The Tax Publishers

Income Tax--Bogus Purchase

Unaccounted Purchases/Sales : Whether Entire Purchases/Sales can be Added to Income or Only the Estimated Profits Embedded in Sales?

Akhilesh Kumar Sah

In this write-up, the learned author discusses an important issue concerning quantum of unrecorded purchases/sales vis-a-vis estimated profit on the basis of undisputed rate of gross profit to be adopted for the purpose of making addition to income of assessee, depending on facts of the case. Unaccounted purchases are treated as unexplained investment and/or undisclosed stock by AO who applies average profit disclosed by assessee i.e., at certain G.P. rate, the profit estimated on unaccounted sales. Difference between unaccounted purchases and unaccounted sales has to be treated as undisclosed stock of assessee. Explaining the observation made and decision rendered by ITAT, Jaipur in Nikhil Garg's case, he sums up that (i) In respect of findings of unrecorded purchases or sales, the profit attributable on the total unrecorded purchases or sales can be subject to income tax and (ii) in respect of undisclosed sales only profit can be added when purchases are recorded but sales is undisclosed. In case of bogus purchases, it is only the profit element which has to be assessed to tax, and not the entire purchases.

1. Introduction

In case of finding of unaccounted sales or purchases of a person only the percentage of profit involved in sales or purchases should be taken for the purposes of additions to the income of such person, and not the whole amount of sales or purchases should be added to the income while computing profits under Income Tax Act, 1961 (for short, the Act).

Nikhil Garg v. ITO [ITA No. 180/JP/2018 (A.Y. 2009-10)] decided by ITAT Jaipur on 14-2-2022 : 2022 TaxPub(DT) 1461 (Jp-Trib) is a recent case on the issue which is helpful for the assessees.

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