2021 (11) TMI 1073 - AT - Income Tax

Estimation of income - Bogus purchases - assessee is unable to justify various expenses including purchases with supporting evidence - CIT-A restrict the disallowance on purchases to the extent of 2.5% - HELD THAT - AO had made adhoc disallowance on purchases without recording any adverse comments on books of accounts maintained by the assessee for the relevant assessment year - AO has not disputed pleading of the assessee that the auditor has given clean chit to the books of accounts maintained by the assessee and has not made any adverse comments on purchases debited into P L account. Under these circumstances, we are unable to subscribe to the reasons given by the AO to make adhoc disallowance on purchases CIT(A), after considering relevant facts and also taken note of fact that there is a decline in gross profit declared by the assessee for the impugned assessment year compared to earlier financial year, has directed the AO to restrict the disallowance on purchases to the extent of 2.5%, fall in rate of gross profit on total turnover for the year. The said findings recorded by the Ld. CIT(A) appears to be logical and on the basis of estimation of gross profit. Therefore, we are of the considered view that there is no error in the reasons given by the Ld. CIT(A) to sustain additions made by the AO towards disallowance on purchases on the basis of fall in gross profit rate declared by the assessee on total turnover. Appeals filed by the assessee and Revenue are dismissed.

Summary

Issues:
Cross appeals against order of Commissioner of Income Tax (Appeals) regarding disallowance of purchases for lack of details.

Analysis:
The case involved cross appeals by the assessee and Revenue against an order pertaining to the assessment year 2014-15. The assessee, engaged in manufacturing, faced an estimated disallowance of 10% on total purchases due to lack of supporting details, resulting in additions of Rs. 3,55,57,472/-. The assessee contended that due to natural calamities, relevant records were destroyed, hindering the provision of complete purchase details. The Commissioner of Income Tax (Appeals) noted the reduction in gross profit margin but found the AO's disallowance unjustified. Instead, the Commissioner restricted the disallowance to 2.5% of total turnover, amounting to Rs. 1,32,85,764/-. The appeals challenged this decision.

The assessee argued that the books were audited as per legal requirements, with no adverse comments, and the lack of purchase records was due to the unforeseen circumstances of the floods. The AO and Commissioner were accused of disregarding these arguments and making arbitrary additions without proof of inflated purchases. On the other hand, the Revenue contended that relief granted lacked evidential support, emphasizing the failure to substantiate purchases.

Upon review, it was found that the assessee failed to provide necessary bills and vouchers to support purchases, despite expressing inability to do so. While the claim of record loss in floods was made, no evidence supported it. The AO's adhoc disallowance lacked adverse comments on the maintained books of accounts, which were audited without issue. The Commissioner's decision to limit the disallowance based on the decline in gross profit rate was deemed logical and estimative. Consequently, the Tribunal upheld the Commissioner's findings, dismissing both appeals.

In conclusion, the Tribunal upheld the Commissioner's decision to restrict the disallowance on purchases to 2.5% of total turnover based on the decline in gross profit rate, rejecting the appeals by both the assessee and the Revenue.