There Cannot Be Sale Without Purchase: ITAT Deletes Addition

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has deleted the addition made by the AO as there cannot be a sale without a purchase.

The bench of Saktijit Dey (Vice President) and Pradip Kumar Kedia (Accountant Member) has observed that the exclusion of purchases from the trading results is not permissible without corresponding exclusion of the sales in such trading activity for arriving at a fair and balanced view. The action of the AO patently offends the rudimentary principle of accounting.

The appellant/assessee has challenged the disallowance of Rs. 15,17,87,755 towards bogus purchases. As per the draft assessment order, the AO proposed disallowance on account of bogus purchases of denim fabric from SunGold Trade Pvt. Ltd. (STPL) amounting to Rs. 15,17,87,755, which was, in turn, sold to two parties, namely Shivoham Trading Pvt. Ltd. and Shakumbri Tradelink Pvt. Ltd. The AO held the purchases made from STPL as bogus purchases and proposed additions under Section 69C in the draft assessment order.

The assessee submitted before the DRP that the assessee is also engaged in the business of trading fabric. The purchase from STPL represents trading activity by the assessee where the goods purchased have been sold to two parties without any modification. The trading transactions have resulted in profit for the assessee company. The sale of goods to these two parties could not be carried out without a corresponding purchase, which is assailed as a bogus purchase by the AO.

The DRP noted that there cannot be any sale without purchases in any business transaction, as the accounting is complete only by taking into account both sides of the transaction. The sale and purchase transactions are thus required to be simultaneously considered. The AO was accordingly directed to make verifications in light of the observations.

The AO, in the final assessment order, however, continued to treat the purchases of fabric from STPL as bogus and refused the claim made under Section 37 without bringing any fresh facts on record.

The assessee contended that in trading activity, the assessee ultimately earned a profit of Rs. 10,36,945/-. The details of purchases and sales are given in the assessment order itself. All the purchases and sales are duly recorded in the books of account. The AO has duly accepted the sales but refused to accept the purchases and consequently failed to appreciate that no sales can be carried out without corresponding purchases. The action of the AO has resulted in double taxation, one by way of sales recorded and another by disallowance of corresponding purchases of the same goods sold.

The tribunal held that the AO was not justified in making additions, as the DRP has held that there cannot be a sale without a purchase. When the sale figure is taken into account by the AO for computing the income of the assessee, the purchase figure is required to be considered.

Counsel For Appellant: Amit Goel

Counsel For Respondent: Rajesh Kuma

Case Title: Bhartiya International Ltd. Versus DCIT

Case No.: I.T.A. No.2109/DEL/2022

Click Here To Read The Order