2020 (12) TMI 1036 - AT - Income Tax

Unverified purchases from related parties - verification of the fixed assets added during the year under consideration - HELD THAT - Books of accounts and bills/vouchers were not produced before either the Assessing Officer or the Ld. CIT(A). The assessee has only produced Tax Auditor Report in Form No. 3CD which contains a list of the items of fixed asset added during the year alongwith the amount, that too in respect of Visicoolers and bolltes only. Before us, also the assessee has only referred to few sample copies of the invoices for purchase of the fixed assets and no complete invoices have been produced. In absence of bills/invoices or vouchers for the purchase of the fixed assets, purchase of those assets cannot be verified. For proper verification, it is required that each entry of fixed assets added need to be seen along with the relevant bill/invoice of purchase, installation, delivery note etc. In absence of any such details produced before us, we are not in position to verify purchase of the fixed assets - we feel it appropriate to restore this issue to the file of the Assessing Officer for examining and verifying in view of our observation above. Disallowance of operating expenses @ 10% - HELD THAT - Without pointing out any such defect in the books of account or vouchers relating to operating expenses, the action of the Assessing Officer in disallowing 10% of the expenses on ad-hoc basis by way of following earlier years and simply mentioning that expenses being of unverified, unreasonable and excessive, is not justified. The action of the Ld. CIT(A) in simply upholding the finding of the Assessing Officer following the finding of his predecessor in earlier years, without noticing the change in facts and circumstances in the year under consideration, is also not justified. In view of the above discussion, we are of the opinion that without pointing out any defects in the bills and vouchers of operating expenses, the ad-hoc disallowance at the rate of the 10% out of the operating expenses cannot be sustained. We also note that in assessment year 2007-08, the Assessing Officer while verifying the operating expenses in compliance to the direction of the Tribunal, has not made any disallowance and accepted the claim of the assessee of the operating expenses. Accordingly, the ground of the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Deletion of addition on account of purchases from related parties.
2. Restriction of disallowance out of operating expenses.
3. Deletion of addition out of unverified expenses in fixed assets.
4. Deletion of addition out of depreciation on unverified fixed assets.

Detailed Analysis:

1. Deletion of Addition on Account of Purchases from Related Parties:
The Revenue contested the deletion of ?10,61,30,515/- related to unverified purchases from related parties. The Assessing Officer (AO) had initially disallowed this amount due to the assessee's failure to produce books of accounts and supporting bills/vouchers. The Ld. CIT(A) deleted this disallowance, leading to the Revenue's appeal. The Tribunal had previously remanded the issue to the AO for further verification, which was upheld by the Hon’ble Delhi High Court. The High Court emphasized the need for specific examination of the documents and papers produced by the assessee before the AO.

2. Restriction of Disallowance Out of Operating Expenses:
The AO had disallowed 30% of the operating expenses amounting to ?8,72,60,100/-, which the Ld. CIT(A) reduced to 10% (?2,90,86,700/-). The Tribunal had remanded this issue for a de-novo assessment, which was upheld by the High Court. The High Court directed that the Tribunal should examine the contention of the assessee regarding the production of books of accounts and supporting documents for operating expenses.

3. Deletion of Addition Out of Unverified Expenses in Fixed Assets:
The AO disallowed ?2,45,00,000/- related to unverified fixed assets, stating that the assessee did not provide the necessary details and documents. The Ld. CIT(A) deleted this disallowance, citing that the assessee had provided a detailed list of additions to fixed assets, signed by the Tax Auditor, along with sample invoices. The High Court set aside the Tribunal's remand order on this issue, directing the Tribunal to re-examine the contention of the assessee regarding the production of documents.

4. Deletion of Addition Out of Depreciation on Unverified Fixed Assets:
The AO disallowed ?36,75,000/- claimed as depreciation on unverified fixed assets. The Ld. CIT(A) deleted this disallowance based on the same reasoning as the unverified fixed assets. The High Court directed the Tribunal to re-examine this issue, similar to the unverified fixed assets.

Tribunal's Findings:

For Assessment Year 2007-08:
- Unverified Fixed Assets and Depreciation:
The Tribunal found that the assessee did not produce complete books of accounts and invoices for the fixed assets before the AO or the Ld. CIT(A). The Tribunal restored the issue to the AO for proper verification of each entry of fixed assets added during the year, along with relevant bills and invoices.

- Operating Expenses:
The Tribunal noted that the AO had verified the books of accounts in respect of operating expenses and did not find any discrepancies. The Tribunal held that without pointing out any defects in the books or vouchers, the ad-hoc disallowance of 10% of operating expenses was not justified. The Tribunal allowed the assessee's ground of appeal.

For Assessment Year 2011-12:
- Operating Expenses:
The Tribunal observed that the AO had examined the books of accounts and verified the operating expenses without finding any discrepancies. The Tribunal held that the ad-hoc disallowance of 10% of operating expenses without pointing out specific defects was not justified. The Tribunal allowed the assessee's appeal.

Conclusion:
The appeal of the Revenue for assessment year 2007-08 was allowed for statistical purposes, requiring further verification by the AO. The appeal of the assessee for assessment year 2011-12 was allowed, with the Tribunal finding the ad-hoc disallowance of operating expenses unjustified. The Tribunal emphasized the need for proper verification and specific examination of documents in both cases.