ITAT Rejects 100% Addition on Suspicious Sales; Remands Case for Fresh Consideration

The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has recently delivered its judgement in a dispute that mainly relates to the additions made by the tax authorities under Section 68 of the Income Tax Act, which deals with unexplained cash credits, for Assessment Years 2014-15, 2015-16, and 2016-17.

The assessee company, Shri Bhumika Strips Private Limited, is engaged in the business of manufacturing stainless steel products. It furnished its income tax return (ITR) for the Assessment Year 2014-15, declaring its total income at Rs 20,65,910. The tax authorities had received information from the Investigation Wing that the assessee had taken the benefit of accommodation entry for Rs 1.60 crore from several companies. The tax authorities treated certain sales as suspicious and made an addition amounting to Rs 1.60 crore to the assessee’s income as unexplained income for AY 2014-15. Similar additions were made for the other years.

The assessee argued that all the sales in question were properly recorded, supported by invoices and already included in taxable income. It further flagged that its booked accounts were not rejected by the tax authorities. Hence, it is unfair to make an addition to the entire sales amount. When the tribunal analysed the facts of the case, it noted that it is a settled legal principle that when sales are recorded in the books, only the profit element embedded in such transactions can be taxed, not the full amount. The Tribunal also noted that the company’s average gross profit rate over the years was around 9%.

Accordingly, the tribunal instructed the tax authorities to recalculate the additions by applying a 9% gross profit rate rather than taxing the entire sales in question. The case is sent back to the tax authorities with directions to freshly consider it after giving the assessee a proper opportunity of hearing. Thus, the appeal was allowed for statistical purposes.