2016 (7) TMI 63 - HC - Income Tax

Court allows 75% deduction for purchase expenditure, rejects disallowance. Errors found in ITAT decision. Previous cases cited.

DRILL ROAD MACHINERY PVT. LTD Versus INCOME TAX OFFICER

The court ruled in favor of the assessee, directing a deduction at 75% of the purchase expenditure instead of disallowing the entire amount. The court ... Disallowance of purchase expenditure - corresponding sales against these very purchases have been offered and accepted for tax - Held that:- This is not a case where purchases have accounted for and suppliers were not traceable or not available at the address given by the assessee. This is a case where the amount has been received back to the assessee from the suppliers of which expenditure on account of purchases accounted for in the books of account. Ends of justice would be met if we grant deduction at 25% for purchase expenditure, as admittedly corresponding sales against these very purchases have been offered and accepted for tax. Accordingly, we modify both the impugned orders and hold that the Tribunal has committed an error in disallowing the purchase expenditure and direct that deduction at 25% of the purchase expenditure may be allowed in both these cases. - Decided in favour of the assessee. Issues Involved:1. Disallowance of purchase expenditure by treating it as bogus.2. Non-granting of deduction for purchase expenditure when material is purchased from one and billed by another.3. Addition on account of unexplained fictitious purchase/creditor.Issue-wise Detailed Analysis:1. Disallowance of Purchase Expenditure by Treating it as Bogus:The assessee challenged the disallowance of Rs. 26,72,656/- and Rs. 10,82,450/- as bogus purchases by the Income Tax Appellate Tribunal (ITAT). The ITAT's decision was based on the premise that although corresponding sales were offered and accepted for tax, the purchases were not genuine. The assessee argued that the purchases were legitimate and relied on the decision in Vijay Proteins Ltd. v. Commissioner of Income Tax, where it was observed that purchases from fictitious invoices justified a 25% disallowance. Similarly, in Commissioner of Income Tax-II v. Gujarat Ambuja Export Ltd., it was held that the material was received, and only a 5% addition was justified. The court concluded that the Tribunal committed an error in disallowing the entire purchase expenditure and directed a deduction at 75% of the purchase expenditure.2. Non-granting of Deduction for Purchase Expenditure When Material is Purchased from One and Billed by Another:The assessee contended that the ITAT erred in not granting the deduction for purchase expenditure when the material was purchased from one party and billed by another. The court referenced the case of Sanjay Oilcake Industries, where it was held that the purchases were genuine despite being billed by different parties. The Tribunal's decision to disallow the entire expenditure was modified, and a deduction at 75% was allowed, recognizing the legitimacy of the transactions despite the billing discrepancies.3. Addition on Account of Unexplained Fictitious Purchase/Creditor:The ITAT upheld the addition of Rs. 10,82,450/- as unexplained fictitious purchases/creditors. The assessee argued that the purchases were genuine and relied on the decision in Commissioner of Income-Tax v. La Medica, where it was held that the Tribunal's findings were erroneous if based on irrelevant materials. The court found that the amount was received back from the suppliers, and the purchases were accounted for in the books. Consequently, the court directed a deduction at 75% of the purchase expenditure, aligning with the consistent decisions of the court.Conclusion:The court concluded that the ITAT erred in disallowing the entire purchase expenditure and directed that a deduction at 75% of the purchase expenditure be allowed. The questions posed were answered in favor of the assessee and against the revenue, modifying the impugned orders accordingly. The court emphasized that the entire issue was based on materials on record, and the consistent decisions of the court justified granting a 75% deduction for purchase expenditure.Separate Judgments:The judgment delivered by the court was unanimous, and no separate judgments by different judges were mentioned. The analysis and conclusions were collectively agreed upon by the court.