2015 (7) TMI 528 - AT - Income Tax

Addition on account of bogus purchases - CIT(A)deleted the addition - Held that - No defects have been found in the stock register nor any defects have been pointed out by the A.O. in the audited books of accounts maintained by the assessee. Despite search and seizure no adverse material was found to substantiate the disallowance made by the A.O. The so called spot enquiry done by the Inspector has no credence as no details have been filed before us, nor was the assessee confronted with the manner in which spot enquiry was conducted, the persons who conducted the spot enquiry or the material gathered by the Revenue in the spot enquiry. Thus the Revenue cannot place reliance on this enquiry. The purchases which are disallowed relate to cement and steel which are essential for the purpose of construction. No enquiries are made with the banks, other statutory authorities on the identity of the parties. Details such as whether sales tax authorities have accepted the quantum of purchases made by the assessee have not been obtained Identity could be ascertained by the AO, both from the banker and the sales tax authorities. Under the circumstances we have to uphold the contentions of the assessee, that the finding of the AO, that the assessee has not furnished full details, is factually in correct. Coming to the identity of the parties we find that all the parties are registered with sales tax department and have charged VAT in each of the bills. All these parties have bank accounts and payments were made through account payee cheques. Evidence of material having been received by the assessee, has been filed. As regards the fact that the assessee was not able to produce the parties, we agree with the contentions of the assessee that non production of the parties cannot be a ground of disallowance of all the purchases as the persons from whom purchases are made could not always be in the control of the assessee, specifically when they are unrelated parties and volume and quality of evidence produced by the assessee is such that non production of the party from whom the assessee purchased cannot lead to a conclusion that the purchases are not genuine. Thus we uphold the finding of the Ld.CIT(A) on the deletion of the disallowance which was treated as bogus purchases by the A.O - Decided in favour of assessee. G.P. addition - Rejection of books - Held that - As no defects have been pointed out in the books of accounts, we uphold the contentions of the assessee and vacate the finding of the Ld.CIT(A) on estimation of gross profit. The direction given to the AO to recompute the assessee s gross profit @ 27% instead of at 16% is hereby vacated and this ground of the assessee is allowed. - Decided in favour of assessee.

Issues Involved:

1. Disallowance of purchases as bogus.
2. Rejection of books of accounts.
3. Estimation of gross profit rate.

Detailed Analysis:

1. Disallowance of Purchases as Bogus:

The primary issue was the disallowance of Rs. 2,89,34,711/- as bogus purchases by the Assessing Officer (AO) in the case of M/s Piyush Developers Pvt. Ltd. The AO disallowed the purchases from three parties, citing the assessee's failure to produce these parties and lack of details such as confirmation of accounts and income tax particulars. The AO's enquiry revealed that the firms did not exist at the given addresses for the last several years.

The First Appellate Authority deleted this addition, holding that the assessee had furnished sufficient evidence, including copies of bills, purchase vouchers, material receipt notes, and proof of payments made through account payee cheques. The Appellate Authority noted that disallowing these purchases would result in an abnormal gross profit margin of 68%, which is impractical in this line of business. The Authority also pointed out that the AO did not find any defects in the books of accounts or stock registers, and the value of work and closing stock were accepted.

The Tribunal upheld the First Appellate Authority's decision, emphasizing that the assessee had provided ample evidence to support the purchases, and mere non-production of the parties could not lead to the conclusion that the purchases were not genuine. The Tribunal also noted that the AO's spot enquiry lacked credibility as the assessee was not confronted with the details of the enquiry.

2. Rejection of Books of Accounts:

The First Appellate Authority rejected the books of accounts on the grounds that the assessee failed to file confirmations and produce the parties from whom purchases were made, and the gross profit rate of the assessee was lower than that of other concerns in the group.

The Tribunal found this reasoning contradictory, as the same Authority had accepted the assessee's evidence regarding the purchases. The Tribunal held that non-production of parties and a lower gross profit rate could not justify the rejection of books of accounts, especially when no specific defects were pointed out.

3. Estimation of Gross Profit Rate:

The First Appellate Authority directed the AO to estimate the gross profit rate at 27% instead of the 16% declared by the assessee. The Tribunal vacated this direction, citing the lack of specific defects in the books of accounts and the impracticality of such a high gross profit rate.

The Tribunal referred to several case laws, including the Delhi High Court's decision in CIT vs. Paradise Holidays, which held that in the absence of specific defects, there was no justification for rejecting audited books of accounts and making additions to the declared income.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the deletion of the disallowance of Rs. 2,89,34,711/- and vacating the rejection of books of accounts and the estimation of gross profit at 27%. The Tribunal allowed the assessee's appeal, confirming that the books of accounts were reliable and the declared gross profit rate of 16% was justified. The same conclusions were applied to the case of M/s Varsa Buildwell India Pvt. Ltd.

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