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2017 (2) TMI 1128 - AT - Income TaxAddition on bogus purchases - AO received an information from DGIT(Investigation), Mumbai that the assessee has entered into bogus transactions from three hawala parties without taking actual delivery of goods - Held that - The assessee filed before the AO complete books of accounts, items wise stock register evidencing the receipts of gift materials and issue thereof as attached in the paper book page 56 to 78. In order to prove the use of gift items in the promotional activities, photographs of the functions and promotional activities and also confirmations from the shop keepers were also produced before the AO which were disbelieved by the AO on the ground that the confirmations were not bearing the PAN of the persons confirming the consumptions of gift materials. The assessee has also produced copies of bank statements of Punjab National Bank and Axis Bank evidencing the payments through banking channels by account payee cheques to the suppliers filed at pages no. 32 to 51 of the paper book. Having considered all these facts which were before the AO as well as FAA, we find that the assessee has discharged its onus by producing the books of accounts, stock register, stock tally and also filing various documentary evidences such as statements of banks etc, confirmations and photographs of the promotional events before us. The purchase made by the assessee could not be disbelieved merely on the basis of information received from the third party without carrying out any meaningful enquiry and further verification on the various records and information filed during the course of assessment proceedings. We are not in agreement with conclusion drawn by the FAA upholding the action of the AO. - Decded in favour of assessee. Allowance of auditors fees and legal and profession expenses - eligible revenue expenditure - Held that - We find that the assessee has debited a sum on account of yearly provisions for internal audit and tax audit fee and legal and professional charges payable to Mr.K A Pandit for Actuarial valuation for determining gratuity and leave encashment provision for staff . The said expenses are in the nature of routine and regular expenses which are incurred and provided at the end of each year and were accordingly accounted for by the assessee on the basis of mercantile system of accounting. Further, the FAA has rightly came to the conclusion that the assessee has rightly accounted for these expenses by following the mercantile system of accounting and the same could not be disallowed by treating as provision for expenses and in the nature of contingent expenses. The FAA also noted that the said expenses are not based upon the guess work or adhoc and were provided in the same manner as in the earlier years on the basis of mercantile system of accounting. Moreover, the liability was very much ascertained and foreseeable due to regular nature of expenses. We are, therefore, inclined not to interfere with the reasoned order of the ld.CIT(A) on this issue and accordingly uphold the same by dismissing the ground raised by the revenue. Disallowance of proportionate interest - Held that - We find that the assessee has advanced money to M/s Tracstar Investment Pvt Ltd during the year to the tune of ₹ 5,00,62,122/- which accordingly to the assessee was a business advances wholly given out of commercial expediency and business considerations as the said company bottled the liquor manufactured by the assessee and was given in that connection. The FAA also recorded the findings of facts in his appellate order that no disallowance of proportionate interest was made by the AO in the earlier years. Moreover, the assessee s own funds were more than ₹ 124 crores and the ld. CIT(A) further recorded the finding of facts that the said advances was not given out of borrowed funds. In our opinion, the order passed by the ld. CIT(A) ,after considering the contention and submissions that the advances were given out of business consideration and commercial expediency as M/s Tracstar Investment Pvt.Ltd was providing bottling services to the assessee, does not contain any infirmities and conclusion drawn by the ld. CIT(A) is supported by the decision of the jurisdictional High Court in the case of Reliance Utilities ( 2009 (1) TMI 4 - BOMBAY HIGH COURT ) in which it has been held that the assessee s own funds are more than the borrowed funds then no disallowance on account of interest is called for.
Issues Involved:
1. Confirmation of addition on account of bogus purchases. 2. Deletion of disallowance of provision for auditors' fees and legal and professional expenses. 3. Deletion of proportionate disallowance of interest on interest-free advances. Issue-wise Detailed Analysis: 1. Confirmation of Addition on Account of Bogus Purchases: The assessee filed returns declaring a total income, which was processed under section 143(1) of the Income Tax Act, 1961. During scrutiny, it was found that the assessee had allegedly entered into bogus transactions amounting to ?4,92,43,370/- with three hawala parties. The Assessing Officer (AO) received information from the DGIT (Investigation), Mumbai, and the Sales Tax Department, Government of Maharashtra, indicating that these parties were involved in issuing bogus bills without supplying actual material. The AO issued a show-cause notice to the assessee, who responded by providing various documents, including stock registers and photographs of promotional activities. However, the AO disallowed the purchases, treating them as bogus, and added the amount to the total income. The CIT(A) upheld the AO's decision, stating that the assessee failed to provide documentary evidence of actual delivery of material. The CIT(A) noted that the parties involved were proven hawala entry providers and the assessee could not substantiate the genuineness of the purchases. Upon appeal, the Tribunal found that the assessee had discharged its onus by producing books of accounts, stock registers, and other documentary evidence. The Tribunal held that the AO had not conducted any independent inquiry and had relied solely on third-party information. The Tribunal cited various precedents where similar additions were deleted due to lack of substantial evidence against the assessee. Consequently, the Tribunal directed the AO to delete the addition. 2. Deletion of Disallowance of Provision for Auditors' Fees and Legal and Professional Expenses: The AO disallowed an amount of ?13,04,410/- on account of provisions for auditors' fees and legal and professional expenses, deeming them contingent liabilities and not allowable under section 37 of the Act. The CIT(A) allowed the appeal, stating that these expenses were regular and routine, incurred every year, and were based on the mercantile system of accounting followed by the assessee. The CIT(A) noted that the provisions were not based on guesswork but on actual expenses incurred in previous years. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were ascertained liabilities and deductible under the mercantile system of accounting. The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the revenue's appeal on this ground. 3. Deletion of Proportionate Disallowance of Interest on Interest-Free Advances: The AO disallowed ?75,09,918/- as proportionate interest on interest-free advances given to Tracstar Investment Pvt. Ltd., suspecting the advances were made out of borrowed funds. The assessee contended that the advances were business-related and given out of commercial expediency. The CIT(A) deleted the disallowance, noting that the assessee had sufficient own funds and the advances were not made from borrowed funds. The CIT(A) relied on the decision of the Bombay High Court in the case of Reliance Utilities Ltd., which held that if the assessee's own funds exceed borrowed funds, no disallowance on account of interest is warranted. The Tribunal upheld the CIT(A)'s decision, agreeing that the advances were given for business purposes and were covered by the assessee's own funds. The Tribunal found the CIT(A)'s order to be in line with the relevant judicial precedents and dismissed the revenue's appeal on this issue. Conclusion: The Tribunal allowed the assessee's appeals, directing the deletion of additions on account of bogus purchases and disallowance of provisions for auditors' fees and legal expenses. The Tribunal also upheld the deletion of proportionate disallowance of interest on interest-free advances, dismissing the revenue's appeals. The Tribunal's decision emphasized the importance of substantial evidence and independent inquiry in tax assessments.
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