2015 (8) TMI 651 - AT - Income Tax

ITAT upholds disallowance of deductions on unverifiable purchases

Income Tax Officer, Ward 2 (1), Jaipur Versus M/s Five Star Corporation

Income Tax Officer, Ward 2 (1), Jaipur Versus M/s Five Star Corporation - TMI Issues Involved:1. Addition of Rs. 57,50,000/- on account of unverifiable purchases.2. Deduction under Section 80HHC on the addition of Rs. 23,76,774/-.Detailed Analysis:1. Addition of Rs. 57,50,000/- on account of unverifiable purchases:The case involves cross appeals by both the revenue and the assessee against the order of the CIT(A)-I, Jaipur, for the A.Y. 2002-03. The primary issue is the addition made by the Assessing Officer (AO) on account of unverifiable purchases amounting to Rs. 57,50,000/-, which was partly deleted by the CIT(A). The revenue appealed against the deletion, while the assessee appealed against the partial confirmation of Rs. 23,76,774/-.The assessee, engaged in the export of precious and semi-precious stones, had filed a return declaring an income of Rs. 3,92,950/-. The AO observed that purchases from M/s Anmol Ratan (Rs. 47,50,000/-) and M/s Shruti Gems (Rs. 10,00,000/-) were bogus. Consequently, the AO made an addition of Rs. 57,50,000/- under Section 69C, treating it as income from other sources and unaccounted expenditure.The CIT(A) directed a recalculation of profit by applying a G.P. rate of 15% on the turnover and allowed deduction under Section 80HHC, deleting the addition to the extent of Rs. 54,94,050/-.The ITAT, in its earlier order, remanded the matter to the AO, directing to verify if the goods worth Rs. 57,50,000/- were exported. Despite multiple notices, the assessee failed to comply, leading to an assessment under Section 144.The AO reiterated that the purchases were bogus, as the assessee could not establish the genuineness of the transactions. The AO applied Section 69C and alternatively Section 68, treating the purchases as unexplained expenditure and adding Rs. 57,50,000/- to the income.The CIT(A) partially accepted the correlation between purchases and exports, allowing Rs. 33,73,226/- but disallowed Rs. 23,76,774/- due to lack of correlation with export invoices. The CIT(A) concluded that the purchases were manipulated, and the funds were diverted for non-business purposes, thus adding Rs. 23,76,774/- to the income.The ITAT, in its final judgment, confirmed the addition of Rs. 8,62,500/- (15% of Rs. 57,50,000/-) as net profit on unverifiable purchases, following the precedent set in similar cases.2. Deduction under Section 80HHC on the addition of Rs. 23,76,774/-:The second issue concerns the deduction under Section 80HHC on the addition of Rs. 23,76,774/-. The CIT(A) disallowed the deduction, stating that the purchases could not be correlated with the exports, and the funds were diverted for non-business purposes.The ITAT upheld the CIT(A)'s decision, stating that the assessee failed to establish a connection between the purchases and exports. Without correlation, the deduction under Section 80HHC could not be allowed.Conclusion:The ITAT dismissed the revenue's appeal and partly allowed the assessee's appeal by confirming the addition of Rs. 8,62,500/- as net profit on unverifiable purchases and disallowing the deduction under Section 80HHC on Rs. 23,76,774/-. The judgment emphasizes the necessity of correlating purchases with exports to claim deductions and the importance of providing adequate evidence to substantiate the genuineness of transactions.