Expenses cannot be disallowed as bogus purchases when proper TDS deduction and documentation maintained despite service providers not filing returns
ITAT Mumbai held that expenses claimed by assessee for shipping and freight services could not be treated as bogus purchases merely because service providers failed to file income tax returns. Since assessee deducted TDS, maintained proper documentation, and reflected transactions in GST returns, the expenses were genuine. Tribunal deleted additions made by AO. Regarding provision reversals, once disallowed in earlier years, assessee was entitled to reduce from current year's business income. Sale of asset proceeds were correctly treated as capital receipts under Section 50. Leave encashment liability matter remanded to AO for verification with additional documents. AO directed to verify and grant credit for self-assessment tax following rectification application.
The core legal questions considered in this appeal pertain to the validity of additions and disallowances made by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) in the final assessment order under the Income Tax Act. The principal issues examined include: (1) whether certain purchases claimed by the assessee constitute bogus purchases warranting disallowance; (2) the correctness of disallowance of reversal of provision for lease rent; (3) the treatment of profit on sale of asset and its taxability; (4) the correctness of additions under Section 43B relating to leave encashment liability; (5) issues related to short grant of Tax Deducted at Source (TDS) and self-assessment tax; (6) the consequential interest under Section 234B; and (7) the initiation of penalty proceedings under Section 270A.
Regarding the issue of bogus purchases, the AO had disallowed purchases amounting to Rs. 85,87,489/- from four vendors on the ground that these vendors had not filed income tax returns or business returns, and in one case, the assessee failed to produce documentary evidence and bank statements. The DRP upheld this disallowance despite the assessee's submission of invoices, bank payment proofs, TDS deductions, and GST returns. The Court examined the evidence, which included invoices (pages 124-172 of the paper book), bank statements (pages 173-179), TDS reflected in Form 16A, and GST returns (Form 2A). It was noted that payments were made through banking channels, TDS was deducted and reported, and the vendors were either active or amalgamated subsequently. The Court held that non-filing of returns by vendors alone cannot render transactions bogus. The presence of documentary evidence, banking transactions, TDS compliance, and GST filings were sufficient to establish genuineness. The Court explicitly stated: "If the assessee has deducted TDS and also reflected the transaction in the GST return alongwith bills in support of nature of services used, then how can the transaction be treated as bogus to disallow the expenses debited." Accordingly, the addition on account of bogus purchases was deleted.
On the reversal of provision for lease rent amounting to Rs. 53,91,234/-, the AO disallowed the deduction on the ground that the assessee failed to produce computations of earlier years. The assessee explained that provisions were created and disallowed in earlier years, and the reversal in the current year was claimed as deduction, consistent with accounting principles and tax treatment. The Court reviewed detailed financial statements and computations for assessment years 2014-15 through 2018-19 (notably pages 202-217 of the paper book), which showed opening and closing balances of lease rent provisions and their treatment in respective years. The Court reasoned that since the provision was disallowed and taxed in earlier years, the reversal rightly reduces income in the current year. The Court concluded that "once these details have been furnished, we do not find any reason to make the disallowance on the reversal of the provision" and decided the issue in favour of the assessee.
Regarding the profit on sale of asset of Rs. 19,660/-, the assessee sold an asset from the block of plant and machinery and reduced the sale consideration from the block as per Section 50 of the Act. Since the block did not cease to exist, short-term capital gains were not required to be computed separately. The DRP disallowed the deduction for failure to submit provisions of past years. The Court noted the tax audit report (page 72) and schedules of other income (pages 218-219), confirming that the profit was accounted for correctly and that the sale consideration was reduced from the block of assets. The Court held that the amount credited to profit and loss account was capital receipt and rightly excluded from taxable income, stating: "The only manner in which it could have taxed was as per Section 50 however, once assessee has reduced from the block of asset and said block of asset does not ceased to exist therefore, there is no requirement to consider it for short term capital gains." The disallowance was thus reversed.
In relation to Section 43B disallowance of Rs. 9,33,311/- pertaining to leave encashment liability, the AO noticed a variance between the return of income (ROI) and the Tax Audit Report (TAR). The assessee claimed deductions for pre-existing and current year leave encashment liabilities under Section 43B, duly reported in the TAR. The difference of Rs. 9,33,311/- was added to taxable income by the AO. The DRP remanded the matter to the AO for verification. The assessee submitted an annexure before the Tribunal which was not before the AO. The Court remanded the matter to the AO for limited purpose of considering the factual aspect and granting appropriate relief. The ground was partly allowed for statistical purposes.
Grounds relating to short grant of TDS of Rs. 5,62,031/- and non-grant of self-assessment tax of Rs. 8,49,68,000/- were addressed on the basis that the assessee had filed rectification applications. The Court directed the AO to verify and grant credit accordingly, allowing these grounds for statistical purposes.
The consequential ground relating to interest under Section 234B was directed to be recomputed by the AO after granting TDS credit and self-assessment tax relief.
The initiation of penalty proceedings under Section 270A was held to be premature and dismissed.
Significant holdings include the principle that non-filing of income tax returns by vendors does not ipso facto render transactions bogus if the assessee has produced sufficient documentary evidence, banking proofs, TDS deductions, and GST returns. The Court emphasized the importance of examining the totality of evidence rather than relying solely on the vendor's compliance status. The Court also clarified the correct tax treatment of reversal of provisions, holding that provisions disallowed and taxed in earlier years can be deducted upon reversal in subsequent years. Furthermore, the Court confirmed that profits on sale of assets from a block of assets that continues to exist need not be separately taxed as capital gains if the sale consideration is adjusted under Section 50.
The final determinations were as follows: additions on account of bogus purchases were deleted; reversal of lease rent provisions was allowed as deduction; disallowance of profit on sale of asset was reversed; the Section 43B disallowance was remanded for verification; short grant of TDS and non-grant of self-assessment tax were allowed for statistical purposes; interest under Section 234B was to be recomputed; and penalty proceedings under Section 270A were dismissed as premature. The appeal was partly allowed accordingly.
TaxTMI 
AI Drafter ✕
TaxTMI 
