2018 (5) TMI 1319 - AT - Income Tax

Unexplained expenditure - GP determination - identity of the suppliers - Held that - We are not in agreement with the findings of the Ld. CIT(A) on this issue as the AO has made the addition only on the basis of replies received under section 133(6). Even if we consider these purchases as bogus/inflated purchases as has been observed by the authorities below even then the entire disallowance is unwarranted and uncalled for. In our opinion, a reasonable disallowance based upon the GP should be made to bring these purchases to tax. Accordingly, we direct the AO to apply a percentage of GP on the said difference in the purchases. Since the assessee has shown a GP rate of 3.75% during the year, we also direct the AO to apply a GP of 4% on these purchases of ₹ 66,09,022/-.

Issues Involved:
1. Deletion of addition of ?1,14,16,135/- by CIT(A) on account of unexplained expenditure.
2. Violation of Rule 46A of IT Rules by CIT(A) in accepting confirmations from creditors at the appellate stage without confronting the same to the AO.
3. Confirmation of ?66,09,022/- by CIT(A) as disallowed by the AO under section 69C of the Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?1,14,16,135/- by CIT(A) on Account of Unexplained Expenditure:
The AO issued notices under section 133(6) of the Income Tax Act to verify purchases from various parties. Six parties did not confirm the purchases amounting to ?1,14,16,135/-, leading the AO to treat these as bogus purchases and add them to the assessee's income under section 69C of the Act. However, the CIT(A) deleted this addition, noting that the identity of the suppliers was established through the notices issued under section 133(6). The CIT(A) emphasized that mere non-reply to notices could not justify the addition, as the AO failed to conduct further inquiries. The CIT(A) relied on various judicial precedents, including the case of Shri Ganpatraj A Sanghavi V/s ACIT, which held that bank payments and proper documentation could prove the genuineness of transactions. The Tribunal upheld the CIT(A)'s decision for four parties, but for two parties where notices were not served, it directed the AO to apply a GP rate of 5% on the purchases, resulting in a sustained addition of ?98,117/-.

2. Violation of Rule 46A of IT Rules by CIT(A) in Accepting Confirmations from Creditors at the Appellate Stage without Confronting the Same to the AO:
The Revenue contended that the CIT(A) violated Rule 46A by accepting additional evidence in the form of confirmations from creditors without confronting the AO. However, the Tribunal found that the CIT(A) had directed the assessee to file these confirmations, which were also filed before the AO. The Tribunal concluded that there was no violation of Rule 46A, as the CIT(A) had followed due process by calling for and examining the evidence before making a decision.

3. Confirmation of ?66,09,022/- by CIT(A) as Disallowed by the AO under Section 69C of the Act:
The AO found discrepancies amounting to ?66,09,022/- between the assessee's books and the replies received from six parties, leading to the addition under section 69C for inflated purchases. The CIT(A) confirmed this addition. However, the Tribunal found merit in the assessee's contention that these discrepancies could be due to the creditors not showing respective sales in their books. The Tribunal held that the entire amount should not be added as unexplained expenditure. Instead, a reasonable disallowance based on the GP rate should be made. The Tribunal directed the AO to apply a GP rate of 4% on the difference of ?66,09,022/-, resulting in a reduced addition.

Conclusion:
The Tribunal partly allowed the appeal of the Department and the cross-objection of the assessee. It upheld the deletion of ?94,53,800/- for four parties, directed a GP rate application on ?19,62,335/- for two parties, and applied a GP rate of 4% on ?66,09,022/-. The final sustained addition was ?98,117/-. The Tribunal found no violation of Rule 46A by the CIT(A).

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