2014 (5) TMI 318 - HC - Income Tax

Bogus purchases made - Disallowance of only 10% of purchases books of accounts and other material had been seized by the Excise authorities - Held that - The Tribunal noted here that though the AO was aware of the search and seizure operations, he made no attempt to obtain the books of accounts from the Excise authorities - The failure of the Revenue could not oblige the assessee s disadvantage - The findings of the Settlement Commission were based upon assessment of the materials before that authority - it was satisfied that the inputs had been used to a large measure - the assessee was unable to pinpoint or ensure the presence of the vendors in the assessment proceedings could not have been sole ground for rejecting its entire books of accounts, particularly when there was relevant material suggesting that the inputs had been utilised and paid for - The suspicion that the cash withdrawn by the vendors directly might have found its way back to the assessee could not have led to the rejection of the books of accounts and the drastic consequences, which the AO in this case had directed by way of disallowance - the restriction of the disallowance amounts, both in terms of the number of vendors and to 10%, is neither unreasonable nor without justification the order of the Tribunal is upheld Decided against Revenue. Applicability of section 40(a)(ia) of the Act Effect of amendment w.e.f. 01.04.2005 - Held that - Section 40 directs a disallowance in the computation of profits and gains from business or profession in the case of any assessee where inter alia any amounts payable as interest, commission, brokerage, rent, royalty, fees for professional services or amounts payable to contractor or subcontractor, for carrying out any work on which tax is deductible at source under Chapter XVII-B - the assessee was not under obligation to deposit the TDS amount and could deduct addition of Section 40(ia) with its proviso as it existed then - This aspect appears to have been lost sight of the ITAT the sum is directed to be given the benefit of deduction u/s 40(a) - the disallowance directed by the AO and as upheld by the CIT (A) are set aside - Decided in favour of Assessee.

Summary

Issues Involved:
1. Justification of ITAT in restricting the number of parties from whom bogus purchases were claimed by the assessee.
2. ITAT's direction to disallow only 10% of purchases from such vendors.
3. Application of Section 40(a)(ia) retrospectively amended by Finance Act, 2008 w.e.f. 01.04.2005.

Detailed Analysis:

1. Justification of ITAT in Restricting the Number of Parties from Whom Bogus Purchases Were Claimed:
The Revenue challenged the ITAT's decision to restrict the number of parties from whom bogus purchases were claimed by the assessee. The ITAT noted that the stock found during the search was tallied with statutory records and no discrepancy was found. The Tribunal took into account the findings of the Settlement Commission, which had fixed the assessee's liability at Rs.4.94 Crores, and noted that many allegations were not established. The ITAT concluded that the facts established before the Settlement Commission should be considered for computing the income of the assessee, and all allegations in the show cause notice could not be taken into consideration as many were proved wrong or not established.

2. ITAT's Direction to Disallow Only 10% of Purchases from Such Vendors:
The ITAT reasoned that while some vendors were not in existence, the goods were actually used in manufacturing the final products. The Tribunal found no evidence of money flowing back to the assessee or its directors. It concluded that the books of account did not contain material defects leading to their rejection. However, the purchase price from 10 vendors was not established by evidence. The ITAT decided to restrict the disallowance to 10% of the purchase price, acknowledging the absence of corroborative evidence for bills from certain vendors and the reasonable inference of inflated purchase prices.

3. Application of Section 40(a)(ia) Retrospectively Amended by Finance Act, 2008 w.e.f. 01.04.2005:
The assessee contended that the ITAT overlooked the retrospective amendment of Section 40(a)(ia) by Finance Act, 2008, effective from 01.04.2005. The Court noted that Section 40 directed a disallowance in the computation of profits and gains where tax was deductible at source and not deducted or paid. The amendment allowed sums to be deducted in the computation of income of the previous year in which the tax was paid. The Court found merit in the assessee's contention, acknowledging that the assessee was not obligated to deposit the TDS amount under the amended provision. Consequently, the assessee's cross objection was allowed, and the disallowance of Rs.18,34,490/- was set aside.

Conclusion:
The Court upheld the ITAT's findings regarding the restriction of disallowance to 10% of purchases and the number of vendors involved. It concluded that the ITAT's decision was justified based on the facts and materials before it. The Revenue's appeal was dismissed, and the assessee's cross objection regarding Section 40(a)(ia) was allowed. The file was directed to be restored to the AO to give effect to the present order on the assessee's cross objection.