Tax tribunal restricts bogus purchase addition to 5% gross profit rate, deletes interest addition under section 36(1)(iii)

The ITAT Mumbai upheld CIT(A)'s decision restricting bogus purchase addition to 5% gross profit rate, finding this reasonable given the assessee's clandestine activities and grey market transactions. The tribunal also confirmed deletion of Rs. 13,08,000 interest addition under section 36(1)(iii), ruling that interest-free advances were justified for business expansion under commercial expediency principles and constitutional right to trade under Article 19(1)(g). The revenue's appeal was dismissed on both grounds.

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Issues Involved:
1. Reduction of addition to 5% of total bogus purchases.
2. Deletion of addition of interest u/s 36(1)(iii) of the Act.

Summary:

Issue 1: Reduction of Addition to 5% of Total Bogus Purchases

The appeal was filed against the impugned order where the CIT(A) reduced the addition to 5% of the total bogus purchases of Rs. 5,76,30,455/- as against the 100% addition made by the Assessing Officer (AO). The AO found that the assessee derived income from business and received purchases from 25 entities declared as non-genuine by the Maharashtra Sales Tax Department. The AO made a 100% addition of Rs. 5,76,30,455/- as non-genuine bogus purchases from hawala parties and disallowed interest paid on the diversion of borrowed funds u/s 36(1)(iii) of the Act. The CIT(A), however, restricted the addition to 5% based on the order of ITAT Mumbai in ITA No. 5917/MUM/2018 for A.Y. 2011-12, which observed that in the case of ferrous and non-ferrous items, the profit is very meager ranging from 2% to 4%. The Tribunal upheld the CIT(A)'s decision, stating that the 100% addition was unreasonable and excessive and that a GP rate of 5% was reasonable to bring the additional income on bogus purchases to tax.

Issue 2: Deletion of Addition of Interest u/s 36(1)(iii) of the Act

The AO disallowed interest paid on the diversion of borrowed funds u/s 36(1)(iii) of the Act and calculated interest @12% on the interest-free advance of Rs. 1,09,00,000/- amounting to Rs. 13,08,000/-. The CIT(A) deleted this addition, stating that the advances were trade advances given for commercial expediency with the intention to expand the assessee's business. The Tribunal agreed with the CIT(A), citing the Supreme Court's decision in S.A. Builders vs. CIT, which held that if the interest-free advances are given for commercial expediency, the assessee is entitled to a deduction of interest paid. The Tribunal found that the advances were made for commercial expediency and that the AO was not justified in making the addition of Rs. 13,08,000/- u/s 36(1)(iii) of the Act.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to restrict the addition to 5% of the total bogus purchases and to delete the addition of interest u/s 36(1)(iii) of the Act.

Order pronounced on 11.06.2024.

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