2018 (5) TMI 1169 - HC - Income Tax

Disallowance under section 40A(3) - AO s opinion that the assessee would have inflated the purchase expenditure by raising bogus claims - Bogus purchases - gp ratio determination - Held that - When the Assessing Officer had doubted the genuineness of the expenditure, he would require bringing to tax the profit element so avoided by the assessee. As noted, the Commissioner of Income Tax (Appeals) while limiting the additions, brought the assessee s declared gross profit ratio at the same rate as in the previous year which was even otherwise in tune with the percentage of the assessee s doubtful purchases. - Decided against revenue

Summary

Issues:
1. Disallowance under section 40A(3) of the Income Tax Act, 1961.
2. Validity of Assessing Officer's decision to disallow expenditure.
3. Interpretation of the principles laid down in Vijay Proteins Pvt. Ltd. Vs. CIT case.
4. Appeal against the Tribunal's decision by the Revenue.

Analysis:

1. The appeal was filed by the Revenue challenging the judgment of the Income Tax Appellate Tribunal regarding disallowance under section 40A(3) of the Income Tax Act, 1961. The key questions raised were whether the Tribunal was justified in not deciding if the assessee violated the provisions of section 40A(3) and if the Assessing Officer's rejection of books of accounts was reasonable for GP addition.

2. The respondent assessee, engaged in trading of art silk cloth, had made payments exceeding ?20,000 per day through modes other than account payee cheque or bank draft. The Assessing Officer observed discrepancies and discarded the explanation provided by the assessee, suspecting inflated purchases through fictitious bills. Consequently, the Assessing Officer disallowed the expenditure of ?2.08 crores and added it to the total income.

3. The Commissioner, on appeal, opined that the Assessing Officer had disputed the expenditure and indirectly applied section 37 of the Act. Referring to the principles in Vijay Proteins Pvt. Ltd. Vs. CIT case, the Commissioner limited the disallowance to ?47.28 lakhs, adjusting the gross profit ratio. The Tribunal upheld this decision, leading to the Revenue's appeal.

4. The High Court agreed with the Commissioner's decision, emphasizing that when genuineness of expenditure is doubted, the profit element should be brought to tax. The Commissioner's approach of limiting additions and maintaining the gross profit ratio in line with previous years and the percentage of doubtful purchases was deemed appropriate. Consequently, the Tax Appeal was dismissed as no question of law arose.

This detailed analysis of the judgment provides insights into the legal reasoning and application of relevant provisions in the case, leading to the dismissal of the appeal by the High Court.