2014 (11) TMI 443 - AT - Income Tax

Tribunal Upholds CIT(A) Decision on Disallowance of Purchases & R&D Expenditure

The Tribunal upheld the CIT(A)'s decision to dismiss the Revenue's appeal regarding disallowance of fictitious purchases and disallowance of R&D ... Disallowance on fictitious/bogus purchases – purchases unverifiable or not – Held that:- CIT(A) rightly was of the view that the disallowance on estimate basis and disallowance on percentage basis cannot be upheld - while cancelling the disallowance made by AO on the purchases, the direction was given to tax additionally declared income of assessee in respective assessment years - the statements from senior employees of the group, which were supported by affidavits, that were not controverted by the AO and the statements from Mr. Rajesh Punamia and Mr. Nishit Doshi, which were not supported by the seized material or further enquiries made in the regard, are not fully reliable to treat few purchases as bogus - The method/procedures adopted in quantification of fictitious purchases in the cases of the appellant company as well as the group concerns are not on sound basis, so as to be used for quantification of unaccounted income, in a search related assessments - the addition of fictitious purchases quantified against the purchases made from Shree group and Pooja group, in the case of appellant company, for the year under reference, do not appear sustainable. Since assessee has not disclosed any income and AO could not establish any bogus purchases, estimation of bogus purchases as a percentage cannot be approved - Moreover there is no consistency also on this estimation as pointed out by CIT(A) - There is also no seized material to suggest that this company also resorted to bogus purchases – Decided against revenue. Claim of R & D expenditure disallowed – Expenses incurred for R&D activity or not – Held that:- CIT(A) rightly allowed the ground not only on the reason that there is no withdrawal of the claim u/s 35(1)(iv) by assessee company but also on the reason that similar issue was allowed in assessee's own appeal – wherein it has been held that the assessee is eligible for deduction u/s 35(1)(iv) and AO is accordingly directed to allow the claim – Decided against revenue. Issues Involved:1. Disallowance of fictitious/bogus purchases.2. Disallowance of R&D capital expenditure.Detailed Analysis:1. Disallowance of Fictitious/Bogus Purchases:The Revenue appealed against the orders of the CIT(A)-VII, Hyderabad, which had overturned the Assessing Officer's (AO) decision to disallow certain purchases as fictitious. The AO based the disallowance on statements from senior employees and associated persons of the group concerns, indicating that some raw material purchases were inflated and entries were made without receiving the material. The AO quantified these fictitious purchases and made additions to the taxable income.The CIT(A) analyzed the issue, noting that the AO's reliance on initial statements without considering subsequent denials and affidavits was flawed. The CIT(A) observed that the purchases from the Shree Group and Pooja Group constituted a small percentage of the total purchases and that the AO's method of estimation lacked a sound basis. The CIT(A) emphasized that no concrete evidence was found during the search to prove the unreliability of the records maintained by the assessee. The CIT(A) concluded that the quantification of fictitious purchases was unsustainable and directed the AO to tax the additionally declared income instead.The Tribunal upheld the CIT(A)'s decision, agreeing that there was no consistency in the AO's estimation and no seized material to suggest bogus purchases. The Tribunal dismissed the Revenue's grounds on this issue for all assessment years.2. Disallowance of R&D Capital Expenditure:For the assessment years 2004-05 and 2005-06, the AO disallowed the assessee's claim for R&D capital expenditure under Section 35(1)(iv) of the Income Tax Act, 1961. The AO's reasons included the withdrawal of the claim by the assessee in another group company and the assertion that the expenditure was not incurred at an approved laboratory.The CIT(A) allowed the assessee's claim, noting that the withdrawal was specific to other group companies and not the assessee. The CIT(A) also referenced a previous ITAT decision in the assessee's favor, which supported the claim for R&D expenditure incurred at the factory premises. The CIT(A) directed the AO to allow the claim and withdraw the depreciation allowed on such capital expenditure.The Tribunal upheld the CIT(A)'s order, referencing the ITAT's earlier decision in a group company case, which supported the assessee's claim for R&D expenditure. The Tribunal found no merit in the Revenue's contention and dismissed the grounds related to R&D expenditure disallowance.Conclusion:The Tribunal dismissed all the Revenue's appeals, upholding the CIT(A)'s orders that disallowed the fictitious purchases and allowed the R&D capital expenditure claims. The Tribunal emphasized the lack of concrete evidence and consistency in the AO's estimations and the validity of the assessee's claims based on previous judicial decisions.