2017 (9) TMI 1097 - AT - Income Tax

Disallowance on account of Bogus Purchase u/s. 69C for Unexplained Expenditure - expenditure incurred on purchase of raw material used for trading and/ or manufacture of goods - Held that - We find that the assessee has placed on record the documents pertaining to purchase of material from the parties. We have noticed that the AO has not issued notice u/s 133(6) of the I.T. Act to the bank of the assessee or of the suppliers to verify whether immediate cash had been withdrawn against the payments made by the assessee. We have further noticed that the AO has not rejected the assessee s books of accounts u/s 145(3) of the Act and moreover no opportunity to confront or cross-examine the parties which were declared as hawala dealers by the Sales Tax Authorities was provided to the assessee. Merely because the assessee could not produce the stock records in the required form in 3CD do not prove that the purchases were not genuine. Under the above circumstances we are of the considered view that non-producing of the supplier or stock register by the assessee is not the ground to declare the expenses /purchases as unexplained expenditure . Considering that the assessee had already supplied corroborative documents like copy of invoices name and address of suppliers and details of bank transactions we are of the considered view that the entire additions of 44, 44, 022 is unreasonable. Therefore in such circumstances the ends of justice would be met in case the additions are restricted @ 12.5% of the total purchases. We direct the AO to restrict the additions to the extent of 12.5% of the total purchases

Summary

Issues:
1. Disallowance of 'Bogus Purchase' under section 69C for 'Unexplained Expenditure' of ?44,44,022.
2. Challenge against the order of Commissioner of Income Tax (Appeals) confirming the addition/disallowance.

Issue 1: Disallowance of 'Bogus Purchase' under section 69C for 'Unexplained Expenditure' of ?44,44,022:

The appellant contested the disallowance on the grounds that the books of accounts were maintained as per the IT Act, full explanation for the source of funds was provided, and the alleged 'Bogus Purchases' should only impact the 'Gross Profit' element, not the entire transaction value. The AO disallowed the purchases based on information from the Directorate of Income Tax, leading to an income reassessment under section 147 at ?68,41,222. The CIT(A) upheld the disallowance, emphasizing the need for the assessee to substantiate the purchases. The ITAT analyzed the case, noting the lack of bank verification by the AO and absence of cross-examination opportunities for the assessee. Considering corroborative documents provided by the assessee, the ITAT found the disallowance excessive and restricted it to 12.5% of the total purchases, concluding that non-production of stock registers does not automatically render expenses as 'unexplained expenditure.'

Issue 2: Challenge against the order of Commissioner of Income Tax (Appeals) confirming the addition/disallowance:

The appeal challenged the CIT(A)'s decision to confirm the addition/disallowance related to the 'Bogus Purchase' under section 69C for 'Unexplained Expenditure.' The ITAT consolidated all grounds raised by the assessee, emphasizing the interconnected nature of the issues. After hearing both parties and reviewing the material and orders, the ITAT found discrepancies in the AO's assessment process, such as the lack of bank verification and cross-examination opportunities. The ITAT considered the documents provided by the assessee, including invoices and supplier details, and concluded that the disallowance was excessive. Therefore, the ITAT partially allowed the appeal, restricting the additions to 12.5% of the total purchases, deeming the original disallowance unreasonable.

In summary, the ITAT partially allowed the appeal, emphasizing the importance of substantiating expenses and purchases while restricting the disallowance to a reasonable percentage of the total purchases. The judgment highlighted procedural flaws in the AO's assessment and stressed the need for proper verification and examination processes to ensure fair treatment of the assessee.