INCOME TAX ACT, 1961

Section 69C

Income from undisclosed sources - Addition under section 69C - Addition on account of bogus purchases - Profit element to be added only

Assessee being resident corporate assessee stated to be engaged in trading of gold jewellery was assessed for year under consideration under section 143(3) r.w.s. 147 wherein the income of assessee was determined at Rs. 1429.07 Lac after sole addition of alleged bogus purchases for Rs. 1302.88 Lacs as against returned income of Rs. 126.18 Lacs e-filed by the assessee which was processed under section 143(1). In the assessment order, AO held that assessee made purchases in cash from outside parties by utilizing undisclosed income and merely took bogus bills from certain suppliers. Finally, he made additions under section 69C and the manner of disallowance adopted by AO was peak credit basis. Held:<>/i> It had been accepted that assessee had made circular transactions to the extent of Rs. 1163.89 Lacs that the transactions, to that extent, were to be considered as mere paper entries and the same were to be disregarded while making the additions in the hands of the assessee. If these transactions were removed from assessee's financials, there would be no impact on the profit for this year as well as subsequent year. So far as the balance purchase of Rs. 384.03 Lacs for the year under consideration was concerned, it was noted that assessee had made cheque payment of Rs. 382.72 Lacs to one of the stated entities during the year and as per the statement of the director, cash was generated and the material was purchased in cash from the open market. To regularize the cash purchases, bills were procured from stated entities. Additions, which were to be sustained in the hands of the assessee against these purchases, would be to account for profit element embedded in such purchase transactions to factorize for profit earned by assessee by procuring goods from grey / unorganized market. The method of peak credit as adopted by AO would not be a suitable method under the circumstances rather an adhoc estimated addition would meet the cause of justice. Thus, the additions at 5% of balance purchases of Rs. 3,84,03,652 which comes to Rs. 19,20,183 was sustained and the balance addition stood deleted.