2017 (9) TMI 1343 - AT - Income Tax

Disallowance of bogus purchases - Held that - Revenue is not entitled to bring the entire sales consideration to tax, but only the profit attributable on the total unrecorded transaction can be subject to income tax. After considering the facts and rival contentions of the parties, we are of the opinion that in order to fulfil the gap of revenue leakage the disallowance of reasonable percentage of impugned purchase would meet the end of justice. Thus, we are of the opinion that disallowance @ 3% on all bogus purchases shown from the alleged hawala dealer would meet the end of justice. We direct the assessing officer accordingly. Addition on account of Foreign Exchange Forward Contract - Held that - We have seen that the ld Commissioner (Appeals) has allowed foreign exchange fluctuation loss by following the decision of DCIT versus Bank of Bahrain 2010 (8) TMI 578 - ITAT, MUMBAI . We have seen that the finding of branded Commissioner (Appeals) is based on the various decision of Tribunal. Hence we do not find any illegality and infirmity in the order passed by ld Commissioner (Appeals). In the result the ground of appeal raised by revenue is dismissed.

Summary

Issues:
1. Addition of VAT on purchases from Mumbai and Surat parties.
2. Disallowance of loss on foreign exchange forward contract.

Analysis:

Issue 1: Addition of VAT on purchases from Mumbai and Surat parties
The case involved cross-appeals against the Commissioner (Appeals)'s order for the assessment year 2012-13. The assessee contested the addition of ?19,16,509 on VAT paid purchases from Mumbai parties and ?1,07,10,438 on purchases from Surat parties against 'H' Form. The revenue challenged the reduction made by the Commissioner (Appeals) on the said additions. The dispute arose from alleged bogus purchases, with the assessing officer disallowing a significant amount. The Tribunal considered the arguments of both parties, emphasizing the need for a genuine inquiry before making additions. It was revealed that the purchases were linked to hawala dealers issuing bogus bills. The Tribunal, after thorough examination, directed the assessing officer to restrict the addition to 3% on purchases from Mumbai and 2% on purchases from Surat parties, considering the nature of the transactions and prevailing tax recommendations.

Issue 2: Disallowance of loss on foreign exchange forward contract
The second issue pertained to the disallowance of ?39,59,626 made by the assessing officer on account of loss from revaluation of outstanding foreign exchange forward contracts. The revenue contested the deletion of this addition by the Commissioner (Appeals), arguing that such losses were notional and should not be allowed. The Tribunal, after reviewing the decisions cited by both parties, upheld the Commissioner (Appeals)'s order. The Tribunal noted that the Commissioner (Appeals) had relied on relevant Tribunal decisions to grant relief to the assessee, finding no legal flaw in the decision. Consequently, the revenue's appeal on this issue was dismissed.

In conclusion, the Tribunal dismissed the assessee's appeal and partly allowed the revenue's appeal concerning the disallowance of loss on foreign exchange forward contracts. The judgment highlighted the importance of genuine inquiries and the need to tax only the actual income under the Income Tax Act. The decision provided a balanced approach by restricting the additions on purchases from alleged hawala dealers and upholding relief on foreign exchange fluctuation losses based on legal precedents.