2021 (8) TMI 147 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - Undisputedly, the assessee has failed to substantiate genuineness of purchases made from alleged hawala operators. At the same time the sales turnover declared by the assessee has been accepted by the Assessing Officer. In such like transactions it is only the profit element embedded in such transactions that can be taxed, entire bogus purchases cannot be disallowed Ref PCIT vs. Paramshakti Distributors Pvt. Ltd. 2019 (7) TMI 838 - BOMBAY HIGH COURT - G.P rate declared by the assessee on regular transactions is 11.32%. The ld.Authorized Representative of the assessee has conceded that the disallowance on bogus purchases may be restricted to 12.5% in line with the disallowance made in previous assessment years - we deem it appropriate to restrict the disallowance on account of bogus purchases @ 12.5%. The ground No.1 of the appeal is partly allowed in the terms aforesaid. Disallowance of business expenditure - AO has made adhoc disallowance of 30% to 40% in respect of various expenditure claimed by the assessee - disallowance of business expenditure was made by the Assessing Officer on the ground that no supporting evidences were filed by the assessee - CIT(A) restricted the disallowance to 20% - HELD THAT - A perusal of the assessment order shows that the Assessing Officer has disallowed business expenditure on mere estimation. The Assessing Officer made flat disallowance of 30% on all business expenditure claimed by the assessee and disallowance of 40% was made in respect of conveyance and travelling expenditure. The manner of making disallowance by the Assessing Officer indicates that Assessing Officer has not examined the books or the relevant documents. The disallowance has been made merely on surmises and conjectures, without pointing short comings in the books and supporting documents maintained by the assessee. The CIT(A) has reduced disallowance to 20% again on estimations. We find no cogent reason to sustain disallowance in respect of business expenditure, accordingly, the same is directed to be deleted.

Summary

Issues:
1. Disallowance of alleged bogus purchases for assessment years 2009-10 and 2010-11.
2. Adhoc disallowance of business expenditure for assessment year 2009-10.
3. Discrepancy in the amount of bogus purchases for assessment year 2010-11.

Issue 1: Disallowance of alleged bogus purchases for assessment years 2009-10 and 2010-11:
- The assessee, a trader in hardware items, faced disallowance of alleged bogus purchases totaling to a significant amount.
- The Assessing Officer made adhoc disallowance without examining relevant documents, leading to disputes.
- The CIT(A) confirmed the addition of bogus purchases but restricted the disallowance percentage for office expenses.
- The Tribunal cited the need to tax only the profit element in such transactions and accepted the assessee's request to restrict disallowance to 12.5% based on previous assessments.
- The Tribunal partially allowed the appeal by restricting the disallowance on account of bogus purchases to 12.5%.

Issue 2: Adhoc disallowance of business expenditure for assessment year 2009-10:
- The Assessing Officer made adhoc disallowance of 30% to 40% of various business expenditures without proper examination of supporting documents.
- The CIT(A) reduced the disallowance to 20% based on estimations.
- The Tribunal found no valid reason to sustain the disallowance and directed its deletion, ultimately allowing the assessee's appeal on this ground.

Issue 3: Discrepancy in the amount of bogus purchases for assessment year 2010-11:
- The Assessing Officer erroneously mentioned a higher amount for bogus purchases compared to the actual figure.
- The CIT(A) acknowledged the error but failed to correct it despite a remand report confirming the correct amount.
- The Tribunal, after considering the remand report, directed the Assessing Officer to restrict the addition on account of bogus purchases to 12.5% of the actual amount, leading to a partial allowance of the appeal for this assessment year.

In conclusion, the Appellate Tribunal ITAT Mumbai partially allowed both appeals by the assessee, addressing the issues of disallowance of alleged bogus purchases and adhoc disallowance of business expenditure for the respective assessment years. The Tribunal emphasized the importance of proper examination of documents and the need for accurate assessment based on factual evidence.