ITAT deletes additions on bogus purchases and sub-contractor expenses without proper current year verification

ITAT Chennai partially allowed the assessee's appeal regarding bogus purchases and sub-contractor expenses. The tribunal held that the AO could not rely solely on findings from earlier years without conducting proper verification for the current assessment year. Since the search occurred mid-year, there was insufficient evidence to establish that all purchases and expenses throughout the year were bogus. Considering the construction business nature requiring raw materials and sub-contractors, the tribunal estimated additions of 5% on alleged bogus purchases and 25% on bogus sub-contractor expenses. The addition for undisclosed interest income was deleted as it was consequential to loans addition already deleted in a previous order for AY 2020-21.

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Issues Involved:

1. Addition of Bogus Purchases for Rs. 1168.34 Lacs
2. Disallowance of Sub-contractor's Expenses for Rs. 131.20 Lacs
3. Addition of Undisclosed Interest Income for Rs. 1401 Lacs

Detailed Analysis:

1. Addition of Bogus Purchases for Rs. 1168.34 Lacs:

The issue of bogus purchases arose from an excel sheet found during a search operation, which indicated cash received from parties against whom bogus purchases were recorded. The assessee denied these allegations, asserting that the inference was based on presumption. However, the Assessing Officer (AO) noted admissions from a key individual that some parties were completely bogus, leading to the addition of Rs. 1168.34 Lacs to the income. During appellate proceedings, it was argued that the AO did not verify the claims or identify any bogus suppliers. The CIT(A) upheld the AO's decision, linking certain bogus purchases to seized documents. However, the tribunal noted that the search occurred mid-year, and no comprehensive evidence was available to label all purchases as bogus. Considering the nature of the assessee's business and lack of verification by the AO, the tribunal restricted the addition to 5% of the alleged bogus purchases, amounting to Rs. 58,41,722/-.

2. Disallowance of Sub-contractor's Expenses for Rs. 131.20 Lacs:

Similar to the bogus purchases, the AO found that bogus sub-contractor expenses were booked, with payments made through banking channels but cash received back. The assessee contested this, stating that no verification was done by the AO. The CIT(A) confirmed the AO's findings based on sworn statements. The tribunal applied the same rationale as for the bogus purchases, noting insufficient evidence and lack of verification for the current year. It was acknowledged that the assessee's business required sub-contractor services, and thus, the tribunal restricted the addition to 25% of the alleged bogus expenses, amounting to Rs. 32,80,189/-.

3. Addition of Undisclosed Interest Income for Rs. 1401 Lacs:

The AO alleged that the assessee advanced undisclosed loans, leading to computed interest income of Rs. 1401 Lacs. This addition was consequential to findings from a previous assessment year. However, the tribunal had already deleted the quantum addition of alleged loans for that year, rendering the basis for the interest addition void. Consequently, the tribunal deleted the addition of undisclosed interest income.

Conclusion:

The appeal was partly allowed, with the tribunal restricting and deleting certain additions based on the lack of evidence and verification by the AO, while upholding the need for some adjustments to prevent revenue leakage. No legal grounds or jurisdictional defects were successfully argued by the assessee.

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