ITAT Surat Restricts Unaccounted Purchase Addition to Profit Under Section 44AD

Mohanlal Premraj Shah Vs ITO (ITAT Surat)

Unaccounted Purchase Cannot Be Taxed Along With Estimated Profit: ITAT Treats Cash Purchase as Additional Turnover and Restricts Addition to Embedded Profit

Summary: The Surat Bench of the Income Tax Appellate Tribunal has held that where an undisclosed purchase is connected with the assessee’s existing business, the entire purchase amount cannot ordinarily be assessed as unexplained expenditure in addition to the profit arising from the corresponding sales. What can reasonably be brought to tax is the profit embedded in the undisclosed business transaction.

Accordingly, against additions aggregating to ₹8,53,177, the Tribunal sustained only ₹51,760 as additional presumptive business income. It also categorically held that Section 115BBE was not applicable, as the amount sustained was assessed as business income under Section 44AD and not as unexplained expenditure under Section 69C.

Facts of the case

The assessee was an individual engaged in the small-scale retail trading of firecrackers. For Assessment Year 2020-21, he filed his return declaring total income of ₹17,25,580, which included presumptive business income of ₹3,70,337 under Section 44AD on a disclosed turnover of ₹14,30,837. Thus, the assessee had declared profit at an effective rate of 25.88% of turnover.

Subsequently, the Assessing Officer received information from the Investigation Wing concerning a search conducted under Section 132 on the Ambica Fireworks Group and a connected survey under Section 133A on M/s Ambica Ashish Trade Link LLP.