2024 (2) TMI 272 - AT - Income Tax

ITAT restricts bogus purchase disallowance to 12.5%, deletes section 68 addition for trade creditors

ITAT Mumbai upheld CIT(A)'s decision restricting disallowance of bogus purchases to 12.5% instead of full amount, finding this reasonable approach ... Disallowance on account of bogus purchases - Reasonable disallowance limited to profit element (12.5%) - Burden to prove genuineness of purchases and compliance with notices under section 133(6) - Addition under section 68 for unexplained sundry creditors - Effect of accepted purchases and payments on sustainment of addition under section 68 - Ad hoc additions lacking supporting evidenceDisallowance on account of bogus purchases - Reasonable disallowance limited to profit element (12.5%) - Burden to prove genuineness of purchases and compliance with notices under section 133(6) - Validity and quantum of addition on account of alleged bogus purchases; whether entire purchases could be added or disallowance should be restricted to profit element. - HELD THAT: - The Tribunal found that parties from whom purchases were shown appeared in the Sales Tax Department's list of Hawala parties and did not comply with notices under section 133(6). The assessee failed to produce the parties or supporting delivery/transport/stock documents, establishing failure to prove genuineness of purchases. However, revenue did not doubt the assessee's sales and, without purchases, sales could not be sustained; hence the material indicates procurement from elsewhere at lower cost and issuance of bogus bills. In view of these facts the Tribunal held that adding the entire amount of purchases was not warranted; a reasonable disallowance to capture the profit element was appropriate. The Tribunal upheld the CIT(A)'s restriction of disallowance to 12.5% of the alleged bogus purchases, noting consistency with the coordinate bench approach and a relevant jurisdictional High Court decision. The same principle was applied to purchases from M/s Abhishek Enterprises, restricting disallowance to 12.5% of that supplier's purchases as well. [Paras 10]Grounds 3-5 partly allowed; disallowance restricted to 12.5% of the alleged bogus purchases.Addition under section 68 for unexplained sundry creditors - Effect of accepted purchases and payments on sustainment of addition under section 68 - Sustainability of addition of outstanding sundry creditors as unexplained cash credits under section 68 where purchases and payments during the year are recorded. - HELD THAT: - The AO added the balance of sundry creditors to income treating them as unexplained under section 68 because the creditors did not respond to notices under section 133(6) and confirmations were not produced. The assessee, however, produced ledger extracts, sample bills and showed payments through banking channels, and the AO had accepted purchases and payments during the year. The Tribunal relied on the principle that where purchases made during the year and the corresponding payments are accepted, the AO cannot simply treat outstanding trade creditors as unexplained cash credits under section 68. Distinguishing authorities where facts showed shorter confirmed balances or payments outside books, the Tribunal followed coordinate bench and Special Bench reasoning to hold that addition was not sustainable in the present factual matrix and directed deletion. [Paras 15, 17]Ground 6 allowed; addition in respect of balance sundry creditors deleted.Ad hoc additions lacking supporting evidence - Sustainability of ad hoc additions made for lower household withdrawal and various cash expenses where no supporting material was produced. - HELD THAT: - The AO made ad hoc additions for low household withdrawal and unverifiable cash expenses without relevant supporting documentation. The Tribunal found these additions to be unsupported and unrealized by any corroborative material. Consequently, the ad hoc additions could not be sustained and were to be deleted. [Paras 20]Grounds 7 and 8 allowed; ad hoc additions of Rs. 75,000 and Rs. 50,000 deleted.Not responding to notices under section 133(6) - Treatment of a ground relying on non-compliance with Circular No.19/2019 (DIN requirement) where the ground was not pressed at hearing. - HELD THAT: - The ground challenging the validity of the order on the basis of Circular No.19/2019 (mandatory DIN) was not pressed by the assessee at the hearing. The Tribunal accordingly treated that ground as not pressed and did not adjudicate it on merits. [Paras 6]Ground 2 dismissed as not pressed.Final Conclusion: The appeal is partly allowed: disallowance for alleged bogus purchases is restricted to 12.5% (partly allowing grounds 3-5); the addition relating to outstanding sundry creditors is deleted (ground 6 allowed); ad hoc additions for household withdrawal and various cash expenses are deleted (grounds 7 and 8 allowed); one ground based on Circular No.19/2019 was dismissed as not pressed; the appeal is otherwise disposed of accordingly. Issues Involved:1. Delay in filing the appeal.2. Validity of the impugned order due to lack of Document Identification Number (DIN).3. Addition on account of alleged bogus purchases.4. Disallowance of sundry creditors.5. Ad hoc additions for lower household withdrawal and various expenses.Summary of Judgment:1. Delay in Filing the Appeal:The assessee filed the appeal after a delay of 525 days, attributing the delay to the pandemic and lockdown in Maharashtra. The Tribunal noted the Supreme Court's order extending the limitation period for filing appeals due to Covid-19 and concluded that the appeal was filed within the extended time, thus proceeding to decide the appeal on merits.2. Validity of the Impugned Order Due to Lack of DIN:Ground no. 2, which challenged the impugned order for not having a Document Identification Number (DIN) as required by Circular No. 19/2019, was not pressed during the hearing and was dismissed as not pressed.3. Addition on Account of Alleged Bogus Purchases:The assessee was found to have made purchases from parties listed as Hawala parties by the Sales Tax Department. The AO disallowed the entire amount of Rs. 80,08,830 as bogus purchases. The learned CIT(A) restricted the addition to 12.5% of the bogus purchases, following the Tribunal's decision in Simit P. Sheth v/s ITO. The Tribunal upheld this decision, noting that while the purchases were not genuine, the sales were not doubted, indicating that the material was purchased from elsewhere at a lower cost. The Tribunal found no infirmity in restricting the disallowance to 12.5%.4. Disallowance of Sundry Creditors:The AO added Rs. 64,17,345 as unexplained sundry creditors due to the assessee's failure to prove their identity, creditworthiness, and genuineness. The learned CIT(A) upheld this addition. The Tribunal, however, noted that the purchases and payments were made during the year and that the outstanding balances were trade creditors. Citing the Special Bench decision in Manoj Agarwal v/s DCIT and other precedents, the Tribunal held that trade creditors cannot be added under section 68 if the purchases are genuine and directed the AO to delete the addition.5. Ad Hoc Additions for Lower Household Withdrawal and Various Expenses:The AO made ad hoc additions of Rs. 75,000 for low household withdrawal and Rs. 50,000 for various expenses incurred in cash without proper bills. The learned CIT(A) upheld these additions. The Tribunal found these additions to be without merit and directed the AO to delete them.General Grounds:Grounds no. 1 and 9-12 were general in nature and did not require separate adjudication.Conclusion:The appeal by the assessee was partly allowed, with specific directions to delete certain additions while upholding others.Order Pronounced:The order was pronounced in the open Court on 29/12/2023.