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2018 (9) TMI 1626 - AT - Income TaxDisallowance of artificial loss made on account of fictitious transactions - bogus purchases - Held that - It is clear from the order of the AO that Highland Industries Limited booked bogus sales to Saraf Chemicals Limited and bogus purchases from L.N Chemicals and Modhera Chemicals. The profit was generated out of this arranged transaction of sale and purchase. This profit was set off from fictitious loss created out of transactions between Highland Industries Limited and Tempatation Foods Limited. AO held that the loss claimed by the assessee company on the transactions made from Temptation foods was fictitious and ought to be disallowed. This factious loss was created only to square off the profits shown from Sharaf Chemicals. Without controverting the detailed finding so recorded by the AO, the CIT(A) has deleted the addition merely by observing that the books of accounts of the assessee were audited and have not been rejected by the AO. CIT(A) also stated that no enquiry was done by the AO to establish that the activity on which losses were shown by the assessee were bogus. Without giving any positive finding on the enquiry which AO has failed to do, the CIT(A) cannot delete the addition just by stating that AO has failed to do the enquiry. There should be positive finding by CIT(A) in support of his action of deleting the addition made by AO. We set aside the order of CIT(A) on this issue and restore the matter back to his file for making due enquiry to find out the nature of loss having been incurred by the assessee which was used to set off the income found to be earned during the course of survey. - Appeal of the Revenue is allowed for statistical purposes.
Issues:
1. Disallowance of artificial loss made on account of fictitious transactions. 2. Addition of commission earned for providing accommodation entries. Analysis: Issue 1: Disallowance of artificial loss made on account of fictitious transactions The Revenue appealed against the deletion of disallowance of a substantial amount due to fictitious transactions with a company. The Revenue contended that the director of the assessee company had admitted the fictitious nature of the loss. The case was repeatedly adjourned as the assessee did not appear for hearings. The Assessing Officer (AO) disallowed the loss created through transactions with Temptation Foods Ltd., leading to a significant addition to the income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, emphasizing that the books of accounts were audited and not rejected during assessment proceedings. The CIT(A) noted that no inquiry established the transactions were bogus and highlighted that similar facts were not challenged in previous and subsequent assessment years. The ITAT found the CIT(A)'s deletion lacked a positive finding on the inquiry the AO failed to conduct. Therefore, the ITAT set aside the CIT(A)'s order, directing a thorough investigation to determine the nature of the loss and its use to offset the income found during the survey. Issue 2: Addition of commission earned for providing accommodation entries The AO added a commission earned for providing accommodation entries to Saraf Chemicals Ltd., which the CIT(A) deleted. The CIT(A) reasoned that the commission was already part of the income declared in the return, hence no further addition was warranted. The ITAT upheld the CIT(A)'s decision to delete the addition of commission, as it was already accounted for in the income declared. In conclusion, the ITAT allowed the Revenue's appeal for statistical purposes, directing the CIT(A) to conduct a thorough investigation into the nature of the disallowed loss in the first issue and to provide a positive finding before making a decision.
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