2026 (1) TMI 1479 - AT - Income Tax

Gold coin purchases and classification as business promotion expenses upheld; reassessment computational addition of exempt dividends set aside.

Assessed purchases of gold coins treated as business promotion and staff welfare were held genuine for the buyer where Revenue failed to produce ... Bogus purchases - expenditure incurred by the assessee towards purchase of gold coins - claimed as business promotion and staff welfare expenditure - claim disallowed u/s 37(1) by treating the purchases as bogus HELD THAT:- Once the transactions have been examined threadbare and accepted as genuine in the hands of the seller by the Tribunal, it would be wholly incongruous to hold that the very same transactions are bogus in the hands of the buyer, namely the assessee. The Revenue has not brought on record any independent or tangible material to demonstrate that the assessee did not receive the gold coins or that the expenditure was not incurred for business purposes. The entire disallowance rests on third-party information and a statement which has already been retracted and judicially discredited in the seller’s own case. The objection of the AO regarding non-maintenance of a stock register also does not advance the Revenue’s case. The assessee is not a dealer in gold, the gold coins were not held as stock-in-trade and were admittedly distributed immediately (list of persons to whom gold coins were distributed for business promotion with quantity of gold distributed and identity of each recipient of gold coin was placed before CIT(A). In such circumstances, the absence of a stock register cannot be a determinative factor to hold the purchases as bogus. AO has failed to discharge the burden of establishing that the expenditure was not incurred wholly and exclusively for the purposes of business. CIT(A) also erred in confirming the disallowance by ignoring the binding Tribunal orders in the case of the seller and by placing undue reliance on a retracted statement without independent corroboration. Accordingly, the disallowance made u/s 37(1) on account of purchase of gold coins for all the assessment years under consideration cannot be sustained on merits and is liable to be deleted. Reopening of assessment - Taxation of dividend income claimed as exempt u/s 10(34) - There is no allegation by the Assessing Officer that the dividend income does not qualify for exemption, nor is there any reference in the reassessment order to deny the exemption claimed by the assessee. As evident from the reassessment order that the Assessing Officer has not made any conscious or reasoned addition of dividend income in the body of the order. The addition appears only in the computation sheet attached to the assessment order, resulting in a contradiction between the assessment order and the computation. It is well settled that where there is a conflict between the reasoning recorded in the assessment order and the computation sheet, the findings recorded in the assessment order must prevail. An addition cannot be sustained merely on the basis of a computational adjustment, in the absence of any discussion or finding by the Assessing Officer justifying such addition. Thirdly, even otherwise, once the dividend income is exempt under section 10(34), the same cannot be brought to tax indirectly by reducing the business loss, without any statutory sanction. The action of the Assessing Officer amounts to taxing exempt income through the back door, which is impermissible in law. Thus, addition of dividend income made in the computation sheet is patently erroneous and unsustainable. The CIT(A) erred in confirming the same without appreciating that no such addition was made in the reassessment order itself and that the income was admittedly exempt. Non Grant of credit for advance tax and TDS - We direct the Assessing Officer to verify the claim of the assessee with reference to Form 26AS and grant due credit in accordance with law while giving effect to this order. These grounds are allowed for statistical purposes. Issues: (i) Whether disallowance under section 37(1) of the Income-tax Act, 1961 of alleged bogus purchases of gold coins can be sustained; (ii) Whether addition of dividend income in the computation sheet for the assessment year could be sustained when the dividend is exempt under section 10(34); (iii) Whether grounds challenging validity of reassessment under section 147 require adjudication after deletion of substantive additions.Issue (i): Whether the Assessing Officers disallowance under section 37(1) treating purchases of gold coins as bogus is sustainable.Analysis: The purchases were recorded as business promotion/staff welfare and supported by invoices, bank payments and distribution details; the disallowance rested solely on third-party information and a statement by the seller which was retracted and which earlier Tribunal orders had accepted as not corroborated; no independent material was produced to show non-receipt or non-business purpose; absence of stock register was not determinative where goods were not held as stock-in-trade and were immediately distributed.Conclusion: Deletion of disallowances under section 37(1) for all assessment years is directed and the corresponding additions (specified amounts per year) are deleted. Conclusion is in favour of the assessee.Issue (ii): Whether the addition of exempt dividend income made in the computation sheet for A.Y. 201617 is sustainable.Analysis: Dividend income was admitted to be exempt under section 10(34) and was accepted in the assessment order body; the assessor made no discussion or reasoned finding in the order but the amount appears only in the computation sheet; settled principle requires the assessment order to prevail over a conflicting computation; taxing exempt income indirectly by computational adjustment without statutory basis is impermissible.Conclusion: The addition of dividend income of Rs. 14,70,796 for A.Y. 201617 is deleted. Conclusion is in favour of the assessee.Issue (iii): Whether the jurisdictional grounds challenging reassessment under section 147 require independent adjudication after substantive deletions.Analysis: The substantive additions, being the sole basis of reassessment, have been deleted on merits after examination of the evidentiary value of the third-party statement and binding Tribunal orders; with merits disposed of, the jurisdictional grounds are rendered academic.Conclusion: Jurisdictional grounds under section 147 are not adjudicated as they are rendered infructuous. Conclusion is neutral with respect to further adjudication.Final Conclusion: The Tribunal allows the appeals by deleting the substantive additions and related erroneous computational taxation, grants consequential directions to give effect to this order including recomputation of interest and verification and grant of tax credits, and treats remaining procedural or consequential grounds as either allowed for statistical purposes or rendered academic.Ratio Decidendi: Where substantive disallowance rests solely on third-party information and a retracted statement which has been judicially discredited in the sellers cases and no independent corroborative material is produced to show non-receipt or non-business purpose, the disallowance under section 37(1) cannot be sustained; further, findings in the body of the assessment order prevail over inconsistent computational adjustments, and exempt income cannot be taxed indirectly by computation.