Tribunal decision: Revenue appeal dismissed, assessee partly successful. Disallowance upheld, expenses deleted.

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeals. The reopening of assessment under section 147 for certain years was not pressed by the assessee. The disallowance of bogus purchases was partially upheld, applying a profit rate on the purchases. Regarding the disallowance of expenses related to exempt income, the Tribunal deleted the interest disallowance and administrative expense disallowance for one year, and deleted the administrative expense disallowance for another year. The appeals were allowed accordingly.

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Issues Involved:
1. Reopening of assessment under section 147 of the Income Tax Act.
2. Bogus purchases and their disallowance.
3. Disallowance of expenses related to exempt income under section 14A read with Rule 8D of the IT Rules.

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The first common issue in all appeals was the confirmation by the CIT(A) of the AO's action in reopening the assessment under section 147 of the Income Tax Act. The assessee argued that there was no 'reason to believe' that income had escaped assessment and that the reopening was invalid. However, the learned Counsel for the assessee conceded that they were not interested in prosecuting the issue of reopening for AY 2008-09 and 2009-10. Consequently, the issue of reopening was dismissed as not pressed for these years.

2. Bogus Purchases and Their Disallowance:
The AO received information from the DGIT investigation and the Maharashtra Sales Tax Department indicating that the assessee had obtained bogus purchase bills from hawala dealers. These dealers issued bills without actual sales of goods, which were used by the assessee to reduce taxable profits. During a survey, the CEO of the assessee company admitted the inability to substantiate the purchases and withdrew the claim, offering it for tax. The CIT(A) confirmed the disallowance of the entire purchases as bogus. However, the Tribunal noted that the assessee had retracted the statement and produced evidence to support the genuineness of the purchases. The Tribunal decided to apply a profit rate of 12.5% on the bogus purchases, as per the precedent set by the Hon’ble Gujarat High Court in CIT vs. Smith P. Seth, and directed the AO to compute the income accordingly. Thus, the appeals of the assessee were partly allowed.

3. Disallowance of Expenses Related to Exempt Income under Section 14A read with Rule 8D:
For AY 2010-11, the AO disallowed expenses related to exempt income under Rule 8D, amounting to Rs. 50,67,085/-. The CIT(A) restricted the disallowance to Rs. 29,73,023/-, deleting the interest disallowance under Rule 8D(2)(ii) but retaining the administrative expense disallowance under Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s deletion of the interest disallowance, citing the presumption that investments were made out of the assessee's own funds, which were sufficient to cover the investments. This was supported by the decision in CIT vs. HDFC Bank Limited. Regarding the administrative expenses, the Tribunal found that the AO had not recorded satisfaction as required under Rule 8D and noted that the assessee had already disallowed a reasonable amount. Consequently, the Tribunal deleted the disallowance of administrative expenses, allowing the assessee's appeal.

For AY 2011-12, the AO disallowed Rs. 36,95,549/- under Rule 8D(2)(iii) without recording satisfaction. The assessee had already disallowed Rs. 3,54,009/- suo moto. The Tribunal found merit in the assessee's arguments and deleted the disallowance, allowing the appeal.

Conclusion:
The Tribunal dismissed the appeal of the Revenue and partly allowed the appeals of the assessee. The order was pronounced in the open court on 15-12-2017.

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