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Facts
The assessee, engaged in the wholesale rice and wheat business, did not file an income tax return for AY 2018-19. The Assessing Officer (AO) reopened the case under Section 147, making additions of Rs. 8,07,30,850/- for alleged unexplained purchases from Shri Sai Baba Rice Industries.
Held
The Tribunal held that the AO's conclusion that purchases were bogus was based on surmises and conjectures. The assessee provided documentary evidence including VAT/GST bills and bank statements, and the supplier's sales were accepted as genuine by the AO. Therefore, the purchases were deemed genuine. However, due to qualified audit report and partial compliance, the book result was not accepted.
Key Issues
Whether purchases from a specific supplier are genuine, and if not, how to quantify the addition. If purchases are genuine, should the net profit be accepted based on book results despite a qualified audit report?
Sections Cited
69C, 115BBE, 250, 139, 147, 148, 142(1), 144B, 44AB
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Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
O R D E R
PER KESHAV DUBEY, JUDICIAL MEMBER:
This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 19.07.2024vide DIN & Order No. ITBA/NFAC/S/250/2-24-25/1066829871(1) passed u/s.250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2018-19.
2. The assessee has raised the following grounds of appeal: - “1. The Ld. CIT (A) has erred in making the additions u/s 69C, r.w.s 115BBE of the act at Rs 64,58,468/-.
The Ld. CIT (A), gave a relief of Rs 7,42,72,382/-, where the assessee had requested for the deletion of the entire additions made by the Assessing officer of Rs 8,07,30,850/-.
3. The Ld. Commissioner state in his Appeal Order u/s 250 of the Act, that the evidences brought on record were carefully considered and it was established that the expenditure incurred towards purchases is un explained. Whereas, the assessee in response to the notices of the LD. CIT (Appeals), has submitted all the required details, documents and records for the contemplations of the Ld. CIT(A).
Swamy Holagundi Page 2 of 10 The Ld. CIT (A), has not elaborated any discussion in his Appeal Order, over the failure of the assessee to establish that the expenditure incurred towards the purchases are genuine.
4. The Ld. CIT(A) states in his order, that after adjudicating the case in a fair and a reasonable manner, the quantum is reduced from Rs. 8,07,30,850/- to Rs 64,58,468/- 5. Further, the Ld. CIT(A), states that based on the merits and facts of the case it was substantiated that an amount of Rs 64,58,468/- needs to be necessarilybrought to tax u/s 69C r.w.s 115BBE of the Act. To substantiate the purchase expenditure, the assessee had furnished the copies of the purchase Bills from M/s Sri Sai Baba Rice Industries, purchase register and bank book. The Assessing Officer has not considered, that all the payments made against the purchase are through bank only. The assesseehad not paid for the purchases not in any mode other than by bank. In the Assessment order by the Assessing Officer, did not have any dispute over the Sales and the Closing stock of the Assessee, then how the purchases can be treated as unexplained. The Ld.CIT(A) is also silent on the issues over the sales and closing stock of the assessee.
The Assessee wish to bring to your kind notice and attention that, theAssessee's Purchases from Shri Saibaba Rice Industries are genuine. As the assessee had made all the purchases against the VAT & GST Bills and the payments made to the supplier are through bank transfers. The assessee had not made any purchases against the cash. To substantiate the claim of the genuine purchases, the assessee had submitted the documents and details for the AY in consideration during the course of Scrutiny Assessment & Appeal Proceedings.
The assessing Officer has made additions of Rs 8,07,30,850/- only on the basisof preconceived opinion, that the assessee had made huge purchases from Smt. Neelima Santosh Purohit, Prop: Shri Saibaba Rice Industries PAN DHJPP1724H. We wish to draw your kind attention to the Order Passed by the Central Circle Hubli vide Order No: ITBA/AST/S/147/2022-23/1048581530 (1) dated 10/01/2023, of the supplier Smt. Neelima Santhosh Purohit, Prop: Shri Saibaba Rice Industries PAN DHJPP1724H, after survey proceedings order U/s 147 was duly passed, wherein, the sales of the supplier are treated asgenuine, then how the purchases of the assessee can be made as additions to total income as 'un- explained expenditure'.
