2017 (1) TMI 455 - AT - Income Tax

Disallowance of bogus purchases - Held that - Admitted facts are that the AO neither in the original proceedings nor during remand proceedings objected to sales made by assessee. In that eventuality it is imperative on our part to hold that there must be purchases. Whether the purchases are from Grey Market or whatever the assessee has made purchases although payments are made to hawala dealers. In that eventuality it is to be seen whether the payments are recorded in the books of account or not. This factum is not denied by Revenue, rather the assessee has proved that the payments are made through accounts payee cheques and purchases are entered in its books of account. Once the assessee is able to prove that the purchases were made only in alternative way, the revenue is to estimate the excess profit at a rate. Here, our difference is that 2% is reasonable or some higher profit is to be estimated. We are of the view that the assessee s gross profit varies from 5% to 8.77%, but these purchases are from Grey Market and its profit element is little higher and accordingly, we direct the Assessing Officer to make further addition of 3 % of the bogus purchases and accordingly estimate the income. We direct the Assessing Officer accordingly. Preliminary expenses written off u/s 35 D (1) - Held that - The details regarding the public issue expenses in respect of commission, brokerage, other charges for drafting, typing and printing are not available in the records of the revenue i.e. in the order of the AO or the CIT (A). Hence, we are of the view that none of the authorities below have examined this issue in proper perspective. Accordingly, we restore this issue to the file of the Assessing Officer for fresh examination after calling for details of these expenses and accordingly, decide the same as per law.

Summary

Issues Involved:
1. Disallowance of bogus purchases.
2. Allowance of preliminary expenses written off under Section 35D of the Income Tax Act.

Issue 1: Disallowance of Bogus Purchases

The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which restricted the disallowance of bogus purchases to 2% of the total amount, i.e., ?1,31,30,609, from the initial disallowance of ?65,65,30,470 made by the Assessing Officer (AO). The AO, based on information from the Sales Tax Department, identified the assessee as a beneficiary of bogus purchase bills from certain entities.

The AO required the assessee to substantiate the purchases, which the assessee attempted to do by producing bills, vouchers, and proof of payments via account payee cheques. Despite this, the AO disallowed the purchases, citing various methods of inflating expenses through bogus bills and concluding that the entire purchase amount should be disallowed.

Upon appeal, the CIT(A) partially accepted the assessee's contention, noting that while the purchases were not verified, the sales were accepted, implying that some purchases must have occurred. The CIT(A) referenced the Gujarat High Court's decision in CIT vs. Bholanath Polyfab Pvt. Ltd., which stated that only the profit element embedded in such purchases should be taxed. Consequently, the CIT(A) deemed 2% of the purchases as a reasonable profit margin, reducing the disallowance to ?1,31,30,609.

The Tribunal, upon review, acknowledged that the AO did not dispute the sales, implying the necessity of purchases. It was noted that the payments for purchases were recorded in the books and made through cheques. The Tribunal found the 2% profit margin reasonable but directed the AO to make a further addition of 3% of the bogus purchases, considering the higher profit margins typically associated with grey market transactions.

Issue 2: Allowance of Preliminary Expenses Written Off Under Section 35D

The Revenue also contested the CIT(A)'s decision to allow the assessee's claim for preliminary expenses written off under Section 35D of the Income Tax Act. The AO had disallowed these expenses, relating to an increase in share capital, based on the Supreme Court's decision in Brooke Bond India vs. CIT, which held that such expenses are not allowable.

The CIT(A) allowed the claim, interpreting Section 35D(2)(c)(iv) to cover expenses related to public issue of shares, including commission, brokerage, and other charges. The CIT(A) held that 1/5th of these expenses should be allowed over five successive years.

The Tribunal, however, found that the details of these expenses were not adequately examined by the lower authorities. Therefore, it restored the issue to the AO for a fresh examination and decision based on the specifics of the expenses.

Conclusion:

The appeal by the Revenue was partly allowed for statistical purposes, with the Tribunal directing further examination of the preliminary expenses and an additional 3% profit margin on the disallowed purchases.