2021 (9) TMI 976 - AT - Income Tax

Addition of circular trading purchases - AO disallowed 5% of such purchases - assessee has admitted that it was engaged in circular trading wherein the bills/invoices changed hands without movement of physical goods - CIT(A) in estimating the disallowance @ 0.30% - HELD THAT - During the course of assessment and appellate proceedings the assessee explained the complete modus operandi of circular trading transaction which was carried out to show better turnover - it is undisputed fact that assessee would make payment to the entity from whom it made purchases, who in turn would make consequent payment and the funds would finally reach back to the assessee. In circular trading the payments were made through cheques and profit on circular trading was disclosed by the assessee in its return of income. In the earlier assessment year, the assessee has gone to Settlement Commission and furnished the circular trading/sample bills and chart which was discussed by the ld. CIT(A) in his findings as supra in this order. CIT(A) has also discussed in his finding that this was not a case of estimation of net profit on circular purchases but this was a case where the assessee had incurred expenses for circular purchases/transaction @ 0.28% and estimated the disallowance @ 0.30% of circular trading purchases - CIT(A) has also explained in his finding regarding analysis of the transaction made by the assessee that these transactions were carried out in order to show better turnover in financial accounts. Revenue could not controvert the facts reported by the ld. CIT(A) with any relevant material. Therefore, no infirmity in the decision of ld. CIT(A) in estimating the disallowance @ 0.30% of circular trading purchases - Appeal of the revenue is dismissed.

Summary

Issues Involved:

1. Legitimacy of Circular Trading Purchases
2. Quantum of Disallowance on Circular Trading Purchases
3. Methodology and Justification for Estimating Disallowance

Detailed Analysis:

1. Legitimacy of Circular Trading Purchases:

The core issue revolves around the legitimacy of circular trading purchases. The assessee admitted engaging in circular trading, where bills/invoices changed hands without the movement of physical goods. The Assessing Officer (AO) deemed these purchases as unreliable and classified them as paper purchases. The AO concluded that the purchases worth ?2,83,77,87,618/- were not genuine and disallowed 5% of these purchases, amounting to ?14,18,89,380/-.

2. Quantum of Disallowance on Circular Trading Purchases:

The Commissioner of Income Tax (Appeals) [CIT(A)] reduced the disallowance significantly from ?14,18,89,380/- to ?85,13,363/-. The CIT(A) noted that the transactions were indeed circular but emphasized that these were not entirely fictitious. The CIT(A) found that the profit on circular transactions was recorded and offered by the appellant company. The CIT(A) observed that the purchases value increased by only 0.28% in these transactions, which was a minimal profit margin.

3. Methodology and Justification for Estimating Disallowance:

The CIT(A) justified the reduction in disallowance by referring to similar cases, such as M/s. Arman Fashion Pvt. Ltd. vs. ITO, where the tribunal had dealt with identical issues of circular transactions. The CIT(A) determined that the transactions were undertaken to show better turnover in financial accounts and not for deriving substantial benefits. The CIT(A) estimated the disallowance at 0.30% of the circular trading purchases, considering the intermediary charges not for the purpose of business.

Conclusion:

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, dismissing the revenue's appeal. The ITAT found no infirmity in the CIT(A)'s estimation of disallowance at 0.30% of circular trading purchases. The ITAT concluded that the revenue could not provide any material to contradict the CIT(A)'s findings. The appeal of the revenue was dismissed, and the order was pronounced in the open court on 16-09-2021.