Revenue's appeal dismissed, assessee's disallowance restricted, partial relief on bogus purchases.

The appeal of the Revenue was dismissed as withdrawn/not pressed due to contravention of CBDT Circular No. 21/2015. The appeal of the assessee regarding disallowance under Section 14A was dismissed, with the disallowance being restricted to Rs. 10,669. In the case of addition on account of bogus purchases, the Tribunal allowed partial relief to the assessee, directing the A.O. to take the GP at 12.5%. The appeal filed by the revenue was dismissed.

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Issues Involved:
1. Applicability of CBDT Circular No. 21/2015 to Revenue’s appeal.
2. Disallowance under Section 14A.
3. Addition on account of bogus purchases.

Issue-wise Detailed Analysis:

1. Applicability of CBDT Circular No. 21/2015 to Revenue’s appeal:

At the outset, the AR pointed out that the CBDT Circular No. 21/2015 dated 10/12/2015 has revised the monetary limits for filing of appeals by the Department before the Tribunal retrospectively. The tax effect in dispute in the captioned appeal is below the monetary limit of Rs. 10.00 lacs specified in the said CBDT Circular. The Departmental Representative did not provide any material to suggest that the appeal is protected by any of the circumstances prescribed in Para-8 of the Circular. Therefore, the appeal is deemed to be withdrawn/not pressed as its filing is in contravention of the CBDT Circular dated 10/12/2015. Consequently, the appeal of the Revenue is dismissed as withdrawn/not pressed.

2. Disallowance under Section 14A:

The first ground in the assessee’s appeal is the disallowance of Rs. 10,000/- under Section 14A. The assessee claimed long-term capital gains on the sale of investments of Rs. 1,06,000/- as exempt from tax. The A.O. queried why expenses incurred and claimed in respect of exempt income should not be disallowed as per Section 14A read with Rule 8D. The assessee contended that the investments were made from its own capital and reserves without incurring any expenditure to earn such tax-free income. However, the A.O. worked out the expenses attributable to exempt income to Rs. 23,685/-, restricting the disallowance to Rs. 18,420/-. The CIT(A) dismissed the appeal of the assessee. The Tribunal found that the assessee had sufficient capital, reserves, surplus, and current account deposits to cover the cost of tax-free investments. Therefore, it was presumed that the investments were made out of interest-free funds. The CIT(A) restricted the disallowance to Rs. 10,669/-. The appeal of the assessee on this ground is dismissed.

3. Addition on account of bogus purchases:

The second ground in the assessee’s appeal is the addition on account of bogus purchases amounting to Rs. 7,92,220/-. The assessee claimed to have made purchases from M/s. Shree Sundha Steels Pvt. Ltd., amounting to Rs. 33,65,085/-. The assessee provided copies of quotations, purchase orders, tax invoices, bills, delivery challans, and confirmation copies. However, the Sales Tax Department recorded a statement from the Director of M/s. Shree Sundha Steels Pvt. Ltd., admitting that no goods were delivered, and cash was remitted back to the purchaser after deducting a nominal commission. The CIT(A) restricted the disallowance to 25% based on the judgment in Sanjay Oil Cake Industries vs 316 ITR 274. The Tribunal found that the assessee might have purchased goods from third parties and utilized them in its factory, making payments as per terms. The Tribunal relied on the decision of the Gujarat High Court in CIT vs Simit Sheth (2013) 38 Taxmann.com 385 (Guj), where it was held that only the profit element embedded in such purchases could be added to the assessee’s income. The Tribunal upheld the addition at 12.5% of the purchases, allowing partial relief to the assessee. The appeal filed by the assessee is partly allowed, and the A.O. is directed to take the GP at 12.5%. The appeal filed by the revenue is dismissed.

Order Pronouncement:

The order was pronounced in the open court on 21/03/2017.

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