2015 (6) TMI 965 - AT - Income Tax

Revision u/s 263 - necessary inquiry with regard to such purchases/expenses and expenses claimed in respect of accommodation bill not made by AO - Held that - The assessee was engaged in the business of hotel wherein the expenditure alleged to be incurred on plumbing, electrical items, furniture, printing and stationary etc. amounting to ₹ 2,98,13,059/-, appears to have reduced directly the profit earned by assessee. Even in respect of alleged bogus payment made for purchase of furniture items no inquiry was made by the AO to find out whether furniture was actually acquired and installed. Genuineness of the various expenditure so incurred or purchases so made whose suppliers were not traceable, were also not inquired by the AO. Thus, we find that AO has not made any inquiry with regard to the expenses claimed in respect of accommodation bill obtained by assessee which reduced profit of assessee by 100% instead of 15% considered by AO. In the absence of making any inquiry as well as applying wrong proposition of treating the assessee as dealer and applying the GP rate on such accommodation bill which is actually in the nature of expenses, the Ld. CIT was justified in setting aside the order perused by AO and restoring the matter back to the file of the AO for deciding afresh after making necessary inquiry with regard to such purchases/expenses and affording assessee adequate opportunity of hearing. - Decided against assessee

Issues Involved:
1. Invocation of Section 263 by the Commissioner of Income Tax (CIT).
2. Alleged errors in the Assessing Officer's (AO) order.
3. Verification of purchases claimed by the assessee.
4. Application of Gross Profit (GP) rate on alleged bogus purchases.
5. Adequacy of inquiry conducted by the AO.

Detailed Analysis:

1. Invocation of Section 263 by the Commissioner of Income Tax (CIT):
The CIT invoked Section 263 of the Income Tax Act, alleging that the AO's order was erroneous and prejudicial to the interests of the revenue. The CIT observed that the AO failed to verify the genuineness of purchases amounting to Rs. 2,98,13,059/- from suppliers listed as accommodation bill providers by the Maharashtra Sales Tax Department. The CIT held that the AO's assessment was based on a change of opinion without pointing out any specific error, thus justifying the invocation of Section 263.

2. Alleged errors in the Assessing Officer's (AO) order:
The CIT contended that the AO's order was erroneous on several counts:
- The AO did not verify the claim of purchases from blacklisted suppliers.
- The AO allowed deductions that were previously permitted in earlier scrutiny assessments.
- The AO overlooked various judicial pronouncements and failed to conduct necessary inquiries.
- The AO added only 15% of the alleged bogus purchases to the income, which the CIT deemed insufficient.

3. Verification of purchases claimed by the assessee:
The assessee argued that the purchases were genuine and supported by bank statements, ledger accounts, bills, delivery challans, and confirmations. The director of the assessee company, during the assessment proceedings, stated that the transactions were genuine. However, due to the age of the matter and to avoid litigation, the director agreed to a Gross Profit addition on the disputed purchases. The AO accepted this and added 15% of the non-genuine purchases to the income.

4. Application of Gross Profit (GP) rate on alleged bogus purchases:
The AO observed that the Gross Profit of the assessee in the relevant year was 10.20%, compared to 13.31% and 12.93% in the preceding years. The AO estimated the Gross Profit on the disputed purchases at 15%, resulting in an addition of Rs. 54,03,687/-. The CIT, however, argued that the entire amount of alleged bogus purchases should have been disallowed, as there were no corresponding sales against these purchases.

5. Adequacy of inquiry conducted by the AO:
The CIT held that the AO failed to make adequate inquiries into the existence of suppliers and the genuineness of the purchases. The CIT relied on judicial precedents, including the case of "Western Extrusion Industries," where disallowance of purchases was confirmed due to lack of evidence of goods movement and immediate cash withdrawal by suppliers. The CIT set aside the AO's order, directing a fresh assessment after necessary inquiries.

Conclusion:
The Tribunal upheld the CIT's order, agreeing that the AO did not conduct sufficient inquiries and incorrectly applied the GP rate on bogus purchases. The Tribunal emphasized that the alleged bogus expenses directly reduced the assessee's profits, warranting a thorough investigation. The appeal of the assessee was dismissed, and the matter was restored to the AO for a fresh assessment with adequate opportunity for the assessee to be heard. The Tribunal concluded that the CIT was justified in invoking Section 263 and setting aside the AO's order.

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