While allowing a departmental appeal, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the term “purchase on credit” shall be included within the meaning of “unexplained cash credit” under section 68 of the Income Tax Act, 1961.
On first appeal, the CIT(A) held in favour of the assessee, M/s Solid Machinery Co Pvt Ltd and observed that the amount shown as outstanding for the credit purchases can never be covered by the scope of Section 68.
Overruling this finding, the Tribunal bench comprising Pramod Kumar (Vice President), and Sandeep S Karhail (Judicial Member) held that “in our considered view, that is a very superficial way of looking at the provisions of Section 68. Section 68 categorically provides that “where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year”. The law is simple and unambiguous. When a sum is found credited in the books of accounts of the assessee, he has to explain the same, and in the event of the assessee’s failure to do so, that amount is treated as unexplained credit under section 68.”
“When an assessee purchases something from a vendor, obviously, the account of such a vendor is credited and the purchases are debited and, therefore, when the assessee does not have a reasonable explanation about the credit appearing in the account of the vendor- as in this case, the Assessing Officer is perfectly justified in making the addition under section 68. The assessee explains that these people keep changing their office and are not easily traceable, but could it be an acceptable explanation that someone owes huge amounts to the vendors and these vendors are untraceable? The answer, in our humble understanding, is emphatically in negative,” the Tribunal said.
Upholding the addition, the Tribunal held that “A lot of emphasis is then placed on the fact that section 68 is titled ‘cash credit’ and, therefore, purchases on credits cannot be covered by this section. This plea is also ex-facie incorrect as wordings of Section 68, as we have noted above, are categorical, and these words cover any unexplained credit in the books of accounts.”
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