2024 (10) TMI 1201 - AT - Income Tax

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

M/s. V. Sathyamoorthy & Co. Versus DCIT Central Circle-2 Coimbatore.

ITAT Chennai partially allowed the assessee's appeal regarding bogus purchases and sub-contractor expenses. The tribunal held that the AO could not rely ... Estimation of income - Addition of Bogus Purchases - HELD THAT:- For the present year, it was incumbent on the part of Ld. AO to make necessary verification / enquiries from alleged bogus suppliers. AO could not proceed merely on the basis of findings of earlier years. The search has happened in the middle of the year and there are not adequate evidences to hold that the purchases made throughout the year are bogus purchases. Assessee is engaged in construction activity and would require purchase of raw material to carry out construction activities. In the light of all these facts and to plug the leakage of revenue, we estimate addition of 5% against alleged bogus purchases. Bogus sub-contractors’ expenses - Though the payment was made through banking channels, cash was received subsequently, Accounts Head, admitted that bogus expenses were booked to reduce the profit of the firm - HELD THAT:- For the present year, it was incumbent on the part of Ld. AO to make necessary verification / enquiries from alleged bogus sub-contractors. AO could not proceed merely on the basis of findings of earlier years. The search has happened in the middle of the year and there are not adequate evidences to hold that the expenditure as incurred throughout the year is bogus. Considering the nature of assessee’s business, the assessee would require services of sub-contractors. In the light of all these facts and to plug the leakage of revenue, we estimate addition of 25% against this item. The same comes to Rs. 32,80,189/-. The impugned addition stands restricted to that extent. The corresponding grounds stands partly allowed. Addition of undisclosed interest income - alleged by Ld. AO that the assessee advanced undisclosed loans - HELD THAT:- We find that the quantum addition as made by Ld. AO for alleged loans in AY 2020-21 has been deleted by us in [2024 (10) TMI 1148 - ITAT CHENNAI]. This is consequential addition. Since the basis of the addition goes, the consequential addition would not have any legs to stand. Therefore, this addition stands deleted. The grounds raised by the assessee stand allowed. Issues Involved:1. Addition of Bogus Purchases for Rs. 1168.34 Lacs2. Disallowance of Sub-contractor's Expenses for Rs. 131.20 Lacs3. Addition of Undisclosed Interest Income for Rs. 1401 LacsDetailed 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.