2016 (4) TMI 1081 - AT - Income Tax

Addition to the income of the assessee-firm on account of purchases made - Held that - It cannot be said that the transactions of purchases of ₹ 35,79,224/- as undertaken by the assessee-firm from M/s. Divya Fabric and M/s. N M Corporation are liable to be added to the income of the assessee-firm to fasten liability of taxation and we are of the considered view that the CIT(A) erred in confirming and sustaining the addition of ₹ 35,79,224/- to the income of the assessee-firm on account of purchases made by the assessee-firm from M/s Divya Fabrics and M/s N M Corporation as made by the AO in the assessment order and we delete the additions of ₹ 35,79,224/- made by the A.O. and as confirmed /sustained by the CIT(A) to the income of the assessee-firm. Disallowance u/s 14A - Held that - We have observed that the current assessment year is 2006-07 and hence Rule 8D of Income Tax Rules,1962 is not applicable , which is held by Hon ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited (2010 (8) TMI 77 - BOMBAY HIGH COURT) to be applicable from assessment year 2008-09 onwards. We have observed that the assessee-firm has worked the disallowance based upon the total expenditure claimed of ₹ 11,09,724/, after excluding the voluntary disallowances made by the assessee-firm of sales promotion of ₹ 5,42,800/-, STT of ₹ 6,036/- and necessary adjustment for depreciation as debited in P & L A/c vis- -vis allowance as per the Act and then worked out the disallowance u/s 14A of the Act which is based upon the proportion of the exempt income to the total income as per audited financial statement, which in our considered view, is a reasonable basis as total expenses claimed by the assessee-firm as revenue expenditure was to the tune of ₹ 11,09,724/- in the return of income filed with the Revenue and not ₹ 16,58,665/- as contended by the authorities below , which amount of ₹ 11,09,724/- was arrived at after the disallowance voluntarily made by the assessee-firm as set out above. Thus, we hold that disallowance of ₹ 1,27,914/- as worked out by the assessee-firm u/s. 14A of the Act is quite reasonable and is correct disallowance worked out by the assessee-firm . The orders of the CIT(A) upholding the addition to income of the assessee-firm by way of further disallowance u/s. 14A of the Act of ₹ 86,917/- in addition to the disallowance of ₹ 1,27,914/- u/s 14A of the Act as offered by the assessee-firm of its own is not justified based on the facts and circumstances of the case and our discussions and reasoning as set out above and the addition of ₹ 86,917/- to the income of the assessee-firm as confirmed/sustained by the CIT(A) is hereby ordered to be deleted.

Summary

Issues Involved:
1. Disallowance of expenditure towards purchases from M/s Divya Fabrics and M/s N.M. Corporation.
2. Disallowance under section 14A of the Income Tax Act for expenditure related to earning exempt income.

Issue-Wise Detailed Analysis:

1. Disallowance of Expenditure Towards Purchases:
The assessee-firm, engaged in trading grey cloth, claimed purchases from M/s Divya Fabrics and M/s N.M. Corporation totaling ?35,79,224/-. The Assessing Officer (AO) issued notices under section 133(6) of the Income Tax Act to verify these transactions, which returned unserved, leading the AO to treat these purchases as bogus. The AO noted the absence of Central/Mumbai Sales Tax No. and VAT No. on the bills and added ?35,79,224/- to the assessee-firm's income.

The assessee-firm appealed to the CIT(A), reiterating that the suppliers had closed their businesses and provided bank statements showing payments via crossed account payee cheques. Despite these submissions, the CIT(A) confirmed the AO’s addition, citing the untraceability of the suppliers and lack of delivery challans or linkage between the suppliers and the PAN numbers provided.

Upon further appeal to the Tribunal, the assessee-firm argued that the purchases were genuine, supported by payment through banking channels, and the goods were sold, generating a gross profit of ?8,17,300/-. The Tribunal observed that the Revenue accepted the sales and gross profit, and without positive evidence to prove the purchases were bogus, the addition could not be sustained. The Tribunal deleted the addition of ?35,79,224/-.

2. Disallowance Under Section 14A:
The AO observed that the assessee-firm claimed exempt income of ?19,96,264/- and debited other expenses amounting to ?16,32,455/-. The AO disallowed ?2,03,866/- under section 14A, following Rule 8D of the Income Tax Rules, 1962. The CIT(A) upheld the AO's decision, noting that expenses were incurred in managing investments and earning exempt income, and computed a reasonable disallowance of ?2,14,831/-.

The assessee-firm contended that the disallowance should be limited to ?1,27,914/- as voluntarily offered, arguing that Rule 8D was not applicable for the assessment year 2006-07. The Tribunal agreed, noting that Rule 8D applies from the assessment year 2008-09 onwards, and the assessee-firm’s method of proportionate disallowance based on total expenditure was reasonable. The Tribunal deleted the additional disallowance of ?86,917/- confirmed by the CIT(A).

Conclusion:
The Tribunal allowed the appeal, deleting the additions of ?35,79,224/- for bogus purchases and ?86,917/- under section 14A, thereby ruling in favor of the assessee-firm. The judgment emphasized the need for positive evidence to substantiate claims of bogus transactions and the correct application of disallowance rules under section 14A.