brought to tax. The assessee, engaged in the wholesale trading of scrap batteries, was subjected to an addition after the Verification Unit found that three alleged suppliers had denied the transactions and were either not carrying on business or were otherwise non-genuine. Based on these enquiries, the Assessing Officer treated the entire purchases from those parties as bogus and added the full amount to the assessee’s income.
Before the Tribunal, the assessee produced additional evidence, including a stock register authenticated by the Chartered Accountant, demonstrating that there was a complete correlation between purchases and sales. The Tribunal admitted the additional evidence and observed that the Revenue had not disputed the sales, nor had it pointed out any disproportion between purchases and sales. In such circumstances, it held that the goods sold must necessarily have been sourced through purchases, even if the purchases were ultimately found to have been made from unidentified or non-genuine suppliers. Therefore, the entire purchase value could not be assessed as income.
Following the Bombay High Court’s decision in PCIT v. Mohammad Haji Adam & Co. and the Supreme Court’s ruling in CIT v. Williamson Financial Services that income-tax is levied on profits and not on gross receipts, the Tribunal restricted the addition to the profit element embedded in the disputed purchases. Considering the nature of the assessee’s business, it estimated the profit margin at 1.15% of the disputed purchases and directed the Assessing Officer to tax only that amount instead of the entire purchase value. The appeal was accordingly partly allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
