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: