Tribunal Partially Allows Appeal, Limits Bogus Purchase Additions to 5%, Deletes Disallowance of Section 14A and TDS on Reimbursements.

The Tribunal partially allowed the assessee's appeal and dismissed the revenue's appeal. It restricted the addition for alleged bogus purchases to 5% of the total, amounting to Rs. 17.04 Lacs, due to the low-margin nature of the trading business. Disallowance under Section 14A was deleted as the dividend income was taxable. The Tribunal upheld the CIT(A)'s exclusion of certain interest components under Section 36(1)(iii) and agreed that no TDS was required on reimbursements under Section 40(a)(ia) due to the absence of a profit element. The order was pronounced on 05/02/2020.

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Issues Involved:
1. Addition on account of alleged bogus purchases.
2. Disallowance under Section 14A.
3. Disallowance under Section 36(1)(iii).
4. Disallowance under Section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Addition on Account of Alleged Bogus Purchases:
The assessee made purchases worth Rs. 340.80 Lacs from four suspicious suppliers. Despite the assessee's defense that there was a one-to-one correlation between purchases and corresponding sales, and payments were made through banking channels, the assessee failed to prove the dispatch, transportation, and delivery of goods. Notices issued to suppliers were returned unserved, and field inquiries revealed non-existence of suppliers at given addresses. Consequently, the Ld. AO termed the purchases as non-genuine and added the entire amount to the income of the assessee.

The Ld. CIT(A) noted that during the survey, soft copies of the books of accounts, including quantitative details of corresponding sales, were impounded. Since there was a correlation between purchases and sales, only the profit element embedded in such transactions could be added. The Ld. CIT(A) estimated additions at 12.5% of these purchases, with a set-off of Gross Profit already shown by the assessee.

The Tribunal opined that there could be no sale without actual purchase of material, given the trading activities of the assessee. However, the assessee failed to substantiate the purchases. Thus, the Tribunal found it appropriate to make estimated additions to account for the profit element embedded in these transactions. Considering the low margin nature of iron & steel trading, the Tribunal restricted the estimation to a net 5% of alleged bogus purchases, resulting in an addition of Rs. 17.04 Lacs, and deleted the balance addition.

2. Disallowance under Section 14A:
During assessment, it was noted that the assessee had closing investments of Rs. 435.28 Lacs and earned exempt dividend income of Rs. 51,250/-. The Ld. AO, applying Rule 8D, computed a disallowance of Rs. 2.89 Lacs. The Ld. CIT(A) directed deletion of disallowance u/s 14A as no exempt income was earned, relying on the decision of the Hon’ble Madras High Court in Chettinad Logistics P. Ltd., which was upheld by the Hon’ble Apex Court.

The Tribunal upheld the Ld. CIT(A)’s decision, noting that the dividend income was taxable, and thus, no disallowance under Section 14A was warranted.

3. Disallowance under Section 36(1)(iii):
The assessee claimed interest expenditure of Rs. 11.67 Lacs but did not reflect any interest income against loans & advances of Rs. 620.42 Lacs. The Ld. AO made a proportionate disallowance of Rs. 3.03 Lacs, opining that the assessee diverted interest-bearing funds towards interest-free advances. The Ld. CIT(A) directed the exclusion of interest on the letter of credit and car loan while computing the disallowance, considering only the balance interest component of Rs. 5.65 Lacs.

The Tribunal found no fault in the Ld. CIT(A)’s directions and dismissed the revenue’s ground.

4. Disallowance under Section 40(a)(ia):
The assessee did not deduct TDS on certain expenses aggregating to Rs. 17.44 Lacs, stated to be reimbursements. The Ld. AO disallowed the same, observing that the assessee could not demonstrate the absence of income element in these reimbursements. The Ld. CIT(A) deleted the disallowance, relying on the decision in the assessee’s own case for AY 2012-13.

The Tribunal concurred with the Ld. CIT(A)’s decision, noting that the reimbursements were supported by bills and had no profit element. Thus, no TDS was required on such reimbursements.

Conclusion:
The assessee’s appeal was partly allowed, and the revenue’s appeal was dismissed. The Tribunal pronounced the order in the open court on 05/02/2020.

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