The Assessing Officer & the Ld. CIT(A) had wrongly treated the Purchases of the Assessee as 'un-explained expenditure'. Which is not correct. In the said assessment order, it has been held that, the entire purchases cannot be particularly in a situation where the Sales have been accepted by the Department, without pointing out any defects.”.
Brief facts of the case are that the assessee is the proprietor of M/s Raviteja Traders & engaged in the wholesale business of trading in rice Swamy Holagundi Page 3 of 10 and wheat. The assessee claims to be had registered under the Goods & Service Taxunder the trade name M/s Raviteja Traders w.e.f. 01/07/2017 vide GSTIN-29DWJPS7047P1ZC, the present status being cancelled effective from 01/07/2017. The assessee was also registered with KVAT Act, 2003 as well as under CST Act, 1956 with effect from 02/02/2015 vide TIN- 29181252862. Further the assessee is having license for operating as a trader in the yard in the state w.e.f. 04/04/2015.Asurvey was conducted on M/s. Shri Sai Baba Rice Industries and in the course of post survey verification it was found that M/s. Shri Sai Baba Rice Industries sold rice to the assessee and received an amount of Rs.8,08,25,241/- in various banks. The assessee had not filed his return of income for the A.Y. 2018-19 under section 139 of the Act. In the light of above information available with department that the assessee had made huge rice purchases from M/s. Shri Sai Baba Rice Industries amounting to Rs.8,07,30,850/-, the case of the assessee was reopened under section 147 of the Act by issuing notice dated30/03/2022 under section 148 of the Act. The books of accounts of the assessee were audited by a chartered accountant & thequalified audit report in Form 3CB & Form 3CD were signed & uploaded on 28/05/2022. Thereafter, the assessee filed his return of income in response to notice u/s 148 of the Act on 14.07.2022 by declaring total income of Rs.5,31,297/-.
3.1 During the course of the assessment proceedings vide notice u/s 142(1) of the Act, the assessee was asked to submit various details & documents, however the assessee did not furnish any reply. Thereafter in response to show cause notices, the assessee submitted his reply on 24/02/2023 & 03/03/2023. The AO observed that the reply submitted by the assessee on 24/02/2023& 03/03/2023 were not found tenable. Further the AO observed that as the assessee has not provided the relevant documentary evidence as called for in the notices u/s 142(1) of the Act & therefore the assessee has not been able to substantiate the Swamy Holagundi Page 4 of 10 expenditure that is made on purchases from Sri Sai Baba Rice Industries (Proprietor- Neelima Santosh Purohit). In response to SCN, the assessee has provided only ledger accounts of purchases / sales and bank accounts which in the opinion of the AO are not sufficient to establish the genuineness of the purchases from M/s. Shri Sai Baba Rice Industries.Further, the Ld. AO observed that the assessee has not got his accounts audited despite having turnover above the limit as prescribed u/s 44AB of the Act.
3.2 The AO finally observed that in the present case sales or closing stock of the assessee are not in dispute. It is however apparent and obvious that for sales to have been made or stock to be in closing stock of an entity, some purchases had to be made. At the same time, it is established that purchases amounting to ₹ 8,07,30,850/- are bogus and have never really occurred. Since the purchases amounting to ₹ 8,07,30,850/-have been proven to be bogus, it is obvious that the purchases which led to sales/closing stock have been done out of books and the same amounts to unexplained expenditure and accordingly the entire purchases from M/s Sri Sai baba Rice industries wastreated as unexplained expenditure and disallowed under section 69C of the act and to be taxed as per the provisions of section 115BBE of the act.
Aggrieved by the assessment order passed under section 147 r.w.s. 144B of the Act dated 15.03.2023, the assessee preferred an appeal before the ld. CIT(A)/NFAC.
The Ld. CIT(A)/NFAC held that the finding of the AO that the purchases to the tune of Rs.8,07,30,850/- to be bogus in nature is upheld. However, the Ld. CIT(A)/NFAC was of the opinion that treating the entire bogus purchases of Rs. 8,07,30,850/- to be the income of the assessee is ill-founded. The Ld. CIT(A)/NFAC relying on the decision of the Hon’ble High Court of Bombay in the case of PCIT vs. Hitesh Mody (HUF) reported in [2024] 160 taxmann.com 110 (Bombay) found that the Swamy Holagundi Page 5 of 10 profit margin to be adopted in this line of trading in rice to be fair & reasonable & accordingly the addition to total income u/s 69C r.w.s. 115BBE of the Act was restricted to Rs. 64,58,468/- (8% of Rs. 8,07,30,850/-). Thus the Ld. CIT(A)/NFAC partly allowed the appeal of the assessee by reducing the additions under section 69C of the Act from Rs.8,07,30,850/- to Rs.64,58,468/- and thus granted relief of Rs.7,42,72,382/-.
