2016 (1) TMI 893 - AT - Income Tax

Addition on account of inflated and bogus purchases - adoption of N.P. rate - CIT(A) deleted the addition - Held that - It is absolutely clear that, firstly, without purchase of material the execution of work contract given by the MCGM is not possible and even if the supplier is not traceable and not coming forward to confirm the sales, then also the factum of purchase cannot be denied; and secondly, the net profit rate on the entire contract work and of the sub-contractor is not more than 8% and 5% respectively. Here in this case also, even if the particular supplier has not confirmed the purchases, this does not lead to any inference that assessee has not made any purchases and the net profit rate of 5.87% is not only unreasonable but is still on a higher side as per finding given by Settlement Commission. Accordingly, the finding of the fact as recorded by the CIT(A) in the impugned order is affirmed and we hold that the addition of ₹ 74,01,988/- made by the AO has rightly been deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of inflated and bogus purchases.
2. Verification of the genuineness of purchases from M/s P K Trading Co.

Detailed Analysis:

1. Deletion of Addition on Account of Inflated and Bogus Purchases:
The revenue filed an appeal against the CIT(A)'s order, which deleted the addition of Rs. 74,01,988/- claimed by the assessee as purchases from M/s P K Trading Co. The Assessing Officer (AO) had treated these purchases as bogus based on information from the sales tax authorities and the inability to trace the supplier. The AO contended that the delivery challans lacked truck or lorry numbers and the assessee failed to produce the supplier for verification.

The CIT(A) reviewed the entire material and noted that the assessee, a sub-contractor for MCGM, had to purchase materials like cement and steel to complete the civil work. The payments were made through account payee cheques and the work was inspected by MCGM officials before payment release. The CIT(A) concluded that the purchases were genuine as the materials were essential for the contract work and payments were made after thorough verification by MCGM.

Before the Tribunal, the revenue argued that the assessee failed to prove the genuineness of the purchases, as the supplier was untraceable and the bank could not verify all payment details. The assessee countered by stating that the materials were necessary for the contract work, which was inspected and approved by MCGM, and the net profit rate was consistent with industry standards.

The Tribunal agreed with the CIT(A), noting that the contract work required specific materials and the payments were made after MCGM's verification. The Tribunal also considered the Settlement Commission's findings in a similar case, which accepted an 8% net profit rate for main contractors and 5% for sub-contractors. The Tribunal concluded that the addition of Rs. 74,01,988/- was rightly deleted as the purchases were necessary and the net profit rate was reasonable.

2. Verification of the Genuineness of Purchases from M/s P K Trading Co.:
The AO's remand report indicated that M/s P K Trading Co. was not traceable, and the bank could not provide satisfactory details about the cheque payments. The CIT(A) noted that the assessee provided comprehensive details of the purchases and the nature of the contract work. The payments were made through account payee cheques and the work was inspected by MCGM officials.

The Tribunal observed that the assessee had to purchase specific materials to complete the contract work, which was verified by MCGM. The Tribunal noted that even if the supplier was not traceable, the fact that the materials were purchased and used for the contract work could not be denied. The Tribunal also considered the Settlement Commission's findings, which supported the assessee's claim that the purchases were genuine and necessary for the contract work.

The Tribunal concluded that the purchases from M/s P K Trading Co. were genuine and necessary for the contract work. The addition made by the AO was rightly deleted by the CIT(A), as the materials were essential for completing the contract and the payments were made after thorough verification by MCGM.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order that deleted the addition of Rs. 74,01,988/- on account of inflated and bogus purchases. The Tribunal concluded that the purchases were genuine, necessary for the contract work, and the net profit rate was reasonable. The Tribunal's decision was based on the comprehensive verification process by MCGM and the findings of the Settlement Commission in a similar case.