2020 (8) TMI 128 - AT - Income Tax

Disallowance of depreciation on hawala purchase of machines - Whether should be restricted to the proportionate depreciation by applying reasonable Gross Profit rate on such alleged hawala purchase transactions? - HELD THAT - GP rate in the extant hawala transactions is 15% and the assessee actually purchased machinery at 85% of the declared value, for which the bills were obtained for 100%. In that view of the matter, purchase value of the machines will get reduced to 85% instead of 100% and the claim of depreciation on such excess of 15% will be disallowed in the year under consideration and all the subsequent years. Addition of ₹ 59,38,955/- as having been made and confirmed u/s 69 of the Act, is unwarranted. The same is accordingly deleted. In so far as the disallowance of depreciation of ₹ 4,45,420/- is concerned, we direct to restrict it by reducing the actual cost of such machines by 15% from ₹ 59,38,955/- to ₹ 50,48,111/- and accordingly disallow the depreciation on the excess amount of ₹ 8,90,844/-. - Decided partly in favour of assessee.

Issues:
Disallowance of depreciation on alleged hawala purchase of machines, genuineness of purchase transactions, disallowance of depreciation amount, application of Gross Profit rate on alleged hawala transactions.

Detailed Analysis:

1. Disallowance of Depreciation on Alleged Hawala Purchase of Machines:
The case involved disallowance of depreciation on alleged hawala purchase of machines by the assessee. The Assessing Officer (AO) received information about the assessee obtaining accommodation entries from hawala operators for certain machines. The AO conducted an independent inquiry and found no genuine business existence, leading to the disallowance of depreciation on the machines. The first appellate authority, CIT(A), did not accept the genuineness of the purchase transactions based on the evidence provided by the assessee. The CIT(A) confirmed the addition made by the AO under section 69 of the Income-tax Act and approved the disallowance of depreciation. However, the ITAT Pune held that the machines were actually purchased from the open market and not from hawala operators. Therefore, the addition made under section 69 was deemed unwarranted, and the disallowance of depreciation was directed to be restricted by reducing the actual cost of the machines by 15%.

2. Genuineness of Purchase Transactions:
The AO and CIT(A) doubted the genuineness of the purchase transactions due to the lack of substantial evidence provided by the assessee. The AO's personal visit to the factory premises revealed that the machines were installed, but there was no specific identification on the machines as described in the bills. The CIT(A) inferred that the machines were purchased from the open market and bills were obtained from specific parties. However, the ITAT Pune concluded that the machines were actually purchased from the open market, and the bills were obtained for higher values. The ITAT held that the explanation provided by the assessee regarding the purchase from the open market was valid, and the addition made under section 69 was deleted.

3. Disallowance of Depreciation Amount:
The AO disallowed depreciation on the alleged hawala purchase of machines, which was confirmed by the CIT(A). However, the ITAT Pune directed to restrict the disallowance of depreciation by reducing the actual cost of the machines by 15%. The ITAT calculated the revised depreciation amount and disallowed depreciation on the excess amount accordingly.

4. Application of Gross Profit Rate on Alleged Hawala Transactions:
The ITAT Pune considered the application of Gross Profit rate on the alleged hawala transactions. After analyzing the peculiar facts and circumstances of the case, the ITAT determined the Gross Profit rate at 15% and adjusted the purchase value of the machines accordingly. The ITAT held that the claim of depreciation on the excess purchase price of the machines should be disallowed, and the depreciation amount was recalculated based on the reduced purchase value.

In conclusion, the ITAT Pune partially allowed the appeal, deleted the addition made under section 69, and directed to restrict the disallowance of depreciation on the machines based on the revised purchase value.

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