2012 (8) TMI 737 - AT - Income Tax

Addition made for bogus purchases letters issued u/s 133(6) returned as unserved in the case of at least 22 parties - no reply received from at least another 11 parties cheques encashed by third parties at places, which were not mentioned anywhere in the purchase bills - Held that - It is observed that in the remand proceedings, creditors send confirmation letters, and confirmed the receipt of cheques on account. In view of aforesaid, we find that the assessee has partially discharged her onus to substantiate the purchases made by her. The purchases have been accounted in the books of account. The sales reported by the assessee have been accepted by the assessing authority. The sales have been made out of the opening stock and purchases made by the assessee. If the purchases omitted by the assessing authority are really excluded from the stock account, it would not have been possible for the assessee to arrive at the sale figures reported by her. It is to be seen that the income generates out of the sales. When all these facts are taken into consideration, it is not possible for us to endorse the view of the lower authorities that the entire such purchases objected to by them should be treated as bogus At the same time, it is also not possible to accept the entire contentions advanced by the assessee, since confirmations have been received only during remand proceedings. Hence, an addition on account of alleged bogus purchases is called for, however with moderation Decided partly in favor of assessee

Summary

Issues Involved:

1. Disallowance of Rs.79,39,637/- as bogus purchases.
2. Disallowance of Rs.2,54,503/- being 1/5 of the expenses claimed in the profit and loss account.

Issue-wise Detailed Analysis:

1. Disallowance of Rs.79,39,637/- as bogus purchases:

The assessee, engaged in the trading of hosiery goods, filed a return declaring a total income of Rs.1,75,750/-. During the assessment, the Assessing Officer (AO) found that the assessee had debited Rs.1,99,84,454/- as purchases in the profit and loss account. Letters under sec.133(6) were issued to verify the genuineness of creditors, but many letters were returned unserved, and no replies were received from several parties. The assessee was asked to prove the genuineness of the purchases, providing ledger accounts and purchase bills, and claimed payments were made by cheques. However, the AO found discrepancies in the encashment locations of these cheques, leading to the addition of Rs.79,39,637/- as bogus purchases.

In the first appeal, the Commissioner of Income-tax (Appeals) requested a remand report. The remand proceedings confirmed the sales and receipt of cheques by creditors but revealed that cheques were encashed by third parties. The Commissioner of Income-tax (Appeals) upheld the AO's addition, citing a lack of satisfactory explanation from the assessee regarding the encashment by third parties and potential violations of sec.40(A)(3).

In the second appeal before the Tribunal, the assessee argued that the purchases were confirmed by creditors and payments were made by cheques, discharging their onus. The assessee also contended that the AO accepted the sales, making it impossible to have sales without corresponding purchases. The Tribunal found that while the assessee partially substantiated the purchases, there were still unexplained issues regarding the encashment of cheques by third parties. The Tribunal decided on a via media, sustaining an addition of Rs.40 lakhs towards bogus purchases and deleting the balance of Rs.39,39,637/-.

2. Disallowance of Rs.2,54,503/- being 1/5 of the expenses claimed in the profit and loss account:

The AO disallowed 1/5th of the total expenses amounting to Rs.2,54,503/- due to a lack of details. The Commissioner of Income-tax (Appeals) did not adjudicate on this disallowance in the first appeal. In the second appeal, the Tribunal found the disallowance reasonable given the absence of detailed evidence supporting the claimed expenses.

Conclusion:

The Tribunal partially allowed the appeal, sustaining an addition of Rs.40 lakhs towards bogus purchases and confirming the disallowance of Rs.2,54,503/- for lack of expense details. The order was pronounced on June 12, 2012, at Chennai.