2018 (12) TMI 1252 - AT - Income Tax

Tribunal dismisses revenue's appeals, partly allows assessee's appeals, directs AO to verify transactions

The Tribunal dismissed the revenue's appeals and partly allowed the assessee's appeals. The Tribunal directed the Assessing Officer to verify transactions ... Disallowance of business expenses on ad hoc basis - Treating receipts as deemed dividend under section 2(22)(e) and taxation in hands of shareholders under section 56 - Estimation of inflated/bogus purchases from ledger defects - Protective additions in respect of cash seized during search - Extrapolation of seized documents to other transactions/assessment years - Remand to Assessing Officer for verification from third partiesDisallowance of business expenses on ad hoc basis - Books of account audited under section 44AB - Validity of ad hoc disallowance of 50% of claimed expenses where assessee produced ledger details and books were not rejected - HELD THAT: - The Tribunal upheld the CIT(A)'s finding that the AO made part disallowance solely because bills/vouchers were not placed on record, although the assessee had furnished ledger accounts and the AO did not raise further queries or point out any defect in books of account. The assessees' accounts were audited under the Companies Act and section 44AB; no specific shortcomings were recorded by the AO to justify an ad hoc 50% disallowance. In these circumstances the AO's estimation was held uncalled for and the deletions by the CIT(A) were sustained. [Paras 9]The disallowance of expenses by estimating 50% as bogus is deleted and the CIT(A)'s order upholding deletion is affirmed.Treating receipts as deemed dividend under section 2(22)(e) and taxation in hands of shareholders under section 56 - Applicability of binding precedent of jurisdictional High Court and Supreme Court - Whether receipts from related companies should be taxed as deemed dividend in hands of the assessee-company or in hands of shareholders - HELD THAT: - CIT(A) applied the principle in CIT v. Ankitech (upheld by the Supreme Court in CIT v. Madhur Housing) that such receipts are to be taxed in the hands of the shareholders under section 56 and not in the hands of the recipient company. Following that binding jurisprudence, the CIT(A) deleted additions in the hands of the assessee and directed AO to initiate proceedings in the hands of the shareholders. The Tribunal found no infirmity in applying the said authorities and sustained the CIT(A)'s direction. [Paras 17]Additions under section 2(22)(e) in the hands of the assessee are deleted; matter to be taken up in shareholders' hands as directed by CIT(A).Estimation of inflated/bogus purchases from ledger defects - Rejection of books of account as prerequisite for large ad hoc disallowance - Sustainability of AO's 40% estimation of purchases as bogus when books/accounts were not rejected and ledger details were furnished - HELD THAT: - The Tribunal accepted the CIT(A)'s reasoning that the AO made the addition merely because bills/vouchers were not produced despite having names, addresses and ledger copies; the AO did not pursue verification from the counterparties nor rejected the books of account. Reliance was placed on precedent (Yunus Haji Fazawala) that disallowance on estimate without rejecting books is unsustainable. The CIT(A)'s deletion was held just and proper, particularly as the AO's approach produced implausible profit ratios. [Paras 25]The 40% disallowance of purchases is deleted and the CIT(A)'s order is upheld.Protective additions in respect of cash seized during search - Validity of protective addition of cash in assessee's hands when substantive/protective additions had been made in other persons' assessments and explanation was recorded - HELD THAT: - The AO made a protective addition of cash in the assessee's hands though substantive/protective additions had already been recorded in the hands of other persons. CIT(A) found that substantive addition in the shareholder's assessment and protective addition in a third person's assessment explained the cash; the assessee had produced explanations recorded during search. The Tribunal found no infirmity in the CIT(A)'s deletion of the protective addition. [Paras 35]Protective addition of cash in the hands of the assessee is deleted; CIT(A)'s order affirmed.Extrapolation of seized documents to other transactions/assessment years - Remand to Assessing Officer for verification from third parties - Whether AO could extrapolate profits/undisclosed income for entire transactions with certain parties and across assessment years on the basis of a few seized documents - HELD THAT: - The Tribunal agreed