2017 (5) TMI 165 - AT - Income Tax

Appellate tribunal decision on bogus purchases, GP disallowance, and Rule 8D(2) under section 14A

M/s Krishna Conchem Products Private Limited Versus Dy. Commissionr of Income Tax- Circle-62), Mumbai

The appellate tribunal partially allowed the appeal, setting aside the addition of Rs. 9,36,000 as bogus purchases while sustaining the disallowance on ... Addition on account of bogus purchases - Held that: - when the AO not doubting the sales cannot disallow the entire purchases without giving detailed findings. At the most GP on the said purchases could be brought to tax which has already been done by applying 2% of the amount of total alleged bogus purchases - the order of the ld.CIT(A) upholding the entire purchases which according to the facts on records were duly entered in the stock register and subsequently sold cannot be sustained - the order of ld.CIT(A) on this issue is set aside and AO directed to delete the addition on account of bogus purchases, whereas the disallowance made on account of GP is sustained to cover possible leakage of revenue. Disallowance of Interest under rule 8D(2)(ii) of the Rules - expenditure at the rate of 0.5% of the average investment u/s 14A of the Act read with rule 8D(2)(iii) of the Rules - disallowance - Held that: - the assessee‟s own funds were ₹ 3,89,28,953/- whereas the investments made by the assessee in shares and securities were ₹ 1,25,15,918/- as per the balance sheet as on 31.3.2010 - in view of the ratio laid down in the case of HDFC Ltd [2014 (8) TMI 119 - BOMBAY HIGH COURT], wherein the Hon'ble Jurisdictional High Court has clearly held that the when the assessee own funds are more than the investments made in the shares and securities made out of own funds, there is no need to disallow the expenditure u/s 14A of the Act r.w.r.8D of the Rules - the disallowance of ₹ 48,202/-made under section 14A of the Act read with rule 8D(2)(iii) of the Rules, is sustained. Appeal allowed - decided partly in favor of assessee. Issues Involved:1. Confirmation of addition of Rs. 9,36,000 as bogus purchases from M/s Sumukh Corporation and application of GP rate at 2% on the alleged bogus purchases.2. Disallowance of Rs. 1,84,741 under section 14A of the Act read with rule 8D(2) of the Rules.Issue 1: Confirmation of Addition of Rs. 9,36,000 as Bogus Purchases and Application of GP Rate:The appellant contested the addition of Rs. 9,36,000 as bogus purchases from M/s Sumukh Corporation and the application of a 2% GP rate on these purchases. The AO rejected the books of account under section 145(3) of the Act due to lack of evidence provided by the assessee to prove the genuineness of the transactions. The ld.CIT(A) upheld the addition, noting that the assessee failed to produce necessary evidence during both assessment and appellate proceedings. The ld.CIT(A) highlighted discrepancies in the bills and lack of evidence regarding transportation and payment terms. The appellate tribunal, after considering the submissions and case law, set aside the ld.CIT(A)'s order. It directed the AO to delete the addition on account of bogus purchases, while sustaining the disallowance on account of GP to prevent revenue leakage.Issue 2: Disallowance under Section 14A of the Act read with Rule 8D(2) of the Rules:The second issue pertained to the disallowance of Rs. 1,84,741 under section 14A of the Act read with rule 8D(2) of the Rules. The ld.CIT(A) upheld the disallowance, following precedents and asserting the applicability of section 14A r.w.r.8D to the assessee's case. The appellant argued that since their own funds exceeded the investments in shares, no disallowance was warranted under section 14A r.w.r 8D(2)(ii) of the Rules. Citing relevant case law, the appellant contended that only the disallowance under section 14A read with rule 8D(2)(iii) should be sustained. The tribunal agreed with the appellant's argument, deleting the disallowance of Rs. 1,36,549 while upholding the disallowance of Rs. 48,202 under section 14A of the Act read with rule 8D(2)(iii) of the Rules.In conclusion, the appellate tribunal partially allowed the appeal, setting aside the addition on account of bogus purchases while sustaining the disallowance on account of GP. Additionally, the tribunal deleted the disallowance under section 14A r.w.r.8D(2)(ii) of the Rules but upheld the disallowance under section 14A read with rule 8D(2)(iii) of the Rules.