Tribunal decision on bogus purchases, commission expenses & "on money" addition

The Tribunal allowed the assessee's appeal regarding bogus purchases and commission expenses, directing the AO to add only 5% of the bogus purchases to the assessee's income. The Tribunal reversed the disallowance of commission expenses due to the AO's failure to provide an opportunity for cross-examination. The addition of "on money" was deleted as buyers denied making cash payments, with the Tribunal upholding the CIT(A)'s decision. The Court pronounced the order on 19th October 2020 in Ahmedabad.

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Issues Involved:
1. Bogus Purchases
2. Commission Expenses
3. On Money

Issue-wise Detailed Analysis:

1. Bogus Purchases:
The first issue raised by the assessee is that the CIT(A) erred in confirming the addition made by the AO amounting to Rs. 62,51,247/- as bogus purchases. The assessee, a partnership firm engaged in building construction and development, claimed to have made steel purchases from M/s Bharat Trading Co and M/s Laxmi Enterprises. However, the AO, upon verification, found that these parties were not available at the given addresses, their VAT registrations were canceled, and no sales to the assessee were reported in their VAT returns. Consequently, the AO treated these purchases as bogus and disallowed them, adding the amount to the assessee's total income. The CIT(A) upheld this addition, noting discrepancies in the affidavits and confirmations provided by the assessee and emphasizing the information from the Sales Tax Department that no sales were made to the assessee by these parties.

Upon appeal, the Tribunal acknowledged that while the purchases appeared bogus, disallowing them entirely would lead to double addition, as the assessee had shown these purchases in its stock register and consumed them in construction activities. Therefore, the Tribunal directed the AO to add only 5% of the bogus purchases to the assessee's income, considering it a reasonable profit margin.

2. Commission Expenses:
The second issue pertains to the addition of Rs. 6,01,000/- on account of commission expenses. The assessee claimed to have paid commission to four parties for arranging buyers for flats. However, the AO disallowed these expenses, as the assessee could not produce the commission agents, and statements from two flat owners indicated no involvement of commission agents. The CIT(A) confirmed this disallowance, noting the assessee's failure to establish the business expediency of the commission payments and the lack of evidence of regular business activities by the commission agents.

The Tribunal, however, found that the AO did not provide the assessee an opportunity to cross-examine the flat owners whose statements were used to disallow the commission expenses. The Tribunal emphasized that the AO had the details of the commission agents and could have verified the genuineness of the commission payments directly. Therefore, the Tribunal allowed the assessee's appeal, reversing the disallowance of commission expenses.

3. On Money:
The third issue raised by the Revenue is the deletion of the addition of Rs. 12,62,76,167/- on account of "on money." The AO, based on statements from ten flat/shop buyers, concluded that the assessee received 40% of the total consideration in cash, which was not accounted for in the books. Consequently, the AO added this amount as undisclosed income. However, during the remand proceedings, the AO recorded statements under oath from these buyers, who denied paying any "on money." The CIT(A) deleted the addition, noting that the basis for the AO's calculation of "on money" no longer existed, as the buyers denied making any cash payments.

The Tribunal upheld the CIT(A)'s decision, emphasizing the AO's remand report, which confirmed that no cash payments were made by the buyers. Therefore, the Tribunal dismissed the Revenue's appeal on this issue.

Conclusion:
In conclusion, the Tribunal allowed the assessee's appeal regarding bogus purchases and commission expenses, while dismissing the Revenue's appeal on the issue of "on money." The order was pronounced in the Court on 19th October 2020 at Ahmedabad.

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