6. Aggrieved by the order of the ld. CIT(A)/NFAC, the assessee has filed the present appeal before this Tribunal. The assessee has also filed the paper book comprising 180 pages containing therein the various notices, documents,records, orders, vouchers and ledger in support of his claim.
7. Before us, the Ld. AR of the assessee vehemently submitted that the addition confirmed by ld. CIT(A)/NFAC amounting to Rs.64,58,468/- treating as unexplained expenditure u/s 69C is not correct specially when the assessee submitted all the required details/documents/record before the Authorities below. Further, Ld.AR of the assessee submitted that the both the Authorities below had not disputed the sales figure as well as closing stock as declared by the assessee and further during the course of assessment & Appellate proceedings, the assessee had also submitted copies of Audited Profit & loss A/c, bank statements, ledger accounts of purchases / sales along with the ledger copy of M/s Sri Saibaba rice Industries and accordingly submitted that the entire addition are based on preconceived opinion.
8. Ld.DR on the other hand supported the order of the ld. CIT(A)/NFAC and submitted that the substantial relief had already been granted by the ld. CIT(A)/NFAC. Further the ld. DR submitted that as the books of accounts were not audited and assessee had also not filed return u/s 139 of the Act, the addition may be sustained.
Swamy Holagundi Page 6 of 10 9. We have heard the rival submissions & perused the material available on record. It is an undisputed fact that assessee had not filed any return under section 139 of the Act for the Asst. year 2018-19. However, the assessee uploaded the Audit Report along with the audited Profit & Loss A/c & balance sheet and also filed the return of income in response to the notice issued u/s 148 of the Act by declaring the total income of Rs.5,31,297/-& paid the self-assessment tax amounting to Rs.49,400/-.
9.1 Before proceeding further, it apposite here to reproduce the relevant provisions of section 69C of the Act for ease of understanding & reference: -
Unexplained expenditure, etc. 69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year : Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. On plain reading of the above, it is clear that the key trigger points are-
Assessee has incurred expenditure in any financial year and Assessee offers no explanation about the source of such expenditure (or part thereof) or Explanation offered by him is not satisfactory in the opinion of the Assessing Officer.
Consequences: Such expenditure (or part thereof) may be deemed to be the income of the assessee for such financialyear in which expenditure is incurred. Further, as per Proviso to section 69C of the Act, such unexplained expenditure shall not be allowed as a deduction under any head of income.
9.2 Thus, the first condition to attract provisions of section 69C of the Act is that the assessee should have incurred some “expenditure” during the financial year. What is postulated in section 69C of the Act is that first of all the assessee must have incurred that expenditure and thereafter, if the explanation offered by the assessee about the source of such expenditure is not found satisfactory by the Assessing Officer, the amount may be added to his income. In the present case, surprisingly the AO has observed that the purchases amounting to Rs.8,07,30,850/- are bogus and have never really occurred. We are of the opinion that on this score alone vitiated the entire order passed u/s 147 of the Act. There is not even a whisper in the assessment order about the sources of this huge expenditure. More remarkably the AO’s disallowance u/s 69C demonstrates complete non- application of mind.
9.3 We also observed that the Ld. CIT(A)/NFAC on the one hand upheld the finding of the AO that the purchases to the tune of Rs.8,07,30,850/- to be bogus in nature, however on the other hand held that the quantification of total income must be on a scientific basis. Even on going through the merits of the case, we take note of the fact that the sales and closing stocks as declared by the assessee are not disputed by the authorities below. On going through the order of the AO, we also observe the fact that the reason for treating the entire purchases from M/s. Shri Sai Baba Rice Industries amounting to Rs.8,07,30,850/-as bogus was completely based on surmises & conjectures as rightly pointed out by the ld. AR of the assessee. The only contention made by the AO is that since the purchases amounting to ₹ 8,07,30,850/-have been proven to be bogus, it is obvious that the purchases which led to sales/closing stock have been done out of books and the same amounts to unexplained expenditure. Thus, the AO while rejecting the purchases declared in the books was also imagining of other purchases which were out of books that too without any cogent material/statement/record. During the Swamy Holagundi Page 8 of 10 course of assessment proceedings, the assessee had produced the copy of Audited Profit & Loss A/c, Balance sheet, Bank Statement, Ledger Copy of Registered Purchases, Ledger Copy of Unregistered purchases (from Farmers), Sales Ledger, and Ledger copy of Shri Sai Baba Rice Industries etc. The AO did not even discuss how this submission of the assessee made before him could not be found tenable.
