2021 (2) TMI 939 - AT - Income Tax

Bogus purchases - certain names were appearing who had been considered as entities not dealing in actual business but only issuing bills to accommodate various parties like the assessee company - HELD THAT - As gone through the items purchases by these parties and found that the items consists of hard discs, air span antennas, alberain bmax CPE IDU 10, CD writers, Cisco port switches, Cisco port Ethernet modules, delink ports switches and modem, DVD drive writer, infinite wireless systems. As gone through the quantitative details of the purchased and sale of the sale of goods in quantity and item wise. We find that the goods have been duly purchased and sold to Tulip Telecom Ltd. We have also examined the value of the total purchases made and also the receipts of sale out of such purchases and the profit earned thereof. Entire purchase from these parties is to the tune of ₹ 37,52,68,800/- whereas the sale receipts from that sales which have been duly accounted were to the tune of ₹ 38,27,42,200/-. We find that a profit of ₹ 74,37,422/- has been earned by the assessee from these transactions and duly offered to tax. Under these circumstances, it cannot be said that the purchase have been bogus especially when the quantitative details have been tallied item wise and the sale proceeds have been taken into P L account and the profit earned on such transaction is offered to tax. They could not have been any sales without purchase of the items. Hence, we are unable to accept the contention of the revenue. The appeal of the assessee on this ground is allowed. Disallowance of interest on advance to Sister concerns - whether in relation to disallowance of interest made u/s.36(1)(iii) of the Act, the action of the AO is correct or not? - HELD THAT - The issue of disallowance of interest has reached finality with the judgment of Hon ble Supreme Court in the case of Hero Cycles (P.) Ltd. Vs. CIT, Ludhiana 2015 (11) TMI 1314 - SUPREME COURT is that where the assessee had sufficient own interest free funds along with interest bearing funds and had made or advanced sums for non business purposes without charging any interest, the presumption that would arise is that the investment had been made out of interest free funds generated or available with the assessee, is still a good law in the light of the decision of the Hon ble Apex Court in the case of Hero Cycles Ltd. (supra). - Decided in favour of assessee. Undisclosed rental income - as argued that no show-cause notice has been given with regard to the addition made - HELD THAT -As revenue could not dispute the contentions of the assessed by the way of production of any show cause notice issued. Hence the addition made by the AO is hereby directed to be deleted for failure to follow the principles of natural justice. The appeal of the assessee on this ground is allowed. Assessment u/s 153A - HELD THAT - The assessment is not an abated assessment. There is no dispute that the additions made were not based on any seized material. Hence, in view of the judgment of the Hon ble Delhi High Court in the case CIT vs. Kabul Chawla ( 2015 (9) TMI 80 - DELHI HIGH COURT the appeal of the department is treated dismissed.

Issues Involved:

1. Disallowance of Preliminary Expenses
2. Addition on Account of Bogus Purchases
3. Disallowance of Interest on Advance to Sister Concerns
4. Undisclosed Rental Income
5. Charging of Interest under Sections 234A and 234B
6. Assessment Based on Seized Material

Detailed Analysis:

1. Disallowance of Preliminary Expenses:

The assessee did not press ground No. (iii) for the assessment years 2008-09 to 2010-11, hence it was not adjudicated.

2. Addition on Account of Bogus Purchases:

For AY 2008-09, the AO noted that certain purchases amounting to ?37,52,68,811/- were from entities considered as issuing bogus bills. The AO disallowed these purchases based on a declaration by Lt. Col H.S. Bedi, CMD of the group, admitting to ?75 Crore of bogus purchases during a search operation. The CIT(A) upheld the AO's decision, citing the lack of satisfactory explanation from the assessee and the established fact of bogus transactions from the entities involved.

Before the tribunal, the assessee argued that there was no material evidence for AY 2008-09 proving the purchases as bogus. They presented detailed quantitative movement of stock, showing that the goods purchased were sold and the sales were accounted for. The tribunal found that the purchases and sales were genuine, as the quantitative details matched and the profit was duly offered for tax. Thus, the tribunal allowed the assessee's appeal, rejecting the revenue's contention.

3. Disallowance of Interest on Advance to Sister Concerns:

For AY 2008-09, the AO disallowed ?7,20,000/- as interest on advances to sister concerns, arguing that these funds were not used for business purposes. The CIT(A) upheld this disallowance. The assessee contended that they had sufficient interest-free funds and that the disallowance was not justified. The tribunal referred to the Supreme Court's judgment in Hero Cycles Ltd., which presumes that investments made from mixed funds are out of interest-free funds if available. The tribunal allowed the assessee's appeal on this ground.

4. Undisclosed Rental Income:

For AY 2009-10, the AO added ?9,07,943/- as undisclosed rental income based on discrepancies in the amounts reported in the P&L account and Form AS-26. For AY 2010-11, ?12,60,000/- was similarly added. The CIT(A) confirmed these additions. The assessee argued that no show-cause notice was issued for these additions, violating principles of natural justice. The tribunal directed the deletion of these additions due to the lack of a show-cause notice, allowing the assessee's appeal.

5. Charging of Interest under Sections 234A and 234B:

The assessee contested the charging of interest under sections 234A and 234B for AYs 2008-09, 2009-10, and 2010-11. The tribunal did not provide a separate analysis for this issue but implied the appeals were allowed on these grounds as well.

6. Assessment Based on Seized Material:

For AY 2007-08, the revenue's appeal was dismissed as the assessment was not based on any seized material. The tribunal referred to the Delhi High Court's judgment in CIT vs. Kabul Chawla, which stipulates that additions must be based on seized material in such cases.

Conclusion:

The tribunal allowed the assessee's appeals on the grounds of bogus purchases, interest disallowance, and undisclosed rental income, and dismissed the revenue's appeal for AY 2007-08, emphasizing the lack of seized material as the basis for additions.

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