2019 (2) TMI 358 - AT - Income Tax

Reopening of assessment - bogus purchases - Held that - It is the profit embedded in these purchases which is required to be brought to tax wherein the assessee had obtained bogus bills from these parties to avoid paying taxes and to inflate costs , while the material/goods were actually purchased from grey market at lower costs and also without paying taxes while the sales were made by the assessee which is recorded in books of accounts and reconciliation statement also reveals that purchases of these materials were supported by sales. The estimation of embedded profits in these purchases has to be an fair & honest estimation as stipulated by Hon ble Supreme Court in the case of Kachwala Gems v. JCIT (2006 (12) TMI 83 - SUPREME COURT). We are of the considered view that if 12.5% of these alleged bogus purchases are brought to tax as an income embedded in these purchases in addition to and over & above income declared by the assessee will meet end of justice and will be an fair and honest estimation of income. Disallowance of 20% of the aggregate expenditure after adjusting for disallowance towards bogus purchases - Held that - We have also considered the nature of these expenses and we are of the considered view that out of these expenses of ₹ 1,33,253/- disallowed by the authorities below , an amount of ₹ 4,001/- incurred towards Donations could not be allowed in the absence of supporting bills/details and its connection with business of the assessee or in the absence of requisite confirmatory details to be eligible for allowability as deduction u/s 80G or other relevant provisions of the 1961 Act. In the absence of supporting invoice/details , the disallowance of expense of donation of ₹ 4,001/- stood confirmed. Rent expenses allowability - Held that - The assessee has only submitted self supporting vouchers with respect to payment of rent in cash without any details as to the premises on which rent its paid and its user for business purposes and under these circumstances, we disallow the claim of the assessee and confirm additions to the tune of ₹ 54,000/- claimed to be incurred by the assessee for alleged rent of which no details are filed even before us. This is the third stage of litigation before us after framing of assessment by the AO and first appeal adjudicated by learned CIT(A) wherein at both the stages claim of the assessee was rejected by authorities below. Before us also there is no evidence filed towards rent expenses paid by the assessee. Allowability of expenses on account of Printing and Stationary, Tea and Refreshment, Mobile charges, Labour charges, Travelling charges and Sundry Expenses - Held that - Keeping in view nature of these expenses and also noting that these expenses represents miniscule amount vis-a-vis total expenses incurred by the assessee , we found no reason and justification for doubting the contentions of the assessee as the assessee in any case submitted supporting self made vouchers prepared by the assessee. Thus we accept contention of the assessee keeping in view factual matrix of the case and keeping in view smallness of the amount involved and our decision shall not have precedential value for adjudicating appeals in the case of other assessee s. Thus , these expenses of ₹ 75,253/- stood allowed.

Summary

Issues Involved:
1. Disallowance of purchases as "hawala purchases."
2. Sustaining disallowance of unverifiable expenses.
3. Rejection of books of account and addition of 20% of expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Purchases as "Hawala Purchases":
The assessee, a reseller of engineering goods, was implicated in a racket involving bogus invoices issued by hawala dealers. The Sales Tax Department, Mumbai, had identified these dealers who admitted to issuing fake invoices without actual supply of goods. The AO reopened the assessment and added ?2,00,678 to the assessee's income as bogus purchases. The assessee argued that all purchases were genuine, paid through cheques, and duly accounted for in the books. However, the assessee failed to produce the suppliers for verification or provide confirmation letters. The CIT(A) upheld the AO's addition, citing the lack of evidence to prove the genuineness of the purchases and the failure to produce the parties for verification. The Tribunal concluded that 12.5% of the alleged bogus purchases should be added to the assessee's income as an honest estimation of embedded profits, in line with the Supreme Court's decision in Kachwala Gems v. JCIT.

2. Sustaining Disallowance of Unverifiable Expenses:
The AO disallowed 20% of the total expenses due to the assessee's failure to provide documentary evidence during the assessment proceedings. The CIT(A) called for a remand report, and the AO identified ?1,33,253 for AY 2009-10 and ?1,11,420 for AY 2010-11 as expenses incurred in cash without supporting bills. The CIT(A) upheld these disallowances. The Tribunal reviewed the nature of these expenses and found that while the donation and rent expenses lacked sufficient evidence, the remaining expenses (printing and stationery, tea and refreshment, mobile charges, labour charges, travelling charges, and sundry expenses) were minor and supported by self-made vouchers. The Tribunal allowed these minor expenses, considering their small proportion relative to the total expenses.

3. Rejection of Books of Account and Addition of 20% of Expenses:
The AO rejected the assessee's books of account under Section 145(3) and made a further addition of ?65,18,663 by disallowing 20% of the expenses. The CIT(A) reduced this disallowance to ?1,33,253 for AY 2009-10 and ?1,11,420 for AY 2010-11, based on the AO's remand report. The Tribunal upheld the disallowance of the donation and rent expenses due to lack of evidence but allowed the remaining minor expenses, noting that they were routine business expenses supported by self-made vouchers.

Conclusion:
The Tribunal partly allowed the assessee's appeals for both AY 2009-10 and 2010-11. It confirmed the addition of 12.5% of the alleged bogus purchases and upheld the disallowance of donation and rent expenses. However, it allowed the remaining minor expenses, considering their small proportion and the nature of the business. The Tribunal's decision emphasized the importance of fair and honest estimation of income and the need for sufficient evidence to support expense claims.