ITO, CHITRADURGA vs. M/S SAI BHAGAWAN TRADERS, CHITRADURGA

Facts apropos are that the assessee, manufacturer of deoiled cake and refined oils had filed its return declaring a total income of Rs.2,43,310/- electronically on 30.10.2007 for the impugned assessment year. There was a survey u/s.133A of the Income-tax Act, 1961 (‘the Act’ in short) in the business premises of the assessee on 02.11.2006. During the course of survey proceedings it seems certain loose sheets were found which reflected therein certain cash purchases made by the assessee. AO listed out the cash purchases from the loose sheets. Such purchases pertained to the month of October 2006 and aggregated to a sum of Rs.2,15,05,363/-. Purchases were made from 37 parties of which AO summoned 25 persons issuing summons u/s.131 of the Act. Their sworn statements were also recorded. As per the AO such persons confirmed that goods were sold by them to the assessee on cash basis. It seems they also filed an account extract, inter alia confirming the cash sales to the assessee. Books of account of the assessee as on the date of survey did not reflect these transactions. 03. Explanation of the assessee was sought on the alleged cash purchases not recorded in the books as on the date of survey. Assessee stated that the loose sheets did not record any purchases. As per the assessee it was also running a weigh bridge, and the persons whose name appeared in the loose ITA.16/Bang/2014 Page - 3 sheets had brought material to the assessee for weighment. They required the assessee to act as a commission agent. As per the assessee it could at the best make only 1% commission on the sale of such goods in its role as a commission agent. In other words as per the assessee it was only helping the owners of the goods to sell their products and was never by itself buying such products. Assessee also submitted that the commission from these transactions were accounted and correctly shown in its books. 04. However the AO was not impressed by the explanations of the assessee. According to him assessee had never stated during the time of survey that it was doing any commission business. Argument that it was doing commission agency on behalf of various parties as per the AO was only an after thought. He held the cash purchases of Rs.2,15,05,353/- as unexplained investment u/s.69 of the Act and made an addition thereof. 05. Aggrieved assessee moved in appeal before the CIT (A). Argument of the assessee was that thirteen parties had never confirmed any sale of goods to the assessee. As per the assessee such unconfirmed amounts itself came to Rs.16,54,143/-. Further as per the assessee there were duplicate bills included in the list compiled by the AO which totalled to Rs.42,63,036/-. Since assessee brought to the notice of CIT (A) that the persons whose statements were recorded by the AO were never cross ITA.16/Bang/2014 Page - 4 examined by it, CIT (A) sought a remand report from the AO. It seems in the remand report dt.18.03.2011, AO stated that a sum of Rs.42,63,036/-, out of total Rs.2,15,05,363/- considered as unexplained investment in purchases were duplication of bills. He also confirmed that one bill of Rs.5,01,331/- was also a duplicate bill as confirmed by the party concerned. It seems one of the suppliers, Murali Industries had in the cross examination done by the assessee during the course of remand proceedings denied any sale to the assessee. Alleged purchase from Murali Industries came to Rs.20,18,690/-.

CIT (A) after considering the remand report and submissions of the assessee held 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 as per the CIT (A) 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. Ld. CIT (A) was of the opinion that the balance sum of Rs.1,30,68,163/- which could be considered as unaccounted cash purchases could not be treated as income in its entirety. According to him at the best only a fair and reasonable ITA.16/Bang/2014 Page - 5 estimate of the gross profit could be applied for arriving at the income. 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/-.

