2016 (5) TMI 761 - AT - Income Tax

Addition on bogus purchases and non-business expenditures - Held that - In the audited financial statements at Annexure-I to Form No.3CD dated 21.09.2009 wherein consolidated financial figures are to be mentioned by the Tax Auditor. In this Annexure- I, there is a specific column at Sr. No.10 which asks about the commission received by the assessee during the year and to our surprise, the amount shown in the current year as well as preceding year is NIL. We also observe from the audited balance-sheet that the inventory at ₹ 2,16,358.79 is appearing under the head application of funds but the same figure does not find any place in the audited Trading & Profit & Loss Account and no details are available on record to show as to what is this inventory about, because if it is an inventory, then the assessee is having regular purchase and sale transactions and he may be treated as trader. Further, at the year end, there is an amount of ₹ 54,13,176.52 is payable to farmers which is approximately 30% of the sales and in the balance-sheet under advance and deposits a sum of ₹ 39,15,975/- is shown as advance to M/s. Thakorbhai & Co., Amalsad, Navsari. These types of financial transactions raise a question as to whether the assessee has entered into these transactions as a trader of agricultural goods or as a commission agent. We are, therefore, of the view that there are series of questions which remained unanswered in the order of the ld. Assessing Officer and more specifically about the distinction between the type of activity of which the assessee is actually engaged into has not been brought on record which needs to prove that whether the assessee is a commission agent or a trader of agricultural products. We, therefore, set aside the matter to the file of the ld. Assessing Officer to examine various issues discussed above and pass a fresh assessment order after giving proper opportunity of being heard to the assessee and while framing fresh assessment order, he should be clear to assess as to whether the assessee is a commission agent or a trader and then proceed further to deal with the related issues. - Decided in favour of Revenue for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (AO) regarding bogus purchases and non-business expenditures.
2. Validity of the AO's action in making additions without rejecting the book results of the assessee.

Issue-wise Detailed Analysis:

1. Deletion of Addition Regarding Bogus Purchases and Non-business Expenditures:
The Revenue challenged the deletion of ?53,74,494/- made by the AO in respect of bogus purchases and non-business expenditures. The AO observed that the assessee made maximum purchases in cash through self-purchase memos without names and addresses of the parties. The AO issued a show-cause notice on 09.12.2011, questioning the genuineness of these purchases. The assessee responded, stating it was a commission agent and the purchases were made in cash due to the nature of the business dealing with perishable agricultural produce (Chickoo). However, the AO was not convinced and added 50% of the total cash purchases as bogus, amounting to ?53,74,494/-.

The assessee appealed to the CIT(A), who deleted the addition, noting that the AO ignored the fact that the assessee was dealing with perishable agricultural produce and disregarded the details and books of accounts furnished. The CIT(A) emphasized that the AO did not discharge his onus to prove the purchases were bogus and relied on an irrelevant decision (Vijay Proteins Ltd vs. ACIT).

2. Validity of AO's Action Without Rejecting Book Results:
The CIT(A) also addressed the issue of the AO making additions without rejecting the book results. The CIT(A) observed that the AO was not justified in making an addition without rejecting the book results under Section 145(3) of the Income-tax Act, 1961. The CIT(A) noted that the AO accepted the sales but doubted the purchases without any substantial evidence, which led to an unreasonable gross profit margin.

Tribunal's Observations and Decision:
The Tribunal examined the arguments and records, noting that the assessee dealt in agricultural produce (Chickoo) and the provisions of Rule 6DD(e) of the Income-tax Rules applied. The Tribunal observed that the AO had two parallel views: treating the assessee as a trader and as a commission agent, but did not conclusively establish either. The Tribunal found that the AO did not provide adequate evidence to substantiate the bogus purchases claim and failed to reject the books of accounts.

The Tribunal highlighted discrepancies in the financial statements and the need to determine whether the assessee was a trader or a commission agent. Consequently, the Tribunal set aside the matter to the AO for a fresh assessment, instructing the AO to clearly establish the nature of the assessee's business and proceed accordingly.

Conclusion:
Both appeals filed by the Revenue were allowed for statistical purposes, with the Tribunal directing the AO to re-examine the issues and provide a clear determination of the assessee's business nature before making any additions. The Tribunal emphasized the need for the AO to provide a proper opportunity for the assessee to be heard and to base the assessment on substantial evidence.