2012 (12) TMI 91 - AT - Income Tax

Addition on account of bogus expenses Held that - Nature of business of the assessee clearly proves that component of labourers is necessary for doing the business of the assessee. The assessee maintained complete records of the payments for labour charges and the outstanding payments have been cleared - With regard to Shyam Steels Pvt. Ltd. the assessee purchased old and used D. G. Sets from them and the assessee submitted before the authorities below that it is a registered dealer under Sales Tax and regularly assessed to income tax and payment is made through account payee cheques. Similarly, commission payments have been made through account payee cheques - addition deleted in favor of assessee Addition on account of bogus purchases Held that - Sale value of oil coolers was disclosed in the books of accounts which the AO himself admitted - On verification of the books of accounts, bills and vouchers found the contention of the assessee to be correct. The assessee filed ledger account, copy of the draft and bills of M/s. Akil Corporation at pages 71, 72 and 73 of the paper book to show that purchase of Rs.1,18,000/- have been made which are recorded in the books and payments are made through banking channel - addition deleted in favor of assessee Addition on account of excess payment to persons specified u/s 40A (2) (b) of the IT Act alleged that major purchases were made from the sister concern which is more than 42% of the total purchases and 65% of the D. G. Sets were also purchased from them - AO was of the view that the assessee could have purchased the same directly instead of purchasing it through sister concern Held that - AO has not compared the prices paid by the assessee to the sister concerns with the market price for proving that these concerns were made excessive or unreasonable payments - AO has not brought any evidence or material on record to prove as to how the payments made to the sister concerns were excessive or unreasonable as compared to fair market value of these services or facilities addition deleted in favor of assessee

Summary

Issues:
1. Deletion of addition of Rs.11,41,837/- on account of bogus expenses.
2. Deletion of addition of Rs.2,78,000/- on account of bogus purchases.
3. Deletion of addition of Rs.2,20,000/- made on account of undervaluation of closing stock.
4. Deletion of addition of Rs.49,812/- on account of excess payment to persons specified u/s 40A (2) (b) of the IT Act.

Issue 1: Deletion of Addition of Rs.11,41,837/- on Account of Bogus Expenses:
The AO disallowed expenses amounting to Rs.11,41,837/- as bogus due to outstanding payments to sundry creditors and commission agents. The CIT(A) found that these expenses were genuine as they were related to semi-technical work and were supported by valid invoices and bills. The AO's concerns regarding untraceable laborers and transporters were countered by the explanation that these were small-time mechanics with no fixed address. The CIT(A) upheld the assessee's explanations, noting that payments were made through proper channels, and hence, deleted the addition.

Issue 2: Deletion of Addition of Rs.2,78,000/- on Account of Bogus Purchases:
The AO added Rs.2,78,000/- for alleged bogus purchases of oil coolers. The CIT(A) reviewed the evidence presented by the assessee, including bills, ledger accounts, and payment details, and found the purchases to be genuine. The AO's suspicion of undisclosed sources for two oil coolers was refuted with proper documentation showing legitimate transactions. The CIT(A) concluded that the addition was unjustified and deleted it based on the evidence provided by the assessee.

Issue 3: Deletion of Addition of Rs.2,20,000/- Due to Undervaluation of Closing Stock:
Following the deletion of the addition related to bogus purchases, an additional amount of Rs.2,20,000/- was added due to the undervaluation of closing stock. The CIT(A) dismissed this ground as it was dependent on the findings of the earlier issue. Both parties agreed that the resolution of the second issue rendered this ground moot, leading to the dismissal of the revenue's appeal on this point.

Issue 4: Deletion of Addition of Rs.49,812/- for Excess Payment to Specified Persons:
The AO added Rs.49,812/- for excess payments to sister concerns under section 40A (2) (b) of the IT Act. The CIT(A) noted the absence of evidence proving excessive or unreasonable payments compared to market rates. As the AO failed to substantiate the claim of overpayment, the CIT(A) deleted the addition, concluding that there was no basis for considering the payments excessive. Consequently, the revenue's appeal on this ground was dismissed.

In conclusion, the Appellate Tribunal ITAT Ahmedabad upheld the CIT(A)'s decisions to delete the additions made by the AO in all the contested issues. The Tribunal found the assessee's explanations and supporting documentation to be sufficient in establishing the genuineness of the expenses, purchases, and payments, leading to the dismissal of the revenue's appeal in its entirety.