Without Purchase, it is Unable to Sale Anything: ITAT Deletes Addition

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

The bench Saktijit Dey (Vice President) and Pradip Kumar Kedia (Accountant Member) pointed out that excluding purchases from trading results without also excluding the sales isn’t fair or balanced. They criticized the Assessing Officer (AO) for disregarding basic accounting principles.

The appellant/assessee contested a disallowance of Rs. 15,17,87,755 for alleged bogus purchases. According to the preliminary assessment, the AO suggested disallowing these purchases of denim fabric from SunGold Trade Pvt. Ltd. (STPL), claiming they were bogus.

These items were then purportedly sold to Shivoham Trading Pvt. Ltd. and Shakumbri Tradelink Pvt. Ltd. The AO labeled the purchases from STPL as fake and proposed adding them under Section 69C in the draft assessment order.

The assessee informed the Dispute Resolution Panel (DRP) that their business involves trading fabric. They clarified that the purchases from STPL were part of their trading operations, where goods bought were resold to two parties without alteration.

These transactions resulted in a profit for the assessee. However, the AO labeled the initial purchase as bogus, despite its role in subsequent legitimate sales.

The DRP emphasized that in any business transaction, sales cannot occur without corresponding purchases. Complete accounting necessitates considering both sides of the transaction.

Therefore, the sale and purchase activities must be assessed together. The AO was instructed to conduct verifications in line with these observations.

However, in the final assessment order, the AO persisted in treating the fabric purchases from STPL as bogus and rejected the claim under Section 37, lacking any new evidence on record.

The assessee argued that within their trading operations, they ultimately gained a profit of Rs. 10,36,945. The assessment order itself detailed the purchases and sales, all meticulously recorded in their books.

While the AO acknowledged the sales, they refused to accept the purchases, overlooking the essential link between sales and corresponding purchases. This oversight by the AO led to potential double taxation: once through recognized sales and again through disallowance of the corresponding purchases of the same goods.

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The tribunal determined that the AO’s additions were unjustified, echoing the DRP’s stance that a sale cannot exist without a purchase. Considering the AO factored in the sales figures to compute the assessee’s income, the purchase figures also warranted acknowledgment.