2012 (2) TMI 613 - AT - Income Tax

Tribunal limits disallowance on purchases, rejects Revenue's appeal. Emphasizes actual purchases for business.

The Tribunal partially allowed the assessee's appeals, directing the AO to restrict the disallowance to 12.5% of the purchases declared from the Panwala ... - Issues Involved:1. Confirmation of 25% of alleged non-genuine purchases.2. Restriction of addition made by the Assessing Officer (AO).3. Rejection of books of account u/s 145.4. Applicability of Section 69C for unexplained expenditure.Summary:Issue 1: Confirmation of 25% of Alleged Non-Genuine PurchasesThe assessee contested the confirmation of 25% of alleged non-genuine purchases from various concerns of the Rohit Panwala group for the assessment years 2001-02 to 2003-04. The Ld. CIT(A) confirmed the addition based on the statement of Rohit Panwala, who admitted issuing bogus bills without selling any raw materials. The Tribunal found that the purchases from the Panwala group were not genuine and upheld the rejection of books of account u/s 145. However, the Tribunal directed the AO to restrict the disallowance to 12.5% of the purchases instead of 25%, citing a similar case where 12.5% disallowance was deemed appropriate.Issue 2: Restriction of Addition Made by the AOThe Revenue appealed against the Ld. CIT(A)'s decision to restrict the addition made by the AO. The AO had added the entire amount of alleged bogus purchases to the taxable income of the assessee u/s 69C, deeming it unexplained expenditure. The Tribunal, however, found that the assessee must have made actual purchases from the open market to conduct its dyeing and printing business. Therefore, the Tribunal upheld the Ld. CIT(A)'s decision to restrict the addition but modified the percentage of disallowance to 12.5%.Issue 3: Rejection of Books of Account u/s 145The AO rejected the books of account u/s 145, citing serious defects due to the inclusion of bogus purchases. The Ld. CIT(A) and the Tribunal both upheld this rejection, agreeing that the purchases from the Panwala group were fictitious and that the assessee had inflated its purchase figures. The Tribunal noted that the assessee's business activities required actual purchases of colors and chemicals, which were likely made from the open market.Issue 4: Applicability of Section 69C for Unexplained ExpenditureThe AO had added the entire amount of alleged bogus purchases as unexplained expenditure u/s 69C. The Ld. CIT(A) disagreed, stating that the amounts paid by cheque to the Panwala group were returned in cash to the assessee, thus explaining the source of expenditure. The Tribunal concurred, holding that the addition should be made for bogus purchases rather than unexplained expenditure u/s 69C, as the source of funds was explained.Conclusion:The Tribunal partly allowed the assessee's appeals, directing the AO to restrict the disallowance to 12.5% of the purchases declared from the Panwala group. The Revenue's appeals were dismissed. The Tribunal emphasized the need for actual purchases to conduct the assessee's business and found the rejection of books of account u/s 145 justified. The addition was to be made for bogus purchases, not unexplained expenditure u/s 69C.