2015 (12) TMI 1177 - AT - Income Tax

Addition made under the head bogus purchase - CIT(A) deleted the addition - whether where sale is genuine, purchase cannot be bogus, whereas no stock register and quantity wise details of purchase and sale is not available? - Held that - It is clear from the order of the CIT(A) and the evidence on record that there was no valid basis to treat the entire purchases as bogus as was done by the AO. If purchases are being disallowed to the extent of ₹ 10,14,942/- what will happen to the corresponding sales being shown. The CIT(A) therefore was right in concluding that the A.O. was not justified in considering the entire purchases as bogus from these nine parties. The fact that the other parties avoided notices u/s. 133(6) of the Act could be because they were not disclosing sales made to the Assessee in their books of accounts. The AO at best could have rejected the books and estimated income of the assessee but he has not done so. Treating the entire purchases as bogus and making addition would result in absurd results in that the entire sale proceeds would get taxed as income. In the given facts and circumstances of the case, the addition made was rightly deleted by the CIT(A). We find no ground to interfere with the order of the CIT(A). - Decided against revenue Addition u/s.41(1) as cessation of liability - CIT(A) deleted the addition - Held that - There was no evidence to show cessation of liability. Assessee still shows the liability in its books of accounts which itself is primafacie evidence that the liability exists.The transaction of purchase, if regarded as bogus then there is no liability in law and hence the question of applying section 41(1) will not arise for consideration.The sums in question has been repaid in the subsequent assessment years, thereby rendering the theory of cessation of liability not sustainable. - Decided against revenue

Summary

Issues Involved:
1. Addition under the head 'bogus purchase' of Rs. 10,14,942.
2. Addition under the head 'cessation of liability' of Rs. 16,67,546.

Issue-wise Detailed Analysis:

1. Addition under the head 'bogus purchase' of Rs. 10,14,942:

The Revenue contested the deletion of Rs. 10,14,942, which was added as bogus purchases by the Assessing Officer (AO). The AO had issued notices under section 133(6) to various parties to verify the transactions. Discrepancies were noted, and some parties could not be traced. The AO concluded these transactions were bogus based on the lack of specific details, the inability of the assessee to prove the existence of the purchasers, and the failure to produce books of accounts for verification.

The CIT(A) reviewed the submissions and remand report, noting that the purchases were genuine and matched with the sales made to CESC Ltd. The CIT(A) highlighted that the assessee provided details of items purchased and entered in the stock register. The CIT(A) concluded that disallowing the purchases would question the corresponding sales, which were genuine. The CIT(A) found that the AO was not justified in considering the entire purchases as bogus and deleted the addition.

The Tribunal agreed with the CIT(A), emphasizing that treating the entire purchases as bogus would result in absurd outcomes, as the corresponding sales were genuine. The Tribunal dismissed the Revenue's ground, affirming the deletion of the addition.

2. Addition under the head 'cessation of liability' of Rs. 16,67,546:

The AO added Rs. 16,67,546 under section 41(1) as cessation of liability, stating that the liabilities were non-existing and the assessee failed to substantiate their existence on 31.03.2007. The AO held that the liabilities ceased to exist and were therefore added to the total income.

Before the CIT(A), the assessee argued that the liabilities were genuine and were paid in the subsequent financial years. The CIT(A) found that the AO had confused the concepts of bogus liabilities and cessation of liabilities. The CIT(A) noted that cessation of liability presupposes the existence of genuine liabilities, which was not the case here. The CIT(A) cited the Supreme Court's decision in CIT v. Sugauli Sugar Works (P) Ltd., which held that the expiry of the limitation period does not extinguish the debt but only prevents its enforcement.

The Tribunal concurred with the CIT(A), noting that there was no evidence of cessation of liability, and the liabilities were still shown in the assessee's books. The Tribunal emphasized that if the purchases were bogus, there would be no liability, and section 41(1) would not apply. The Tribunal dismissed the Revenue's ground, affirming the deletion of the addition.

Conclusion:

The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal on both grounds. The additions under the heads 'bogus purchase' and 'cessation of liability' were rightly deleted by the CIT(A), as there was no valid basis for treating the purchases as bogus, and there was no evidence of cessation of liability. The appeal filed by the Revenue was dismissed.