2022 (6) TMI 903 - HC - Income Tax

Revenue appeal dismissed: where sales accepted, proportionate disallowance of bogus purchases, s.41(1) time-barred liability not income

Pr. Commissioner of Income Tax-14. Versus Batliboi Environmental Engineering Ltd.

The HC dismissed the revenue appeal, upholding the ITAT's deletion of the addition and penalty. The court held that where sales are accepted, proven bogus ... Estimation of income - Bogus purchases - CIT-A Directed the Assessing Officer to disallow 12.5% bogus purchases and to add 12.5% of the amount of purchases as income of the Appellant - ITAT deleted the addition - HELD THAT:- he argument advanced is that the bogus purchases ought to have been disallowed in totality. The learned counsel for the parties have placed before us the decisions of the Division Bench in the cases of Pr. Commissioner of Income Tax v. M/s.Mohommad Haji Adam & Co. [2019 (2) TMI 1632 - BOMBAY HIGH COURT] AND M/S. PARAMSHAKTI DISTRIBUTORS PVT. LTD. [2019 (7) TMI 838 - BOMBAY HIGH COURT] wherein as observed that if the factum of sales has been accepted by the Department then even if it is established that there were bogus purchases, it is not necessary that entire amount should be added to the income of the Assessee as there cannot be a sale without purchase. The facts of the present case are identical wherein the sales have been accepted. Therefore, in light of the aforesaid decisions first question of law does not survive for consideration. Addition u/s. 41(1) - cessation of liability - tribunal deleted the penalty - as per revenue the said liabilities were not payable as they stood barred by limitation - HELD THAT:- As decided in JAIN EXPORTS PVT. LTD. [2013 (5) TMI 690 - DELHI HIGH COURT] after following the decisions concluded that merely because the liability is barred by limitation, it does not cease to be a debt. This view is also taken by this Court in the case of CIT v. Indian Rayon and Industries Ltd. [2010 (3) TMI 299 - BOMBAY HIGH COURT] Therefore, the submission made by the Appellant that because the liability is barred by the period of limitation the same would be treated as income and added under section 41(1) of the Act cannot be accepted as no other decision contrary to the above is shown to us. Thus, the second question of law does not survive for consideration. Revenue appeal dismissed. Issues:1. Disallowance of bogus purchases2. Disallowance of liabilities under section 41(1) of the Income Tax Act, 1961Analysis:Issue 1: Disallowance of Bogus PurchasesThe Appellant-Revenue challenged the judgment of the Income Tax Appellate Tribunal regarding the disallowance of Rs.28,07,058 made by the Assessing Officer on account of bogus purchases for the assessment year 2011-12. The Tribunal upheld the Commissioner of Income Tax (Appeals) decision to disallow only 12.5% of the bogus purchases and add the same amount as the Appellant's income. The Appellant argued that the entire amount of bogus purchases should have been disallowed. However, citing precedents like Pr. Commissioner of Income Tax v. M/s.Mohommad Haji Adam & Co. and Pr.Commissioner of Income Tax v. Pramshakti Distributors Pvt. Ltd., the court held that if sales are accepted, even with bogus purchases, the entire amount need not be added to the Assessee's income as there cannot be a sale without a purchase. Therefore, the first question of law was deemed irrelevant based on the accepted sales in this case.Issue 2: Disallowance of Liabilities under Section 41(1)The second question of law revolved around the disallowance of Rs.1,52,29,070 made by the Assessing Officer under section 41(1) of the Income Tax Act, 1961, due to the cessation of liability. The Appellant argued that certain liabilities were not payable as they were barred by limitation, making them the Assessee's income. Both the Commissioner (Appeals) and the Tribunal referred to the decisions of the Gujarat High Court and the Delhi High Court, emphasizing that a liability barred by limitation does not cease to be a debt. The Delhi High Court cited Supreme Court decisions in Bombay Dyeing and Manufacturing Co. Ltd. v. State of Bombay and CIT v. Sugauli Sugar Works (P) Ltd., along with a Division Bench decision of the Bombay High Court in Kohinoor Mills v. C.I.T., to support this view. Consequently, the court rejected the Appellant's argument, stating that the liabilities, even if barred by limitation, cannot be treated as income under section 41(1) of the Act. Therefore, the second question of law was also dismissed.In conclusion, the High Court upheld the decisions of the lower authorities and dismissed the appeal filed by the Appellant-Revenue.