with the assessee that the AO had relied on limited seized documents (many pertaining to AY 2014 15) to estimate undisclosed profits for much larger volumes of transactions and for AY 2013 14 without independent verification. The Tribunal observed that the AO did not issue enquiries to the counterparties whose names/addresses were available and that extrapolation across years without cogent material or third party verification was impermissible. In the interest of justice the Tribunal restored the issue to the file of the AO with directions to obtain information from the parties and verify whether unaccounted transactions exist beyond the seized material; if no additional unaccounted transactions are found, no extrapolation should be done. The matter was remitted for fresh consideration after opportunity to the assessee. [Paras 51]Issue remitted to the Assessing Officer for verification from the counterparties and fresh decision; additions based on extrapolation are not to be sustained without such inquiry.Final Conclusion: The Tribunal dismissed the revenue appeals and upheld the CIT(A)'s deletions of ad hoc disallowances of expenses and purchases, the deletion of additions treated as deemed dividend in the assessee's hands (directing assessment in shareholders' hands per binding precedent), and the deletion of protective cash addition; however, where the AO extrapolated profits from limited seized documents across transactions and years, the Tribunal remanded the matter to the AO to obtain and verify information from the counterparties and decide afresh after giving the assessee an opportunity to be heard. Issues Involved:1. Disallowance of Expenses2. Deemed Dividend u/s 2(22)(e)3. Inflated Purchases4. Protective Addition of Cash Seized5. Estimation of Profit on Sales and PurchasesDetailed Analysis:1. Disallowance of Expenses:The Assessing Officer (AO) disallowed 50% of the expenses claimed by the assessee, totaling Rs. 22,29,092/- for AY 2013-14 and Rs. 19,05,653/- for AY 2014-15, citing the lack of supporting bills/vouchers. The CIT(A) deleted these additions, noting that the AO had not found any defects in the books of accounts, which were duly audited. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not raise further queries to verify the genuineness of the expenses and failed to bring any defects on record.2. Deemed Dividend u/s 2(22)(e):The AO added Rs. 6,43,198/- for AY 2013-14 and Rs. 51,72,955/- for AY 2014-15 as deemed dividend under section 2(22)(e), arguing that the directors had substantial shareholdings in the companies involved. The CIT(A) deleted these additions, relying on the Delhi High Court's decision in CIT vs Ankitech Pvt. Ltd., upheld by the Supreme Court, which stated that such receipts should be taxed in the hands of the shareholders, not the recipient company. The Tribunal agreed with the CIT(A), dismissing the revenue's appeal.3. Inflated Purchases:The AO disallowed 40% of the purchases, totaling Rs. 5,00,10,163/- for AY 2013-14 and Rs. 9,30,49,922/- for AY 2014-15, claiming they were inflated/bogus. The CIT(A) deleted these additions, noting that the AO did not conduct any verification or raise objections to the details provided by the assessee. The Tribunal upheld the CIT(A)'s decision, pointing out that the AO did not reject the books of accounts and that the profit margins resulting from the AO's disallowance were unrealistic.4. Protective Addition of Cash Seized:The AO made a protective addition of Rs. 1,00,000/- in the hands of the assessee for cash seized during a search, which was already substantively added in the hands of Mr. Moin Akhtar Qureshi. The CIT(A) deleted this protective addition, and the Tribunal upheld the CIT(A)'s decision, noting that the substantive addition had already been made.5. Estimation of Profit on Sales and Purchases:The AO estimated profits on sales to M/s Jagatjit Industries Ltd. and purchases from other parties based on seized documents, resulting in additions of Rs. 83,85,628/- for AY 2013-14 and Rs. 42,53,909/- for AY 2014-15. The CIT(A) upheld these additions but directed the AO to reduce the disclosed profit from the estimated profits. The Tribunal found merit in the assessee's argument that extrapolation based on isolated instances was not justified without further verification. The Tribunal restored the issue to the AO to verify transactions and decide based on facts and law.Conclusion:The Tribunal dismissed the revenue's appeals and partly allowed the assessee's appeals, directing the AO to verify transactions and decide accordingly. The Tribunal emphasized the need for proper verification and rejected the AO's arbitrary disallowances and additions.