2021 (9) TMI 1384 - AT - Income Tax

Estimation of income - Addition of bogus purchases - HELD THAT - When the sales have been accepted as genuine the entire purchases cannot be treated as non-genuine - In the case of Bholanath Polyfab Pvt. Ltd. 2013 (10) TMI 933 - GUJARAT HIGH COURT held that when the assessee made purchases and sold the finished goods as a natural corollary not the entire amount covered under such purchases would be subject to tax but only the profit element embedded therein. Similar view has been taken in the case of CIT v. Simit P. Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT . Simply because the parties were not produced the entire purchases cannot be added as held in the case of CIT v. Nikunj Eximp 2013 (1) TMI 88 - BOMBAY HIGH COURT - However at the same time keeping in view the nature of business of the assessee and the fact that the assessee is making some local purchases without any transportation bills lorry receipts etc the possibility of making purchases in gray market on cash cannot be ruled out - we direct the Assessing Officer to restrict the disallowance/addition to 12.5% of the non-genuine purchases Allocate the R D expenditure among 80IB and 80IC units and non 80IB and 80IC units - Allocating/sustaining allocation of Research Development Expenses incurred by the appellant amongst the different manufacturing unit of the appellant - HELD THAT - We observe that when the details of products manufactured by the units and products on which R D is undertaking by the assessee were placed on record before the Assessing Officer to show that they are completely independent from each other the Assessing Officer completely failed to bring on record that R D expenditure in fact benefited the existing units and thereby it is necessary to allocate the R D expenditure among 80IB and 80IC units and non 80IB and 80IC units on the basis of percentage of sales on respective units to the total sales. We further observe that even after allocation of expenses among 80IB eligible and non-eligible units the taxable income from the assessment under consideration remained the same as the tax was assessed under book profits u/s. 115JB of the Act and not under normal provisions of the Act. Almost identical issue has come up in the case of Zandu Pharmaceuticals Works Ltd. v. CIT 2012 (9) TMI 620 - BOMBAY HIGH COURT wherein the Hon ble Bombay High Court held that unless expenditure incurred on research and development work relates to units eligible for deduction under section 80-IA same cannot be apportioned to the said units. Thus we hold that the allocation of R D expenditure by the Assessing Officer among 80IB and 80IC units and non 80IB and 80IC units on the basis of percentage of sales of respective units to the total sales is baseless and totally unwarranted. Thus we direct the Assessing Officer to recompute the income under normal provisions of the Act without any allocation of R D expenditure among 80IB/80-IC and non 80IB/80IC units.

Summary

Issues Involved:
1. Reopening of assessment under section 148.
2. Disallowance of alleged bogus purchases.
3. Allocation of Research & Development (R&D) expenses among different manufacturing units.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148:
The assessee challenged the reopening of the assessment under section 147, arguing that there was no tangible material to justify the reopening. The original assessment had been completed under section 143(3), and the assessee had fully disclosed all relevant facts. The reopening was based solely on a report from the MVAT department, which the assessee contended was insufficient and sketchy information. The assessee also argued that there was no change in total income or tax payable even if the alleged bogus purchases were added, making the reopening unnecessary. The tribunal did not delve into the technicalities of the reopening, considering it an academic exercise after addressing the substantive issues on merits.

2. Disallowance of Alleged Bogus Purchases:
The assessee contested the disallowance of ?50,18,436/- as alleged bogus purchases. The Assessing Officer had treated purchases from M/s. Shah Trading Company and Dhulee Enterprise as non-genuine because notices issued under section 133(6) were returned unserved, and the assessee could not produce the parties for verification. The tribunal observed that the assessee had provided substantial evidence, including invoices, delivery challans, purchase orders, and transport receipts, to prove the genuineness of the purchases. The tribunal held that when sales are accepted as genuine, the entire purchases cannot be treated as non-genuine. Following precedents from the Gujarat High Court, the tribunal directed the Assessing Officer to restrict the disallowance to 12.5% of the non-genuine purchases, acknowledging the possibility of purchases being made in the gray market.

3. Allocation of R&D Expenses Among Different Manufacturing Units:
The assessee argued that its R&D activities were not directly related to its manufacturing units, as the R&D division worked on future products and innovations. The R&D expenses were on futuristic research, and none of the qualifying undertakings benefited from the present research. The tribunal observed that the Assessing Officer had failed to demonstrate that the R&D expenditure benefited the existing units eligible for deductions under sections 80IB and 80IC. Citing the Bombay High Court's decision in Zandu Pharmaceuticals Works Ltd. v. CIT, the tribunal held that unless the R&D expenses directly related to the qualifying units, they could not be apportioned to those units. The tribunal directed the Assessing Officer to recompute the income without allocating R&D expenses among the units, as the allocation was deemed baseless and unwarranted.

Conclusion:
The tribunal partly allowed the assessee's appeal, directing the Assessing Officer to restrict the disallowance of alleged bogus purchases to 12.5% and to recompute the income without allocating R&D expenses among the units. The tribunal did not address the technicalities of the reopening of assessment, focusing on the substantive issues instead.