Estimated profit on doubtful purchases and carry-forward of unabsorbed depreciation upheld under the amended tax regime.
ITAT Mumbai held that where purchases were doubtful but the record did not support treating the entire amount as income, the addition could be restricted to an estimated 12.5% of the purchases rather than enhanced to 100%. It also held that unabsorbed depreciation relating to earlier assessment years could be carried forward and set off in assessment year 2010-11, as the amended section 32(2) removed the earlier eight-year restriction, subject to verification to avoid double allowance. On both issues, the Revenue's challenge failed.
Issues: (i) Whether the addition on account of alleged bogus purchases should be restricted to 12.5% of the purchases or enhanced to 100%. (ii) Whether unabsorbed depreciation relating to assessment years 1998-99, 1999-2000 and 2000-01 could be carried forward and set off in assessment year 2010-11 beyond the earlier eight-year restriction.
Issue (i): Whether the addition on account of alleged bogus purchases should be restricted to 12.5% of the purchases or enhanced to 100%.
Analysis: The purchases were found to be unsupported by delivery evidence and the parties were untraceable, but the record did not contain clinching material to justify treating the entire purchases as income. The authorities below adopted estimation of profit embedded in the purchases, and the lower appellate authority applied 12.5% having regard to the treatment given in an earlier year on similar facts. The claim for enhancement to 100% was not supported by sufficient incriminating material to disturb the estimate already made.
Conclusion: The addition at 12.5% was upheld and the Revenue's plea for enhancement failed.
Issue (ii): Whether unabsorbed depreciation relating to assessment years 1998-99, 1999-2000 and 2000-01 could be carried forward and set off in assessment year 2010-11 beyond the earlier eight-year restriction.
Analysis: The amended scheme of section 32(2), read with Circular No. 14 of 2001, restored the position enabling unabsorbed depreciation to be carried forward without the earlier eight-year limitation. The Tribunal followed the view already accepted in the assessee's own earlier year and the governing judicial precedent, and directed verification only to prevent double allowance.
Conclusion: The set-off of the brought forward unabsorbed depreciation was allowed.
Final Conclusion: The Revenue's challenge to both the estimation of bogus purchase profit and the carry-forward of unabsorbed depreciation was rejected, resulting in dismissal of the appeal.
Ratio Decidendi: Where purchases are found doubtful but the record does not justify disallowance of the entire amount, the profit embedded in such purchases may be estimated on a reasonable basis; and unabsorbed depreciation available at the commencement of the amended regime under section 32(2) is allowable for carry forward and set-off without the earlier eight-year restriction.