2010 (4) TMI 1113 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of purchase of color and chemicals.
2. Addition on account of work-in-progress.
3. Addition u/s 2(22)(e) of the Income-tax Act, 1961.
4. Penalty u/s 271(1)(c) of the Income-tax Act, 1961.

Summary:

1. Disallowance of Purchase of Color and Chemicals:
The assessee appealed against the order of CIT(A) confirming the disallowance of purchases of color and chemicals. The assessee argued that it had provided complete documentary evidence, including purchase bills, delivery challans, and payments by account payee cheques. However, during the survey operation u/s 133A, discrepancies were found in the stock of color and chemicals. The Assessing Officer (AO) disallowed the purchase, treating it as bogus, based on statements from suppliers admitting to issuing accommodation bills. The Tribunal set aside the issue to the AO, directing the assessee to produce evidence to establish the actual use of the material and the reasonableness of the purchase price.

2. Addition on Account of Work-in-Progress:
The Revenue appealed against the CIT(A)'s deletion of the addition made on account of work-in-progress amounting to Rs. 2,89,095/-. The AO had noted that the assessee did not show work-in-progress in the closing stock. The CIT(A) deleted the addition, noting that the assessee consistently did not include work-in-progress in its stock and that the goods belonged to customers, not the assessee. The Tribunal confirmed the CIT(A)'s order, emphasizing the principle of consistency and the fact that the goods did not belong to the assessee.

3. Addition u/s 2(22)(e) of the Income-tax Act, 1961:
The Revenue appealed against the CIT(A)'s deletion of the addition of Rs. 81,96,421/- made u/s 2(22)(e). The AO had added this amount, treating it as deemed dividend. The CIT(A) deleted the addition, noting that the amount was an opening balance from the previous year and that no payment was made during the year under consideration. The Tribunal confirmed the CIT(A)'s order, agreeing that the addition was not justified as the conditions of section 2(22)(e) were not met.

4. Penalty u/s 271(1)(c) of the Income-tax Act, 1961:
The AO levied a penalty for furnishing inaccurate particulars of income u/s 271(1)(c) based on the additions made. The CIT(A) restricted the penalty to the addition of Rs. 10,00,140/- for bogus purchases. The Tribunal set aside the issue of bogus purchases to the AO, thus deleting the penalty. The AO was allowed to re-initiate penalty proceedings if it was concluded that there was furnishing of inaccurate particulars or concealment of income.

Conclusion:
Both Revenue's appeals were dismissed. The assessee's appeal regarding the disallowance of purchases was allowed for statistical purposes, and the appeal against the penalty was allowed. The Tribunal directed the AO to re-examine the issues based on the evidence provided by the assessee.