Now before us, Ld. DR strongly assailing the order of CIT (A) submitted that the loose sheets found from the premises of the assessee had clearly recorded purchases made by the assessee. Relying on Annexure-1 to the assessment order, Ld. DR submitted that all the details like date of purchase, , name of the seller, commodity, quantity and price were mentioned in such loose sheets. As per the Ld. DR, these purchases were never recorded in the books of account of the assessee. Thus as per the Ld. DR these were nothing but unexplained investment made by the assessee for purchase. Since assessee was not able to show the source for funds used for these purchases, according to Ld. DR, the amount was rightly added u/s.69 of the Act. As per the Ld. DR though the sum of Rs.42,63,036/- and Rs.5,01,331/- were duplicate bills as accepted by the AO in the remand report, balance of the sum truly reflected unaccounted purchases. Just because summons were not issued to 12 or 13 of the 37 parties it could not be presumed that notings in the loose sheets in so far as such persons were concerned was incorrect. Assessee could not offer any ITA.16/Bang/2014 Page - 6 explanation on the loose sheets. Just because Murali Industries had denied any sale to the assessee, notings in the loose sheets ought not have been disbelieved. As per the Ld. DR source of money for the purchases stood unexplained. Assessee could not show any sale from these purchases. As per Ld. DR assessee might have stocked such unaccounted purchases elsewhere. Hence, the CIT (A) ought not have estimated any gross profit and given relief to the assessee.

Per contra, Ld. AR strongly supported the order of CIT (A) and submitted that there was no scope for addition on account of any unaccounted purchase. As per the Ld. AR at the time of survey there was no discrepancy in the stock of goods with the assessee. Had there been unrecorded purchases which were not sold, there should have been discrepancy in the stock. Once the stock was found correct, it was wrong to come to a conclusion that loose sheets represented notings of any cash purchases. As per the Ld. AR, assessee was also doing commission sales and whatever commission was earned on the goods sold as commission agent were reflected in its books of account. Thus according to him, addition was made purely on surmises.

We have perused the orders and heard the rival contentions. AO has listed out 250 items in the annexure to the assessment order showing purchases worth Rs.2,15,05,364/-. In the course of remand proceedings it was accepted by the AO that the said amount contained duplication of bills to the extent of Rs.42,63,036/-. It was also accepted by the AO that bill for Rs.5,01,331/- was accepted by one supplier to be a duplicate one. One, M/s. Murali Industries who was summoned had denied any transactions with the assessee. The alleged transactions with Murali Industries by itself came to Rs.20,18,690/-. AO has himself stated that out of 37 parties he had issued summons only to 25 persons. Revenue has not disputed the argument of the Ld. AR that there no discrepancy was found in stock on the date of survey. If we take a presumption that the items in the loose sheets reflected purchases made by the assessee which were not recorded in its books, then definitely on the date of survey there should have been a stock variation. Items which were purchased by the assessee or which were alleged to have been purchased by the assessee were the same items which the assessee was manufacturing and trading. Hence in the nature of the trade, we cannot presume that assessee held all the purchased stock with it without effecting any sales. Since there was no discrepancy in stock, obvious conclusion is that whatever was purchased was sold by the ITA.16/Bang/2014 Page - 8 assessee. As to the argument of the Ld. DR that stock might have been kept elsewhere, there is nothing on record to suggest any place of business for the assessee other than the one which was surveyed. Thus to consider the whole of the purchases as unexplained investment was incorrect. Assessee was continuously purchasing and selling and therefore the preponderance of probability is that successive purchases would have been financed by the sales of the earlier purchases. In such situation at the most what we can consider as unexplained investment is the first purchase. All the purchases were in the month of October, 2006 and the first purchase was on 03.10.2006. Assessee would have sold these and used such funds for the next purchase. In such a situation, in our opinion, what the assessee could have earned is only the profits from such purchases. Even if we consider the first purchase to have been made out of unaccounted income, the estimated profits from the unaccounted sales would be more than sufficient to justify the source. Against the gross profit rate of 2 to 3% suggested by the assessee, based on a decision of Third Member bench of Ahmedabad Tribunal in the case of ITO v. Gurubachansingh J. Juneja [(1995) 55 ITD 0075], CIT (A) had taken a higher rate of 6%. We find that in the circumstances of the case, directions of the CIT (A) were fair. We do not find any reason to interfere.