2016 (11) TMI 740 - AT - Income Tax

Bogus expenditure and bogus sales quantification - ad-hoc disallowance by invoking provisions of section 40(a)(ia) Held that - From the reading of the AO s order and CIT(A) it is not clear as to whether the bogus expenditure and bogus sales had in fact been carried out by the actual inflow and out flow of money. The conclusion that there was bogus expenditure as well as bogus sales is based on material found in the course of search, statement recorded at the time of search and material and statement recorded in the subsequent Survey u/s.133A of the Act. Therefore it cannot be said that there was no basis for the AO or the Assessee to have quantified the bogus expenditure and bogus sales. In our opinion if there had been an actual inflow of a sum of ₹ 114,10,16,936/- if such bogus income is recorded by the assessee in the books of accounts and if the corresponding bogus expenditure of ₹ 85,10,68,095/- is also evidenced by out flow of funds then the action of AO would be justified. If, on the other hand, the aforesaid transactions are only book entries without there being actual flow of funds then the action of CIT(A) would be proper and justified calling for no interference. We, therefore, set aside the order of CIT(A) and remand the issue to the AO for fresh consideration on the lines indicated above. Estimation of 0.40% rate of commission on bogus sales recorded by the assessee - Held that - addition was rightly upheld by CIT(A) because the assessee failed to substantiate its claim that the rate of commission received was only @ 0.25%. As far as the commission paid on bogus booking of expenses is concerned, the CIT(A) has rightly held that the AO had not disputed that the assessee indulged in bogus booking of expenses and was paying commission for creating entries for such bogus expenses. As rightly held by CIT(A) one this fact is admitted, then the AO cannot deny deduction on account of payment of commission and conclusion of CIT(A) that only net commission income had to be taxed in the hands of the assesseee, in our opinion, is just and proper. The quantum of commission of expenditure on booking of bogus expenses adopted, in our view, is also justified. To this extent we confirm the order of CIT(A).

Summary

Issues Involved:
1. Deletion of disallowance made under Section 40(a)(ia) of the Income Tax Act.
2. Elimination of income from bogus sales against expenditure on bogus purchases.
3. Ad-hoc disallowance under Section 40(a)(ia) of the Act.
4. Calculation of commission income on bogus transactions.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance Made Under Section 40(a)(ia):
The Revenue appealed against the deletion of disallowance of ?37,78,831/- under Section 40(a)(ia) by the CIT(A). The Assessee, a private limited company, was involved in the business of hiring construction and earth-moving equipment. During a search operation under Section 132, incriminating documents were found, leading to a special audit. The AO disallowed ?37,78,831/- on an ad-hoc basis, suspecting non-compliance with TDS provisions. The CIT(A) deleted this disallowance, stating that disallowance under Section 40(a)(ia) cannot be made on estimates or presumptions. The Tribunal agreed with the CIT(A) that ad-hoc disallowance is not permissible but remanded the matter to the AO for fresh consideration, directing the Assessee to substantiate its claim with evidence.

2. Elimination of Income from Bogus Sales Against Expenditure on Bogus Purchases:
For AY 2008-09, the AO disallowed ?85,10,68,095/- as bogus machinery hire charges and reduced the corresponding bogus income by the same amount. The Assessee argued that the bogus sales should be ?114,10,16,936/- and not ?85,10,68,095/-. The CIT(A) agreed with the Assessee, directing the AO to eliminate the entire amount of ?114,10,16,936/- from the gross sales. For AY 2009-10, similar issues arose with the AO disallowing ?120,41,23,721/- and the Assessee claiming ?152,47,01,711/-. The Tribunal remanded the issue to the AO for fresh consideration, emphasizing the need to verify whether these transactions involved actual inflow and outflow of funds.

3. Ad-Hoc Disallowance Under Section 40(a)(ia):
The AO made an ad-hoc disallowance of ?37,78,831/- under Section 40(a)(ia) based on the suspicion that the Assessee failed to comply with TDS provisions. The CIT(A) held that disallowance under this section cannot be made on an ad-hoc basis and must be based on concrete evidence. The Tribunal upheld this view and remanded the issue to the AO to allow the Assessee to provide proof that individual payments did not exceed the threshold limits for TDS.

4. Calculation of Commission Income on Bogus Transactions:
For AY 2008-09, the AO calculated commission income at 0.40% on bogus sales of ?114,10,16,936/-, while the Assessee claimed it was 0.25%. The CIT(A) upheld the AO's rate but allowed the deduction of commission paid on bogus purchases, resulting in net commission income of ?32,87,465/-. The Tribunal confirmed this decision, agreeing that the AO had not provided a basis for the 0.40% rate and that the Assessee should be allowed to deduct commission paid on bogus purchases.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes, remanding the issues to the AO for fresh consideration with specific directions to verify the Assessee's claims with evidence. The Tribunal emphasized that disallowances under Section 40(a)(ia) cannot be made on an ad-hoc basis and must be substantiated with concrete evidence. The Tribunal also upheld the CIT(A)'s decision on the calculation of commission income, allowing the deduction of commission paid on bogus transactions.