Entire amount cannot be added to income when assessee is not able to prove the genuineness of the party

The Income Tax Appellate Tribunal (ITAT) in Ahmedabad ruled that if a business cannot prove the identity of a supplier, the entire purchase amount should not automatically be added to their income. Instead, only a portion, specifically 10% of the purchase value, should be added back, particularly considering the profit already declared on the final product. The tribunal also noted that the assessee's fixed deposit balances were correctly stated.

The ITAT, Ahmedabad in the case of M/s. Accra Pac (India) Pvt. Ltd. v. D.C.I.T [ITA No. 514/Ahd/2018 dated November 07, 2022], partially allowed the appeal of the assessee against the order passed by the Revenue Department confirming the addition of unexplained deposit as bogus purchases on the ground that the assessee was not able to prove the genuineness of the party. Held that, only 10% of the purchase would be added to the Appellant’s income in case where the Appellant was unable to prove the supplier’s identity. Further remanded back the matter for verification.

Facts

M/s. Accra Pac (India) Pvt. Ltd. ("the Appellant") was engaged in the business of manufacturing perfume and other beauty products. During the Financial Year 2010-11 the Appellant had purchased chemicals amounting to INR 7,71,22,502/- from one of the suppliers.

The Assessing Officer ("AO") during the course of assessment observed that the Appellant has not furnished the PAN number of such supplier. Further, the supplier has shut the business and therefore, came to the conclusion that purchases were not genuine and should be added back to the income of the Appellant on the ground of bogus purchases as the Appellant was not able to prove the identity of the supplier.

Further, the AO found mis match in Fixed deposits amount, the amount in balance sheet was lower as compared to the amount furnished in Annual Information Return, the AO added the difference amount to the income of the Appellant.

The Appellant filed an appeal before the Commissioner of Income Tax (Appeal) ("the Respondent") who vide Order dated December 22, 2017 ("the Impugned Order") confirmed the additions made by the AO.

Being Aggrieved by the Order of the Respondent, the Appellant has filed this appeal.

The Appellant contention was that, since the Appellant’s outward sales is taxable and the Appellant is subject to Excise and tax Audit where auditors had not made any adverse opinion, therefore, the AO cannot add the entire purchases to the income of the Appellant.

Further, in case if the impugned amount is to be added then it should be restricted to reasonable amount as the Appellant only had gross profit margin of 7.63% of the turnover.

Furthermore, for the mis-match of fixed deposit amount the Appellant produced the balance confirmation sheet issued by the banker of the Appellant confirming the balance as stated in balance sheet. Therefore, Appellant was of the view the amount of fixed deposit was correctly stated in balance sheet and the excess amount added should be deleted.

Issue

Whether the entire purchase should be added to the Appellant’s income where the supplier was not traceable?

Held

The ITAT, Ahmedabad in ITA No. 514/Ahd/2018 dated November 07, 2022, held as under:

• Noted that, it would not be justified to disallow the entire purchase amount as the purchases were utilized for making the final finished product which is subject to tax and only the profit element should be added back to the income.
• Observed that, that the balances standing at the end of the year in the balance sheet of the assessee were correct. Further, the bankers have confirmed the year end balances which tallies with the balances as per the books of the Appellant.
• Held that, a certain percentage of such alleged bogus purchases may be disallowed, keeping into consideration the profit offered to tax by the Appellant. Accordingly, in the interest of justice, 10% of the purchases may be disallowed and added back to the income of the Appellant.
• Remanded back the matter to the AO for verifying the correctness of the claim made by the Appellant in the issue of fixed deposit mis-match.