Not hypothetical income, but Its only real income can be taxed under Income Tax Act


Not hypothetical income, but Its only real income can be taxed under Income Tax Act




There are various istances wherein abrupt disallowance is done by the assessing income tax authorities without considering the element of real income embedded therein. Here is one interesting case of CIT vs. Hariram Bhambani ABCAUS 1275 (2017) (05) ITAT wherein it has been held that only real income can be taxed under Income Tax Act. Even if the whole transaction is not verifiable, only income component not the entire purchase is taxable. In this case, the appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] confirming the order of the Assessing Officer (‘AO’) making addition for entire purchase u/s 69C of the Income Tax Act, 1961 (‘the Act’) treating them as bogus.

Short Overview of the case:

The appellant assessee was a proprietor engaged in the business of Civil Contractor, Sub-contractor for Civil and for Labour Contract and sub-Contract. During the course of the assessment proceedings u/s 143(2), the AO asked the assessee to furnish the list of persons from the assessee purchased the material.

The assessee furnished the list of such parties.

The Assessing Officer noticed that out of such parties, the names of some of such parties were appearing in the list of suspicion dealers on the website of the State Sales Tax Department. Those dealers were issuing bogus bills without delivery of any goods or material only for a commission.

The Assessing Officer collected the statement of the parties whose names appeared in the list State Government Sales Tax Department. Copies of all the information, statement, and deposition, affidavit etc. were provided to the assessee. The Assessing Officer also issued notice under section 133(6) of the Act to all such parties. The notices sent to those parties were returned back by the postal authorities with the remark both ‘left’, ‘not known’ or ‘not available’ at its address.

The Assessing Officer asked the assessee to explain as to why the purchases from such parties should not be treated as unexplained expenditure. The assessee filed his reply claiming that purchases made from these parties were genuine.

The assessee contended that the assessee used to purchase material like Sand, Cement as the same easily available in the market, the assessee used to place the order verbally based on the requirement on site. All the sites were under the control of supervisor and proprietor, there was no possibility of any leakage in use of material, all the payments were made through account payee cheque and copies of bank statements along with copies of cheques number were provided to the Assessing Officer.

The contention of assessee was not accepted by Assessing Officer and he disallowed the entire purchases holding that the assessee failed to produce the delivery challans, payments of octroi receipt, stock register to substantiate the genuinity of the purchases from these parties. The assessee failed to produce the evidence as to how the material comes to the possession of the assessee and thus the Assessing Officer disallowed the cost of entire expenditure incurred on account of purchases.

The assessment of the assessee was completed u/s 143(3) of the Act making addition under section 69C on account of bogus expenditure.

The CIT(A) examined that the Gross Profit ratio in two preceding AYs was in the range of 13% whereas the GP Ratio in the year under consideration had fallen to 7.88%. The Commissioner (Appeals) concluded that the assessee has not been able to substantiate as to why the G.P. Ratio has not fallen down to 7.88%, which was overall more than 13% in the past except AY 2006-07 & 2007-08, where the G.P. was above 17%.

On the basis of average G.P. Ratio for AY 2008-09 & 2009- 10, the Commissioner (Appeals) arrived at an average G.P. of 13.37% for the year under consideration. By applying the G.P. ratio on Gross Receipt the Gross Profit of Rs. 1,00,70,803/- was worked out. The CIT(Appeals) further reduced the amount of Gross Profit already declared by the assessee from the profit worked out by him and sustained the balance disallowance

However, aggrieved by the order of Commissioner (Appeals) both the assessee and the Revenue were in cross appeals before the Tribunal.



In this case, ITAT made following important Observations:

The Tribunal observed that Commissioner (Appeals) had not given opportunity to the assessee while working out the disallowance on the basis of G.P. Ratio.  It was further noticed that the AO nor the CIT(A) rejected the sales of the assessee. The AO had disallowed the entire amount of purchases/ expenditure without examining the gross profit ratio or net profit ratio of the assessee for previous year and in subsequent years.

The ITAT opined that under Income Tax Act only real income can be taxed by the Revenue. It was further noted that even in cases where the whole transaction is not verifiable due to various reasons, the only taxable is the taxable income component and not the entire transaction.

The Tribunal observed that a similar view was taken by Hon’ble Bombay High Court wherein it was held that only the profit attributable on the total unrecorded sale consideration alone can be subject to income tax.

The ITAT opined that in order to fulfill the gap of revenue leakage the disallowance of reasonable percentage of impugned purchase would meet the end of justice.


ITAT concluded that that disallowance made on account of bogus purchases be restricted to 10% of the impugned/ disputed purchases.




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