2015 (1) TMI 741 - AT - Income Tax

Bogus purchases - CIT(A) deleted the addition of ₹ 2,84,01,250/- on account of bogus purchases of ₹ 2,98,96,050/- - Held that - AO has given various reasons for not accepting the explanation of the assessee. The AO has given finding that the assessee failed to produce the original sale invoices, not a single cheque issued by the assessee against these purchases has been credited in the account of any of these parties, none of the cheque was issued as A/c.payee cheque and no cheque was issued in favour of any of these parties. The AO has also invoked the provisions of section 40A(3) and proviso to section 69C of the Act. We find that there is no finding or any whisper on these objections of the Assessing Officer in the impugned order. The ld.CIT(A) has simply restricted the disallowance to the extent of benefit of VAT, i.e. 5% of the total purchases. Under these facts and circumstances of the case, unable to confirm the finding of the ld.CIT(A), therefore the order of the ld.CIT(A) is set aside on this issue and restore the same back to his file for decision afresh in accordance with law. Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Whether the CIT(A) erred in allowing relief on account of bogus purchases.
2. Whether the disallowance of office rent, godown rent, and adjustments in closing stock was justified.
3. Whether the CIT(A) correctly restricted the disallowance to 5% of the purchases.

Issue-wise Detailed Analysis:

1. Bogus Purchases:
The primary issue in this appeal was whether the CIT(A) erred in law and on facts by allowing relief of Rs. 2,84,01,250/- on account of bogus purchases amounting to Rs. 2,98,96,050/-. The Assessing Officer (AO) had disallowed the entire expenditure towards these purchases, citing various reasons for not accepting the assessee's explanation. The AO noted that the assessee failed to produce original sale invoices, none of the cheques issued against these purchases were credited to the accounts of the concerned parties, and no cheques were issued as account payee cheques. Additionally, the AO invoked provisions of section 40A(3) and proviso to section 69C of the Income Tax Act, 1961, to disallow the expenditure.

The CIT(A), however, accepted that the purchases were not made from the concerned parties but proceeded to restrict the disallowance to 5% of the total purchases. The CIT(A) cited decisions from the Gujarat High Court and the ITAT Ahmedabad, suggesting that it would be fair to disallow 5% of the purchases as the expenditure saved by buying from the open market outside the books of accounts.

The Tribunal found that the CIT(A) failed to address the objections raised by the AO, such as the failure to produce original sale invoices and the non-issuance of account payee cheques. The Tribunal set aside the order of the CIT(A) and restored the issue back to the CIT(A) for a fresh decision after obtaining a Remand Report from the AO and addressing all objections in accordance with the law.

2. Disallowance of Office Rent, Godown Rent, and Adjustments in Closing Stock:
The AO had also made disallowances for office rent of Rs. 60,000/-, godown rent of Rs. 45,600/-, and adjustments in closing stock amounting to Rs. 5,41,926/-. The CIT(A) confirmed the disallowance of office rent and godown rent and restricted the disallowance made on account of the closing stock. However, these disallowances were not the primary focus of the Tribunal's decision, as the main contention was regarding the bogus purchases.

3. Restriction of Disallowance to 5% of Purchases:
The CIT(A) had restricted the disallowance to 5% of the total purchases, citing a precedent from the Gujarat High Court and ITAT Ahmedabad. The CIT(A) reasoned that the assessee would have saved at least 4% on VAT by purchasing outside the books of accounts and obtaining bills from other parties. The Tribunal, however, found that the CIT(A) did not adequately address the AO's objections and the provisions of sections 40A(3) and 69C of the Act. Consequently, the Tribunal set aside the CIT(A)'s order on this issue and directed the CIT(A) to decide afresh after obtaining a Remand Report from the AO.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes, setting aside the CIT(A)'s order and directing a fresh decision after considering the AO's objections and obtaining a Remand Report. The Tribunal emphasized the need for the CIT(A) to address all objections raised by the AO and to decide the issue in accordance with the law. The disallowance of office rent, godown rent, and adjustments in closing stock were confirmed by the CIT(A) and were not the primary focus of the Tribunal's decision.