INCOME TAX ACT, 1961

Section 69C

Income from undisclosed sources - Addition under section 69C - Bogus purchases - Quantum of addition

AO noticed that assessee-company made purchases through bogus hawala entries without getting actual supplies. Accordingly, the AO disallowed the entire purchases by treating them as bogus. Further, CIT (A) noted that while the AO treated the purchases as bogus but accepted the sales and gross profit declared in return of income. Therefore, the CIT (A) held that only profit element embedded in the purchases would be subject to tax and not the entire purchase amount. Accordingly, he restricted such disallowance to 2% of alleged purchases. However, Tribunal considering the gross profit rate of the assessee, made further addition of 3%. Aggrieved, Revenue was in appeal. Held: It was an admitted fact that the AO did not object to the sales made by the assessee. Thus, it was evident that there were corresponding purchases. Further, the assessee made payments on account of the purchases through account payee cheques and the purchases were entered in its books of account. Therefore, the assessee was able to prove that the purchases were made only in the alternative way. If that being so, then only profit element embedded in the purchases would be subject to tax at a particular rate. Further, as assessee's gross profit varied from 5% to 8.77%, the Tribunal was justified in restricting the disallowance to 5% of the gross purchases.

REFERRED : CIT v. Bholanath Poly Fab Pvt. Ltd. (2013) 355 ITR 290 (Guj): 2013 TaxPub(DT) 1852 (Guj-HC)

FAVOUR : In assessee's favour

A.Y. : 2010-11

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