2022 (12) TMI 1077 - AT - Income Tax

Tribunal limits purchase disallowance to 10%, remands unexplained deposit issue for verification.

The Tribunal partially allowed the appeal by restricting the disallowance of purchases to 10% of the total amount and remanded the unexplained deposit ... Estimation of income - bogus purchases - HELD THAT:- There is always an element of guesswork on the quantum of disallowance that should be made in case in the case of purchases made from parties whom the assessee is unable to identify. It would not be justifiable to disallow the entire purchases when the corresponding sale of finished product (in which such which the purchases so made were utilised for making the final finished product) have been subject to tax. Accordingly, in light of the judicial precedents cited above, a certain percentage of such alleged bogus purchases may be disallowed, keeping into consideration the profit offered to tax by the assessee. Accordingly, in the interest of justice, we are of the view that in the instant set of facts 10% of the above purchases may be disallowed and added back to the income of the assessee. Unexplained deposit on the basis of a AIR information - HELD THAT:- In light of the facts placed before us, in the interests of justice, the matter is being restored to the file of the Ld. Assessing Officer to verify the correctness of the claim made by the assessee. The assessee may file the necessary confirmation given by the Bank of India, the assessee’s banker, to the effect that the deposits made with the bank are duly tallying with the assessee’s books of accounts. Issues Involved:1. Disallowance of Rs. 77,12,502/- in respect of purchases from M/s Virat Enterprises.2. Addition of unexplained deposit of Rs. 10,30,500/- based on AIR information.Issue-wise Detailed Analysis:1. Disallowance of Rs. 77,12,502/- in respect of purchases from M/s Virat Enterprises:The assessee, a manufacturer of perfumes and other beauty products, purchased chemicals amounting to Rs. 77,12,502/- from M/s Virat Enterprises during the assessment year 2011-12. The Assessing Officer (AO) disallowed these purchases, citing the absence of the PAN number and confirmation from M/s Virat Enterprises, which had shut down its business. The AO deemed the purchases as bogus, questioning the identity, genuineness, and creditworthiness of the party.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing the assessee's failure to establish the identity of M/s Virat Enterprises and the lack of PAN and confirmation. The CIT(A) referenced several judicial precedents, including CIT vs. Precision Finance Co. Pvt Ltd. and CIT vs. United Commercial & Industrial Co. (P) Ltd., to support the requirement for the assessee to prove the identity, creditworthiness, and genuineness of transactions.Upon appeal, the assessee argued that the purchases were backed by invoices, delivery challans, and payments through banking channels. The assessee also highlighted that the purchases contributed to the manufacturing process, which was subject to tax audit and excise audit without adverse remarks. The assessee cited judicial precedents, such as Jagadish H Patel, to argue for a reasonable disallowance instead of the entire amount.The Tribunal acknowledged the judicial precedents and the necessity of a reasonable disallowance. It noted that disallowing the entire purchase would be unjustifiable since the sales, which included the purchased chemicals, were taxed. Consequently, the Tribunal decided to disallow 10% of the purchases, amounting to Rs. 7,71,250.20, and added this to the income of the assessee.2. Addition of unexplained deposit of Rs. 10,30,500/- based on AIR information:During the assessment proceedings, the AO noted a discrepancy between the fixed deposits shown in the assessee's balance sheet (Rs. 94,47,000/-) and the AIR information (Rs. 1,04,77,500/-). The AO added Rs. 10,30,500/- as unexplained deposits due to the assessee's failure to reconcile the difference.The CIT(A) confirmed the addition, stating that the assessee's explanation was unsubstantiated by independent documentary evidence. The CIT(A) emphasized the need for a reconciliation statement supported by the Fixed Deposit Receipt (FDR) statement from the bank.On appeal, the assessee presented confirmation from Bank of India, which matched the balances in the assessee's books. The Tribunal, in the interest of justice, remanded the matter to the AO for verification. The assessee was instructed to provide necessary confirmations from the bank to substantiate its claim.Conclusion:The Tribunal partly allowed the appeal regarding the disallowance of purchases, restricting the disallowance to 10% of the total amount. For the unexplained deposit, the Tribunal remanded the case to the AO for verification, allowing the appeal for statistical purposes. The order was pronounced on 07-11-2022.