2018 (2) TMI 964 - AT - Income Tax

Tribunal confirms CIT(A)'s decision on bogus purchases, commission expenses, and disallowance under section 14A.

Dy. CIT-CC-1 (4), Mumbai Versus M/s. M.P. Recycling Co. Pvt. Ltd.

The tribunal upheld the CIT(A)'s decision to restrict the addition on account of bogus purchases and commission expenses. It confirmed that purchases from ... Addition on account of bogus purchases - purchases made from non - genuine parties - Held that:- The assessee is not a wholesale trader of steel, but is a manufacturer of steel items. It had purchased and used steel from the parties, who have not issued bills. PKS and others from whom the assessee has claimed to have purchased steel, had not supplied goods to it. But consumption of steel has not been questioned-rather sales have been accepted as it is. Unlike the matter of Bholanath Poly Fab (2013 (10) TMI 933 - GUJARAT HIGH COURT) it is not a case where the cheque issued by the assessee have been encashed by unknown persons. At least the AO has not alleged that. It is a case of purchases made from non - genuine parties and not a case of bogus purchases. The FAA had adopted a formula to determine possible profit out of purchases made from unknown suppliers. There is no legal or factual infirmity in her order. No hard and fast rules can be applied in such cases. The rate of profit would vary from business to business and case to case. So, we are not interested in interfering with her order. Confirming the same, we decide first ground of appeal against the AO. Addition on account of commission expenses - Held that:- FAA had rightly held that no ad hoc disallowance can be made without relying upon any cogent material. Confirming her order, we dismiss second ground, raised by the AO. Disallowance u/s 14A - time limit for issue of notice under section 143(2) - Held that:- The original return for the year under consideration was filed on 30/09/2009, the time limit for issue of notice under section 143 (2) was six months from the end of the financial year in which the return was filed, that the search took place on 29/04/2011, that time limit for issue of notice at expired on the date of initial of search, that the assessment for the year under appeal could not be said to be pending or abated, that the impugned order did not reflect that any material emanating from the search led to the disallowance, made by the AO, under section 14A. See All Cargo Global Logistics Ltd [2017 (6) TMI 309 - BOMBAY HIGH COURT] - Decided in favour of assessee. Issues Involved:1. Restriction of addition on account of bogus purchases.2. Addition of commission expenses.3. Disallowance under section 14A of the Income Tax Act.Detailed Analysis:1. Restriction of Addition on Account of Bogus Purchases:The Assessing Officer (AO) challenged the order of the CIT(A) which restricted the addition on account of bogus purchases from Rs. 1.70 crores to Rs. 12.06 lakhs. During the search proceedings, it was found that the assessee had booked bogus expenditure by obtaining bogus purchase bills from various entities. The AO directed the assessee to substantiate the purchases by producing ledger confirmations, bills, lorry receipts, delivery challans, etc. Despite the explanations provided by the assessee, the AO held that sufficient evidence existed to show that the assessee had made bogus purchases. The statements of certain individuals indicated that bogus bills were issued, and the sales tax department identified some entities as providers of bogus invoices. The AO added back the purchase amount of Rs. 1.70 crores to the total income of the assessee.The CIT(A) considered the submissions of the assessee and judicial pronouncements, noting that the sales tax department listed parties engaged in issuing bogus bills. The CIT(A) held that the AO had accepted the sales made by the assessee and found no discrepancies in the stock or payment routes through banking channels. The CIT(A) concluded that the primary motive behind availing bogus bills was to save on the gross profit rate and upheld the disallowance to the extent of 7.09% of the peak purchases.Upon appeal, the tribunal found no defect in the approach of the CIT(A), emphasizing that without purchases, there cannot be any sales. The tribunal referred to the judgments in Bholanath Poly Fab and Simit P Sheth, which held that if the purchases were made from bogus parties, only the profit element embedded in such purchases should be subjected to tax. The tribunal confirmed that the case involved purchases from non-genuine parties and not bogus purchases, thus upholding the CIT(A)'s order.2. Addition of Commission Expenses:The AO observed that the assessee would have incurred commission expenses at the rate of 1% for availing bogus bills and added an amount of Rs. 1,70,223/- based on this estimation. The assessee argued before the CIT(A) that the addition was purely based on estimates without any evidence of incurring such expenditure. The CIT(A) held that estimated commission expenses could not be upheld without any cogent material.The tribunal agreed with the CIT(A), stating that no ad hoc disallowance can be made without relying upon any substantial evidence. The tribunal confirmed the order of the CIT(A) and dismissed the AO's second ground of appeal.3. Disallowance under Section 14A of the Income Tax Act:The AO disallowed Rs. 37.70 lakhs under section 14A read with rule 8D of the Income Tax Rules, 1962, due to contradictions in the details of direct and indirect expenses incurred by the assessee. The AO noted that the assessee had made investments in unquoted shares of its associate sister concern and incurred financial costs related to loans and advances. The disallowance included expenditure directly related to earning exempt income and a percentage of the average value of investments.The assessee challenged the disallowance before the CIT(A), arguing that additions not related to incriminating material yielded by the search could not be made under section 153A in non-abated assessments. The CIT(A) referred to the case of All Cargo Global Logistics Ltd., upheld by the Bombay High Court, and noted that the assessment for the year under appeal could not be said to be pending or abated. The CIT(A) found no material from the search leading to the disallowance under section 14A and deleted the disallowance.The tribunal found no legal or factual infirmity in the CIT(A)'s order, as it followed the jurisdictional High Court's judgment. The tribunal confirmed the order of the CIT(A) and decided the last ground of appeal against the AO.Conclusion:The appeal filed by the AO was dismissed, and the order was pronounced in the open court on 7th February 2018.