2019 (4) TMI 273 - AT - Income Tax

Profit estimation on bogus purchases - assessee was the beneficiary of accommodation entries in form of bogus purchase bills as well as unsecured loans - addition towards 12.5% profit on alleged bogus purchases - HELD THAT - considering the fact that sales are not doubted and also there is no mismatch between quantity of goods purchased and sold, the AO has estimated fair amount of profit by considering various parameters including amount of VAT applicable to the goods and also the probable percentage of amount saved by the assessee by obtaining accommodation entries. Keeping these facts in mind, if you examine percentage of profit applied by the AO, i.e. 12.5% on alleged bogus purchases, we find that the AO was fair enough to adopt a reasonable percentage of profit on alleged bogus purchases - No error in the finding recorded by the AO in arriving at 12.5% profit on alleged bogus purchases. Addition towards unsecured loan taken - HELD THAT - Mere furnishing of confirmation letter, ledger extract and bank statement is not sufficient enough to come out of the shadow cast upon the assessee and what is required to be proved is genuineness of transactions. In this case, the AO has brought out number of reasons to doubt transactions between the parties, but the assessee failed to file any evidence to contradict the facts brought out by the AO while making addition towards unsecured loan. Therefore, we are of the considered view that the lower authorities were right in making addition towards unsecured loan taken from three companies belonging to Shri Bhanwarlal Jain and hence, we are not inclined to deviate from the findings recorded by the Ld.CIT(A). Accordingly, the ground of appeal taken by the assessee is rejected. Disallowance of interest u/s 14A r.w.r. 8D(2)(ii) - assessee claims that no interest bearing funds have been used for investment - HELD THAT - We find that the assessee s capital is more than the amount of investments in shares which yielded exempt income. Therefore, AO was erred in quantifying disallowance of interest u/r 8D(2)(ii) of I.T. Rules, 1962. Accordingly, we direct the AO to delete addition towards interest expenditure. Disallowance of expenditure u/r 8D(2)(iii) we find that the assessee has incurred various common expenditure including salaries, conveyance, telephone and other overhead expenses. Since the assessee has not disputed the fact of earning exempt income, the possibility of incurring certain expenditure towards such income cannot be ruled out. Further, since the assessee has not filed any apportionment of expenses in respect of exempt income, we find no reason to interfere with the findings of AO and Ld.CIT(A) in confirming the disallowance of expenditure u/r 8D(2)(iii) @0.5% of average value of investments amounting to ₹ 26,049. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Initiation of reassessment proceedings under section 147.
2. Confirmation of assessment order under section 143(3) r.w.s. 147.
3. Rejection of books of accounts under section 145.
4. Addition of 12.5% of total purchases as bogus non-genuine expenditure under section 69C.
5. Disallowance of unsecured loans as unexplained cash credits under section 68.
6. Disallowance of commission/brokerage as unexplained expenditure under section 69C.
7. Disallowance of expenses attributed for exempt income under section 14A r.w.r. 8D.
8. Charging of interest under sections 234A, 234B, 234C, and 234D.
9. Initiation of penalty proceedings under section 274 r.w.s. 271(l)(c).

Detailed Analysis:

1. Initiation of Reassessment Proceedings under Section 147:
The assessee challenged the initiation of reassessment proceedings arguing that such proceedings cannot be initiated merely on information received from the investigation wing or based on suspicion rather than belief. However, the Tribunal upheld the initiation of reassessment proceedings, noting that the AO had valid reasons to believe that income had escaped assessment due to the assessee being a beneficiary of accommodation entries provided by the Bhanwarlal Jain group.

2. Confirmation of Assessment Order under Section 143(3) r.w.s. 147:
The Tribunal concurred with the AO and CIT(A) in confirming the assessment order under section 143(3) r.w.s. 147. The AO had made additions based on detailed findings and evidence from the investigation into the Bhanwarlal Jain group, which provided bogus purchase bills and unsecured loans to the assessee.

3. Rejection of Books of Accounts under Section 145:
The Tribunal upheld the rejection of the assessee's books of accounts under section 145. The AO found discrepancies and evidence of bogus purchases, leading to the conclusion that the books did not reflect the true state of affairs.

4. Addition of 12.5% of Total Purchases as Bogus Non-Genuine Expenditure under Section 69C:
The Tribunal upheld the addition of 12.5% of total purchases as bogus non-genuine expenditure. The AO had determined this percentage based on the modus operandi of the Bhanwarlal Jain group and the lack of genuine transactions. The Tribunal found the AO's estimation reasonable and supported by judicial precedents.

5. Disallowance of Unsecured Loans as Unexplained Cash Credits under Section 68:
The Tribunal upheld the disallowance of unsecured loans amounting to ?1.50 crores and ?20,958 as unexplained cash credits. The AO had found that the loans were accommodation entries from companies controlled by the Bhanwarlal Jain group, and the assessee failed to provide sufficient evidence to prove the genuineness of these transactions.

6. Disallowance of Commission/Brokerage as Unexplained Expenditure under Section 69C:
The Tribunal upheld the disallowance of commission/brokerage of ?3.50 lakhs as unexplained expenditure. The AO had found these payments to be non-genuine based on the investigation findings.

7. Disallowance of Expenses Attributed for Exempt Income under Section 14A r.w.r. 8D:
The Tribunal provided partial relief to the assessee by directing the AO to delete the disallowance of interest expenditure under Rule 8D(2)(ii), as the assessee had sufficient interest-free funds. However, it upheld the disallowance of ?26,049 under Rule 8D(2)(iii) for other routine expenses related to exempt income.

8. Charging of Interest under Sections 234A, 234B, 234C, and 234D:
The Tribunal did not provide specific relief on the issue of charging interest under sections 234A, 234B, 234C, and 234D, implicitly upholding the AO's decision.

9. Initiation of Penalty Proceedings under Section 274 r.w.s. 271(l)(c):
The Tribunal did not provide specific relief on the initiation of penalty proceedings under section 274 r.w.s. 271(l)(c), implicitly upholding the AO's decision.

Conclusion:
The Tribunal partly allowed the appeals, providing relief only on the disallowance of interest expenditure under Rule 8D(2)(ii) while upholding the AO's findings and additions on other issues. The decision emphasized the importance of genuine transactions and sufficient evidence in tax assessments.