2018 (4) TMI 1281 - AT - Income Tax

Assessment u/s 153A - Addition of bogus purchases - Held that - Enquiry could not be completed by the authorities below as notices u/s 133(6) returned unserved, inspector gave adverse report after verification and also assessee could not produce these parties before the AO, but, however, the entire alleged bogus purchases could not be added as was done by the authorities below keeping in view ratio of decision of Hon ble Supreme Court in the case of Kachwala Gems (2006 (12) TMI 83 - SUPREME COURT) We direct the AO to disallow 12.5% of the alleged bogus purchases and accordingly depreciation shall be re-worked by the AO after such disallowance. The claim of the assessee for revenue expenditure shall also be accordingly reduced to the tune of additions sustained by us to the tune of 12.5% of the alleged bogus purchases. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Addition of ?39,000 as revenue expenditure for alleged bogus bills.
2. Disallowance of ?29,139 as depreciation on capital expenditure for alleged bogus bills.

Issue-wise Detailed Analysis:

1. Addition of ?39,000 as Revenue Expenditure for Alleged Bogus Bills
The assessee, engaged in the business of manufacturing and trading gold ornaments, conducted an exhibition and later faced scrutiny when the General Manager was detained with cash and documents, leading to an assessment by the AO. During the assessment, the AO received information from the Sales Tax Department about bogus purchases from three parties. Notices issued to these parties returned unserved, and field inquiries confirmed their non-existence at the given addresses. The AO disallowed ?39,000 claimed as revenue expenditure for lighting premises, considering it as bogus. The CIT(A) upheld this disallowance, emphasizing that the assessee failed to prove the genuineness of the purchases despite opportunities provided.

2. Disallowance of ?29,139 as Depreciation on Capital Expenditure for Alleged Bogus Bills
The AO also disallowed ?29,139 as depreciation on capital expenditure of ?2,91,392, used for furnishing a new showroom in Aurangabad, citing the same bogus bills. The CIT(A) confirmed this disallowance, noting that despite the assessee's submission of purchase invoices, bank statements, and a certificate from the interior designer, the assessee could not produce the parties for verification. The CIT(A) rejected the assessee's reliance on various case laws, distinguishing them based on the nature of the purchases (capital asset acquisition vs. trading goods).

Tribunal's Decision:
The Tribunal considered the scale of the assessee's operations, the turnover of ?276.64 crores, and the smallness of the amount involved in the alleged bogus purchases. It acknowledged that while the material was likely used by the assessee, the inability to produce the parties and adverse field reports warranted a partial disallowance. The Tribunal applied the principle of preponderance of probabilities and directed the AO to disallow 12.5% of the alleged bogus purchases, adjusting the depreciation and revenue expenditure claims accordingly.

Conclusion:
The Tribunal partly allowed the appeals, directing a 12.5% disallowance on the alleged bogus purchases for all three assessment years, thus modifying the AO's and CIT(A)'s decisions. The order was pronounced on 23.04.2018.