2021 (7) TMI 285 - AT - Income Tax

Estimation of income - Bogus purchases - HELD THAT - Since, in the instant case, the sale of the assessee has not been disturbed by the AO, treating the same as bogus, therefore, the entire bogus purchase could not have been added to the total income of the assessee. Since the assessee has already declared profit on account of sales against such bogus purchases which is more than the GP rate declared by the assessee at 1%, therefore, on this count also no addition is called for in the instant case. If the AO treats the purchase as bogus, then, the sales also is bogus and since such bogus purchase has been sold at a price higher than cost of such bogus purchase and the assessee has already offered income out of such bogus purchases, therefore, in our opinion, no separate addition on account of such bogus purchase is called for especially in absence of any incriminating material found during the course of search for the impugned assessment year. In this view of the matter, we set aside the order of the CIT(A) and direct the AO to delete the addition. Disallowance u/s 14A - HELD THAT - As in the case of Cheminvest 2015 (9) TMI 238 - DELHI HIGH COURT has held that no disallowance u/s 14A can be made in a year in which no exempt income has been earned or received by the assessee. Similar view has been taken in the case of PCIT vs. Oil Industries Development Board, 2018 (2) TMI 1861 - DELHI HIGH COURT and in various other decisions relied on by the assessee. Since, admittedly, the assessee in the instant case has not received any dividend income during the year, a fact stated before the lower authorities and not controverted by them, we are of the considered opinion that no disallowance u/s 14A is called for. The order of the CIT(A) on this issue is accordingly set aside and the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Addition of ?15 lakhs on account of bogus purchases.
2. Disallowance of ?1,00,121/- under Section 14A of the Income Tax Act.

Detailed Analysis:

Issue 1: Addition of ?15 lakhs on account of bogus purchases

The assessee, a private limited company dealing in computer hardware and IT services, was subjected to a search action under Section 132 of the Income Tax Act, 1961. During the assessment proceedings, the Assessing Officer (AO) observed that the assessee made purchases worth ?15 lakhs from M/s Jay Enn Infotech Pvt. Ltd., which was declared as a bogus entity providing accommodation entries. The AO added this amount to the assessee's total income due to the inability of the assessee to substantiate the purchases.

The CIT(A) upheld the AO's action, noting that the Tulip Group, to which the assessee belongs, had admitted to making bogus purchases from various entities, including M/s Jay Enn Infotech Pvt. Ltd., during the search proceedings. Despite the assessee's argument that no incriminating material was found for the assessment year 2007-08, the CIT(A) maintained the addition, citing the group's inability to substantiate purchases from the listed entities.

The Tribunal found merit in the assessee's argument that no incriminating material was found for the assessment year 2007-08. The Tribunal referred to the coordinate Bench's decision in the case of Gulf Technologies Pvt. Ltd. vs. ACIT, where under similar circumstances, additions were deleted in the absence of incriminating material. The Tribunal also noted that the assessee had already declared a profit of ?61,276/- from the alleged bogus purchases, which was more than the gross profit rate. Therefore, the Tribunal concluded that no separate addition was warranted, and the entire addition of ?15 lakhs was deleted.

Issue 2: Disallowance of ?1,00,121/- under Section 14A

The AO disallowed ?1,00,121/- under Section 14A, stating that the assessee had made investments of ?2 crores, and the provisions of Section 14A were applicable. The CIT(A) upheld this disallowance, reasoning that the assessee's main activity was investment, and considerable resources were utilized for this purpose.

The Tribunal, however, found that the assessee did not receive any dividend income during the assessment year, a fact not disputed by the lower authorities. Referring to the Delhi High Court's decision in Cheminvest vs. CIT, which held that no disallowance under Section 14A can be made in a year when no exempt income is earned, the Tribunal concluded that the disallowance was not justified. Consequently, the Tribunal set aside the CIT(A)'s order and allowed the assessee's appeal on this ground.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, deleting the addition of ?15 lakhs on account of bogus purchases and the disallowance of ?1,00,121/- under Section 14A. The decision was pronounced in the open court on 05.07.2021.