2014 (5) TMI 620 - AT - Income Tax

Tribunal confirms restriction on purchases disallowance citing improved GP rate, dismisses department's appeal

The Tribunal upheld the CIT (A)'s decision to restrict the disallowance of purchases made by the assessee firm to Rs. 28,87,305/-, citing the firm's ... Restriction of addition - cessation of liability - Disallowance of purchases being not genuine – Held that:- CIT (A) has observed that the GP rate of the assessee firm for the year was better in comparison to the immediately preceding AY – as such, the purchases made by the assessee ought not to have been doubted by the AO - and that if at all, the amounts outstanding to the credit of the three parties in the assessee’s books of account could have been disallowed u/s 41 (1) of the IT Act - CIT (A) restricted the disallowance on account of cessation of liability of credit balance outstanding in the name of the three parties in the assessee’s books - CIT (A) has correctly held that addition needs only be made of the amounts outstanding to the credit of the three parties in the assessee’s books, on account of cessation of liability of credit balance, u/s 41 (1) of the Act – there was no reason to interfere in the order of the CIT(A) – Decided against Revenue. Issues involved:Department's appeal for Assessment Year 2003-04 regarding restriction of addition made by AO from Rs. 76,39,453/- to Rs. 28,87,305/- by CIT (A).Analysis:1. Verification of Purchases: The assessee firm was engaged in the business of manufacturing and selling engineering goods. The AO disallowed the entire purchases amounting to Rs. 76,39,453/- made by the assessee from three parties as unverifiable. The parties were not found at the given addresses, and despite reminders, they did not respond. The AO observed discrepancies in the confirmation of purchases and lack of evidence regarding the genuineness of transactions.2. Dispute over Disallowance: The CIT (A) restricted the disallowance to Rs. 28,87,305/-, emphasizing the better GP rate of the assessee firm compared to the previous year. The CIT (A) considered the outstanding amounts to the credit of the three parties in the assessee's books and applied Section 41(1) of the IT Act for the disallowance.3. Judicial Decision: The Tribunal upheld the CIT (A)'s decision, stating that the purchases made by the assessee contributed to its GP, and even if purchases from the disputed parties were questionable, they could have been made from other genuine sources. The Tribunal noted that the sales made by the assessee to Government agencies were not in doubt, and the GP rate was better than the previous year. Consequently, the Tribunal confirmed the restriction of disallowance to Rs. 28,87,305/-, finding no error in the CIT (A)'s order.4. Conclusion: The Tribunal dismissed the department's appeal, affirming the CIT (A)'s decision. The Tribunal emphasized that the disallowance was correctly limited to the outstanding amounts on the credit balance of the three parties in the assessee's books under Section 41(1) of the Act. The department's grounds of appeal were deemed without merit and rejected.