2025 (5) TMI 1408 - AT - Income Tax

Unverifiable/in-genuine purchases - addition u/s 69C - HELD THAT - GST Department has carried out a survey at the business premises of M/s. Krishna Traders and it was found that no tax was deposited by Krishna Traders on the goods sold by it and subsequently the assessee has deposited the tax alongwith interest on the purchases made from Krishna Traders. Assessee has filed the copies of the invoices e-way bills and further claimed that the payments were made to these parties through banking channels. However merely by following these details it cannot be stated that the purchases made from these parties are genuine more particularly in the light of admission of the proprietor of M/s. Krishan Traders. We are inclined to interfere in the observations made by the lower authorities that purchases made of INR 26, 47, 92, 365/- from three parities remained unverified. As seen that the claim of the assessee that the goods purchased from these parties were sold and due profits were offered for tax which has not been doubted by the AO. Neither the provision of section 145(3) were invoked nor the turnover of the assessee was doubted. As in the case of N.K. Proteins 2016 (6) TMI 1139 - GUJARAT HIGH COURT has held that in case of unverifiable purchase the profit element embedded should be taxed and not the entire amount of purchases. It is also seen that if the entire purchases is added that would give absurd results thus in our considered view the action of the Ld.CIT(A) in applying the profit rate on such unverifiable purchases is correct and such action is hereby upheld. GP estimation - It is settled proposition of law in case of the estimation of profits past history of the assessee is to be considered and also certain amount of estimation could be done looking to the facts of the case. In the instant case admittedly the assessee has shown better results as compared to preceding years and is engaged in the business of wholesale supply of building material and also worked as civil contractor where the profit rate is comparatively high as against 2.39% applied by the Ld.CIT(A). Thus in our considered opinion G.P rate of 5% on the in-gunine purchase owould be reasonable to meet the end of justice.

Summary

The core legal questions considered in this appeal pertain to the genuineness of purchases made by the assessee from three specific parties and the consequent tax treatment of such purchases. Specifically, the issues are:

(i) Whether the purchases made from the three parties-Indo Trading Co., Krishna Traders, and Som Enterprises-are genuine or unverifiable/in-genuine;

(ii) Whether the entire gross amount of these purchases should be disallowed as unexplained expenditure under section 69C of the Income Tax Act, 1961, or whether a reasonable gross profit (G.P.) rate should be applied to these purchases for addition to the income of the assessee.

Regarding the first issue, the legal framework involves the provisions of the Income Tax Act, particularly sections 142(1), 133(6), 143(3), 144B, and 69C. The assessing officer (AO) invoked section 69C to treat the purchases as unexplained expenditure due to failure to substantiate the genuineness of transactions with these parties. Notices under section 133(6) were issued to 49 suppliers, and responses were examined. The AO found that for three parties, the assessee failed to provide adequate evidence to prove genuineness. In the case of Krishna Traders, the proprietor admitted to being a salaried employee with no business activity, and a GST survey found no tax payments by Krishna Traders, leading the assessee to pay GST and interest voluntarily. For Indo Trading Co. and Som Enterprises, no responses to notices were received, and the assessee failed to produce confirmations or bank statements, resulting in unverifiable purchases.

The Court accepted the AO's findings that the purchases from these three parties remained unverified. While the assessee submitted invoices, e-way bills, and bank payments, the Court held that such documentation alone could not establish genuineness, especially in light of the proprietor's admission and the GST department's findings regarding Krishna Traders. The Court thus upheld the conclusion that the purchases totaling INR 26,47,92,365/- were unverifiable.

On the second issue concerning the tax treatment of unverifiable purchases, the Court examined the precedents, including the Supreme Court's decision in N.K. Proteins vs DCIT, which held that in cases of unverifiable purchases, the profit element embedded in such purchases should be taxed rather than the entire purchase amount. The Court noted that the AO had disallowed the entire purchase amount as unexplained expenditure under section 69C, while the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the addition to the gross profit portion by applying a G.P. rate of 2.39% on the net purchase amount.

The Court observed that the CIT(A)'s approach was aligned with the principle that taxing the entire purchase amount would lead to absurd results, especially since the assessee's trading results and turnover were not doubted and section 145(3) (relating to rejection of accounts) was not invoked. The Court agreed that the entire purchase amount should not be added back as unexplained expenditure but the profit element should be assessed.

However, the Court found that the 2.39% G.P. rate applied by the CIT(A) was on the lower side. The Supreme Court in N.K. Proteins had applied a 25% profit rate where evidence suggested suppression of profits, but in the present case, no such evidence existed. The Court emphasized that estimation of profits should consider the assessee's past history and business nature. Given the assessee's engagement in wholesale trade and civil contracting with relatively higher profit margins, the Court deemed a 5% G.P. rate reasonable and just to meet the ends of justice.

The Court directed the AO to apply a 5% gross profit rate on the unverifiable purchases of INR 26,47,92,365/-, deducting the G.P. declared by the assessee on these purchases, and make the addition accordingly. The Court clarified that the addition would be on account of trading profits and not under section 69C after applying the profit rate, thereby excluding unexplained expenditure treatment.

In dealing with competing arguments, the Revenue contended that since the assessee failed to prove genuineness, the entire purchase amount should be added back. The Revenue relied on the proprietor's admission and GST survey findings, asserting that voluntary GST payment by the assessee indicated acceptance of bogus purchases. The Court accepted these points to establish unverifiability but rejected the Revenue's contention for full addition, citing legal precedents and the principle of taxing only the profit element.

The assessee argued that the purchases were genuine, supported by invoices, e-way bills, and payments through banking channels. It contended that GST payment was a prudent business decision to avoid prolonged proceedings and did not imply admission of bogus purchases. The assessee also pointed to the absence of rejection of books of accounts or invocation of section 145(3) to support the genuineness of transactions. The Court acknowledged these arguments but found the evidence insufficient to establish genuineness fully, especially for Krishna Traders and the other two parties, given the lack of confirmations and responses.

The significant holdings of the Court include the following:

"Merely by following these details, it cannot be stated that the purchases made from these parties are genuine more particularly, in the light of admission of the proprietor of M/s. Krishna Traders."

"In case of unverifiable purchase, the profit element embedded should be taxed and not the entire amount of purchases."

"Considering the overall facts and circumstances of the case, in our considered opinion, G.P rate of 5% on the in-genuine purchase of INR 26,47,92,365/- would be reasonable to meet the end of justice."

"The addition is confirmed on account of trading addition and no addition is sustained under s. 69C of the Act as after application of the profit rate, there is no question of invoking the provision of section 69C of the Act."

In conclusion, the Court upheld the AO's finding that purchases from the three parties were unverifiable but modified the quantum of addition. Instead of disallowing the entire purchase amount under section 69C, the Court directed applying a 5% gross profit rate on the net purchase amount and making addition only to the extent of profits, thus partially allowing the Revenue's appeal and dismissing the assessee's cross-objections.