ITAT Upholds CIT(A) Orders on Bogus Purchase Addition & Penalty

The ITAT dismissed both appeals by the revenue, upholding the orders of the CIT(A) in reducing the addition for bogus purchase and in the penalty under section 271(1)(c) of the Income Tax Act. The ITAT emphasized that the Assessing Officer's lack of independent inquiry and the purchases being made from the grey market justified the reduction in the addition. Additionally, the ITAT found that the penalty under section 271(1)(c) was not warranted in cases where disallowances were made on an estimated basis without proper investigation.

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Issues:
- Reduction of addition for bogus purchase
- Penalty under section 271(1)(c) of the Income Tax Act

Reduction of addition for bogus purchase:
The case involved an appeal by the revenue against the reduction of the addition for bogus purchase by the learned Commissioner of Income Tax (Appeals) (CIT(A)). The assessee was engaged in contractual work-in-progress, and the assessment was reopened based on information from the sales tax department regarding purchases from bogus dealers. The Assessing Officer had made a 100% addition for the bogus purchase without issuing a notice to the alleged supplier. The CIT(A) sustained only a part of the addition after considering various case laws and the facts of the case. The ITAT upheld the CIT(A)'s order, emphasizing that the Assessing Officer did not conduct any independent enquiry and that when sales are not doubted, a hundred percent disallowance for bogus purchases cannot be justified. The ITAT referred to a jurisdictional High Court decision supporting this principle. The ITAT concluded that the disallowance made by the CIT(A) was appropriate in the circumstances, considering that the purchases were made from the grey market, resulting in savings for the assessee at the expense of the exchequer.

Penalty under section 271(1)(c) of the Income Tax Act:
The penalty under section 271(1)(c) was levied based on the disallowance of 100% on account of bogus purchases, which was solely done on information from the sales tax department without an independent enquiry by the Assessing Officer. The CIT(A) partly confirmed the addition, and the penalty was restricted to the amount sustained in the appeal. The revenue appealed against this order. The ITAT held that in such cases where disallowance was made on an estimated basis due to nonproduction of suppliers, and where purchase vouchers were produced with payments made through banking channels, the penalty under section 271(1)(c) was not justified. The ITAT referred to a decision of a larger bench of the Supreme Court to support this conclusion. Additionally, the tax effect in this case was below the limit set by the CBDT for filing appeals before the ITAT. The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s order and emphasizing that the penalty appeal could not stand on the basis of information from outside agencies.

In conclusion, the ITAT dismissed both appeals by the revenue, upholding the orders of the CIT(A) in both the reduction of addition for bogus purchase and the penalty under section 271(1)(c) of the Income Tax Act.

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