Tribunal partially upholds appeal on non-genuine purchases under Income Tax Act

The Tribunal partly allowed the appeal, upholding the disallowance of Rs. 19,51,632/- for non-genuine purchases while deleting the disallowance of Rs. 8,40,000/- under Section 40A(2)(b) of the Income Tax Act. The Tribunal found the lack of evidence to substantiate the purchases justified the disallowance, but considered the higher salary paid to the director's wife reasonable given their tax rates. The decision was pronounced on March 1, 2017.

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Issues Involved:
1. Addition of Rs. 19,51,632/- on account of disallowance of purchases.
2. Disallowance of Rs. 8,40,000/- under Section 40A(2)(b) of the Income Tax Act.

Detailed Analysis:

1. Addition of Rs. 19,51,632/- on Account of Disallowance of Purchases:

During the assessment proceedings, the Assessing Officer (AO) observed that the assessee had made purchases amounting to Rs. 19,51,632/- from five parties. Notices issued under Section 133(6) to these parties were returned unserved, and the assessee failed to produce these parties or provide alternative addresses. Consequently, the AO disallowed the purchases as non-genuine. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee failed to provide independent confirmations or present addresses for verification. The CIT(A) noted that the onus was on the assessee to produce the parties once the notices were returned unserved. The assessee's reliance on the Bombay High Court decision in CIT-1, Mumbai Vs. Nikunj Eximp Enterprises Pvt. Ltd. was deemed inapplicable as the facts differed. The Tribunal found no reason to interfere with the CIT(A)'s order, given the lack of evidence provided by the assessee to substantiate the purchases. Thus, the addition of Rs. 19,51,632/- was upheld.

2. Disallowance of Rs. 8,40,000/- under Section 40A(2)(b):

The AO noticed that the assessee had paid a salary of Rs. 16,80,000/- to Mrs. Divya Kharbanda, wife of the director, which was significantly higher than the salary paid to other employees with similar roles. The AO disallowed 50% of the salary, amounting to Rs. 8,40,000/-, as excessive and disproportionate. The CIT(A) upheld the AO's decision, noting that the assessee failed to provide documentary evidence justifying the higher salary. The CIT(A) considered the AO's allowance of Rs. 8,40,000/- as reasonable compared to the Rs. 2.5 to Rs. 3 lacs paid to other employees. However, the Tribunal found merit in the assessee's argument that Mrs. Kharbanda had been drawing a similar salary for several years and that both the assessee and Mrs. Kharbanda were taxed at the maximum marginal rate, implying no tax evasion. The Tribunal referred to the Bombay High Court decision in CIT Vs. Indo Saudi Services, which held that no disallowance is warranted if the recipient is also taxed at a higher rate. Consequently, the Tribunal directed the deletion of the disallowance of Rs. 8,40,000/-.

Conclusion:

The appeal was partly allowed, with the disallowance of Rs. 19,51,632/- on account of purchases being upheld, and the disallowance of Rs. 8,40,000/- under Section 40A(2)(b) being deleted.

Order pronounced on 1st day of March, 2017.

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