2017 (3) TMI 1299 - AT - Income Tax

Addition of bogus purchases - Held that - AO has noted that despite various opportunities, the assessee did not produce the parties for verification nor has produced any details to support the purchases made. Ld. CIT(A) has also noted that assessee was not able to furnish details regarding the address of the parties as well as confirmations even during the Appellate Proceedings. Before us also assessee has not been able to furnish any evidence with respect to purchases. In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus, the ground of the assessee is dismissed. Disallowance u/s 40A(2)(b) - Held that - In the present case out of total salary of ₹ 16,80,000/-, AO has disallowed 50% of the salary holding to be excessive and disproportionate. Before us, it is assessee s submission that Mrs. Divya Kharbanda has been paid similar salary in earlier years and she has been drawing same salary since F.Y. 2007-08 and also in subsequent years and in none of the earlier or subsequent years the disallowance on account of salary being excessive has been made by the Revenue authorities. We further find that Hon ble Bombay High Court in the case of CIT Vs. Indo Saudi Services (Travel) P. Ltd (2008 (8) TMI 208 - BOMBAY HIGH COURT) after considering the CBDT Circular No.6-P, Dt. 6th July, 1968 has held that no disallowance of expense can be made when the person to whom the payment is made is also assessed at higher rate and there is no evasion of tax. Thus we are of the view that in the present case, no disallowance of expenses u/s 40A(2)(b) is called for and therefore direct its deletion. - Decided in favour of assessee

Summary

Issues Involved:
1. Addition of ?19,51,632/- on account of disallowance of purchases.
2. Disallowance of ?8,40,000/- under Section 40A(2)(b) of the Income Tax Act.

Detailed Analysis:

1. Addition of ?19,51,632/- on Account of Disallowance of Purchases:

During the assessment proceedings, the Assessing Officer (AO) observed that the assessee had made purchases amounting to ?19,51,632/- from five parties. Notices issued under Section 133(6) to these parties were returned unserved, and the assessee failed to produce these parties or provide alternative addresses. Consequently, the AO disallowed the purchases as non-genuine. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee failed to provide independent confirmations or present addresses for verification. The CIT(A) noted that the onus was on the assessee to produce the parties once the notices were returned unserved. The assessee's reliance on the Bombay High Court decision in CIT-1, Mumbai Vs. Nikunj Eximp Enterprises Pvt. Ltd. was deemed inapplicable as the facts differed. The Tribunal found no reason to interfere with the CIT(A)'s order, given the lack of evidence provided by the assessee to substantiate the purchases. Thus, the addition of ?19,51,632/- was upheld.

2. Disallowance of ?8,40,000/- under Section 40A(2)(b):

The AO noticed that the assessee had paid a salary of ?16,80,000/- to Mrs. Divya Kharbanda, wife of the director, which was significantly higher than the salary paid to other employees with similar roles. The AO disallowed 50% of the salary, amounting to ?8,40,000/-, as excessive and disproportionate. The CIT(A) upheld the AO's decision, noting that the assessee failed to provide documentary evidence justifying the higher salary. The CIT(A) considered the AO's allowance of ?8,40,000/- as reasonable compared to the ?2.5 to ?3 lacs paid to other employees. However, the Tribunal found merit in the assessee's argument that Mrs. Kharbanda had been drawing a similar salary for several years and that both the assessee and Mrs. Kharbanda were taxed at the maximum marginal rate, implying no tax evasion. The Tribunal referred to the Bombay High Court decision in CIT Vs. Indo Saudi Services, which held that no disallowance is warranted if the recipient is also taxed at a higher rate. Consequently, the Tribunal directed the deletion of the disallowance of ?8,40,000/-.

Conclusion:

The appeal was partly allowed, with the disallowance of ?19,51,632/- on account of purchases being upheld, and the disallowance of ?8,40,000/- under Section 40A(2)(b) being deleted.

Order pronounced on 1st day of March, 2017.