2017 (12) TMI 928 - AT - Income Tax

Bogus purchases - Held that - We find that Hon ble Gujarat High Court in the case of CIT vs. Smith P. Seth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) wherein it has applied the profit rate at the rate of 12.5% of the bogus purchases in similar circumstances. Accordingly, we also apply the profit rate of 12.5% of the bogus purchase and direct the AO to compute the income of all these AYrs. and not the entire bogus purchases are to be added. Accordingly, we allow these appeals of assessee partly. Addition u/s 14A - Held that - Hon ble Bombay High Court in the case of CIT vs. HDFC Bank Limited 2014 (8) TMI 119 - BOMBAY HIGH COURT wherein, it is held that the presumption will go in favour of the assessee, that it has made investment out of its own funds which are sufficient to cover the value of investment, in that case, no disallowance of interest is required to be made under section 14A of the Act read with Rule 8D(2)(ii) of the Rules. When this was confronted to the learned Sr. Departmental Representative, he fairly conceded the position. As the issue is squarely covered in favour of the assessee we confirm the order of CIT(A) by deleting the disallowance of interest under Rule 8D(2)(ii) of the IT Rules made by the AO. Retention of disallowance under Rule 8D(2)(iii) i.e. administrative expenses the assessee has calculated the disallowance by calculating 5% of the salary of the CFO, 50 % of the salary of one accounts executive and 79.1% of bank charges paid to ABN Amro Bank through which the investment were routed. Further, the assessee suo moto has disallowed a sum of ₹ 2,26,732/-, the expenses relatable to exempt income. The learned counsel took us through the relevant expenditure booked in the profit and loss account and argued that there is no item which can be co-related with the investment giving exempt income. We find force in the arguments of the learned counsel, which is apparent from the records and hence, we delete the disallowance and allow this issue of assessee s appeal. Disallowance of expenses relatable to exempt income under section 14A - Held that - The assessee claimed that it has disallowed 5% of salary of CFO and 50% salary of Accounts executive and further disallowed 71% of bank charges at ₹ 34,609/- on the basis that the total transaction relating to investment are routed through current account. The learned counsel took us through the relevant expenditure booked in the profit and loss account and argued that there is no item which can be co-related with the investment giving exempt income. We find force in the arguments of the learned counsel, which is apparent from the records and hence, we delete the disallowance and allow this issue of assessee s appeal.

Summary

Issues Involved:
1. Reopening of assessment under section 147 of the Income Tax Act.
2. Bogus purchases and their disallowance.
3. Disallowance of expenses related to exempt income under section 14A read with Rule 8D of the IT Rules.

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The first common issue in all appeals was the confirmation by the CIT(A) of the AO's action in reopening the assessment under section 147 of the Income Tax Act. The assessee argued that there was no 'reason to believe' that income had escaped assessment and that the reopening was invalid. However, the learned Counsel for the assessee conceded that they were not interested in prosecuting the issue of reopening for AY 2008-09 and 2009-10. Consequently, the issue of reopening was dismissed as not pressed for these years.

2. Bogus Purchases and Their Disallowance:
The AO received information from the DGIT investigation and the Maharashtra Sales Tax Department indicating that the assessee had obtained bogus purchase bills from hawala dealers. These dealers issued bills without actual sales of goods, which were used by the assessee to reduce taxable profits. During a survey, the CEO of the assessee company admitted the inability to substantiate the purchases and withdrew the claim, offering it for tax. The CIT(A) confirmed the disallowance of the entire purchases as bogus. However, the Tribunal noted that the assessee had retracted the statement and produced evidence to support the genuineness of the purchases. The Tribunal decided to apply a profit rate of 12.5% on the bogus purchases, as per the precedent set by the Hon’ble Gujarat High Court in CIT vs. Smith P. Seth, and directed the AO to compute the income accordingly. Thus, the appeals of the assessee were partly allowed.

3. Disallowance of Expenses Related to Exempt Income under Section 14A read with Rule 8D:
For AY 2010-11, the AO disallowed expenses related to exempt income under Rule 8D, amounting to ?50,67,085/-. The CIT(A) restricted the disallowance to ?29,73,023/-, deleting the interest disallowance under Rule 8D(2)(ii) but retaining the administrative expense disallowance under Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s deletion of the interest disallowance, citing the presumption that investments were made out of the assessee's own funds, which were sufficient to cover the investments. This was supported by the decision in CIT vs. HDFC Bank Limited. Regarding the administrative expenses, the Tribunal found that the AO had not recorded satisfaction as required under Rule 8D and noted that the assessee had already disallowed a reasonable amount. Consequently, the Tribunal deleted the disallowance of administrative expenses, allowing the assessee's appeal.

For AY 2011-12, the AO disallowed ?36,95,549/- under Rule 8D(2)(iii) without recording satisfaction. The assessee had already disallowed ?3,54,009/- suo moto. The Tribunal found merit in the assessee's arguments and deleted the disallowance, allowing the appeal.

Conclusion:
The Tribunal dismissed the appeal of the Revenue and partly allowed the appeals of the assessee. The order was pronounced in the open court on 15-12-2017.