2016 (11) TMI 328 - AT - Income Tax

Bogus purchases - Unverifiable purchases - AO has estimated 25% of purchases whereas the ld CIT(A) has reduced the same to 15% - Held that - It is noted that the decisions in case of Anuj Kumar Varshney and others 2015 (4) TMI 533 - ITAT JAIPUR were in respect of companies engaged in similar line of business i.e, gems and jewellery. Further, similar arguments were made in terms of following the past history of the assessee in those cases as well. The Coordinate Bench has held that the past history can be taken as a basis where the same is reliable. In the instant case, in the past years, books of accounts have been rejected and profit has been estimated and therefore, it cannot be said with certainty that the past history will be the reliable basis in the instant case. In our view, ld CIT(A) has rightly estimated unverifiable purchases @ 15% based on decision of the Coordinate Bench in case of Anuj Kumar Varshney (supra). We accordingly, confirm the order of the ld CIT(A). Disallowance of commission on sales to Travel Corporation of India TCI - period to which the expenditure pertains - Held that - Confirmation from TCI clearly shows that this expenditure pertains to F.Y. 2008-09. Also the agreement which states that this commission pertains to a period of 15 months has not been signed by the assessee. In view of the above discussion, it is held that this expenditure pertains to the previous year under consideration and disallowance of prepaid expenses of ₹ 15,00,000/- is directed to be deleted

Summary

Issues Involved:
1. Restriction of trading addition by CIT(A).
2. Deletion of disallowance on account of prepaid expenses.
3. Application of rate on unverified purchases by CIT(A).
4. Non-following of past history by CIT(A).

Detailed Analysis:

1. Restriction of Trading Addition by CIT(A):
The Revenue appealed against the CIT(A)'s decision to restrict the trading addition to ?13,19,803/- from ?21,99,672/- made by the AO by disallowing 25% of the total purchases of ?87,98,686/-. The AO had found that the assessee made purchases from certain parties that were identified as bogus entry providers. Summons issued under Section 131 of the IT Act, 1961, were either returned with remarks "Not known" or went unanswered. The AO rejected the books of accounts under Section 145(3), estimating the profit by adding back 25% of the unverifiable purchases. The CIT(A) upheld the rejection of books but reduced the disallowance to 15%, following the ITAT Jaipur Bench's decision in a similar case.

2. Deletion of Disallowance on Account of Prepaid Expenses:
The AO disallowed ?15,00,000/- out of ?75,00,000/- debited as commission on sales to Travel Corporation of India (TCI), arguing it pertained to a prior period based on an unsigned agreement. The CIT(A) found that the expenditure was correctly claimed for the current year, supported by a confirmation from TCI. The CIT(A) directed the deletion of the disallowance, noting that the expenditure would have been more beneficially claimed in the previous year when the assessee had a returned income.

3. Application of Rate on Unverified Purchases by CIT(A):
The assessee's cross-objection challenged the application of a 15% rate on unverified purchases without comparable cases. The CIT(A) upheld the AO's rejection of books but reduced the disallowance rate from 25% to 15%, based on the ITAT Jaipur Bench's decision in a similar case. The ITAT confirmed that the CIT(A) rightly estimated unverifiable purchases at 15%, considering the assessee's inability to verify purchases despite providing PAN numbers and confirmations.

4. Non-Following of Past History by CIT(A):
The assessee argued that the CIT(A) erred by not following the past history of the case where a Gross Profit (G.P.) rate was applied. The ITAT noted that in previous years, the books of accounts were rejected, and profit was estimated, making past history unreliable. The ITAT upheld the CIT(A)'s decision to estimate unverifiable purchases at 15%, aligning with the decision in a similar case involving gems and jewellery.

Conclusion:
The ITAT dismissed both the Revenue's appeal and the assessee's cross-objection, confirming the CIT(A)'s order to restrict the trading addition to 15% of unverifiable purchases and deleting the disallowance of prepaid expenses. The decision emphasized the importance of verifying purchases and the applicability of past history in estimating profits. The judgment was pronounced in the open court on 30/09/2016.