9.4 Before us also, the assessee submitted a paper book consisting of Copy of ITR Acknowledgement along with the computation of Income, Copy of Audited financials along with the Audit report filed, copy of Sales register, Copies of Vouchers for payment of Gunny bags, transportation & unloading, sample purchase invoices from M/s. Shri Sai Baba Rice Industries, Ledger copy of M/s. Shri Sai Baba Rice Industries, Godown Rent Agreement along with the copy of SBI Bank Statement for the relevant period which were also produced before the ld. CIT(A)/NFAC. On going through the bank Account as well as the sample invoices/ledger, we observed that all the purchases are against the VAT/GST Bills & all the payments made against the purchases were through bank A/c only.We also take a note of the fact that the assessee had also vide his reply dated 28/06/2024 before the ld.CIT(A)/NFACsubmitted that the proceeds from sales were used to repay the suppliers of the goods which can be verified from the bank statement. Further, on going through the assessment order (placed at Pages 174-180 of PB) passed under section 147 of the Act dated 10.01.2023 after survey proceedings in the case of Neelima Santosh Purohit proprietor of M/s. Shri Sai Baba Rice Industries, we also take note of the fact that the sales as declared by the said supplier is also accepted by the Ld. AO & treated as genuine and therefore we are of the considered opinion that the corresponding purchases as declared by the assessee cannot be held as bogus. Considering the totality of the facts of the case, we are inclined to hold the purchases as made by the assessee from M/s. Shri Sai Baba Rice Swamy Holagundi Page 9 of 10 Industries to be genuine and accordingly no addition can be made under the provisions of section 69C of the act.
On going through the Income Tax Return, as well as the statement of income along with the audited profit and loss account and balance sheet filed before us, we take a note of the fact that assessee has declared the sales of Rs.9,89,28,560/- against total purchases declared amounting to Rs.9,08,57,231.18/-. The assessee has declared the net profit of Rs.5,31,296.82/- from his proprietary concern M/s. Raviteja Traders. We cannot brush aside the fact that the assessee got his books of Accounts audited & filed his return only after receiving the notice u/s 148 of the Act. We also take a note of the fact that the assessee had submitted only the partial compliance before the AO during the course of assessment proceedings. Further, we are also completely aware of the fact that the tax auditor had also issued qualified report with the following observations/qualifications-
all the information and explanations which were necessary for the purpose of audit has not been provided by the assessee.
Purpose of accounts to enable reporting in form 3CD have not been maintained by the assessee
the valuation of closing stock is not possible
creditors under MSME are not ascertainable.
10.1. Under these circumstances we cannot accept the book result (Net Profit) of the assessee declared by the assessee amounting to Rs.5,31,296.82/-as such and accordingly we are of the considered opinion that as the sales of the assessee is not disputed by any of the lower authorities below, we deem it fit and proper to remit this issue to the file of AO with a direction to calculate the Net profit of the assessee by taking into consideration the sum equal to 5% of the total turnover or Swamy Holagundi Page 10 of 10 gross receipts of the assessee as declared in the return to be profits and gains of such business chargeable to tax. In case of the turnover or gross receipts which is received by Account Payee Cheque or Account Payee Bank Draft or use of electronic clearing system through the bank account, the sum equal to 4% of the turnover or gross receipts of the assessee shall be deemed to be profits and gains of assessee’s business. Needless to say that the reasonable opportunity of being heard must be granted to the assessee to provide the details of sales / turnover declared by the assessee with a bifurcation of total Sales receipts through cash & through bank. Assessee is also directed to appear and produce the same before the AO. It is ordered accordingly.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 05th August,2025