ITAT upholds CIT(A)'s decision on circular trading, reduces disallowance, affirms minimal profit margins. (A)

The Income Tax Appellate Tribunal (ITAT) upheld the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision regarding circular trading purchases, reducing the disallowance from Rs. 14,18,89,380/- to Rs. 85,13,363/-, estimating it at 0.30% of the purchases. The ITAT found the transactions were not entirely fictitious, with minimal profit margins, and dismissed the revenue's appeal due to lack of contradictory evidence, affirming the CIT(A)'s methodology and justification. The order was pronounced on 16-09-2021.

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Issues Involved:

1. Legitimacy of Circular Trading Purchases
2. Quantum of Disallowance on Circular Trading Purchases
3. Methodology and Justification for Estimating Disallowance

Detailed Analysis:

1. Legitimacy of Circular Trading Purchases:

The core issue revolves around the legitimacy of circular trading purchases. The assessee admitted engaging in circular trading, where bills/invoices changed hands without the movement of physical goods. The Assessing Officer (AO) deemed these purchases as unreliable and classified them as paper purchases. The AO concluded that the purchases worth Rs. 2,83,77,87,618/- were not genuine and disallowed 5% of these purchases, amounting to Rs. 14,18,89,380/-.

2. Quantum of Disallowance on Circular Trading Purchases:

The Commissioner of Income Tax (Appeals) [CIT(A)] reduced the disallowance significantly from Rs. 14,18,89,380/- to Rs. 85,13,363/-. The CIT(A) noted that the transactions were indeed circular but emphasized that these were not entirely fictitious. The CIT(A) found that the profit on circular transactions was recorded and offered by the appellant company. The CIT(A) observed that the purchases value increased by only 0.28% in these transactions, which was a minimal profit margin.

3. Methodology and Justification for Estimating Disallowance:

The CIT(A) justified the reduction in disallowance by referring to similar cases, such as M/s. Arman Fashion Pvt. Ltd. vs. ITO, where the tribunal had dealt with identical issues of circular transactions. The CIT(A) determined that the transactions were undertaken to show better turnover in financial accounts and not for deriving substantial benefits. The CIT(A) estimated the disallowance at 0.30% of the circular trading purchases, considering the intermediary charges not for the purpose of business.

Conclusion:

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, dismissing the revenue's appeal. The ITAT found no infirmity in the CIT(A)'s estimation of disallowance at 0.30% of circular trading purchases. The ITAT concluded that the revenue could not provide any material to contradict the CIT(A)'s findings. The appeal of the revenue was dismissed, and the order was pronounced in the open court on 16-09-2021.

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