2022 (3) TMI 652 - AT - Income Tax

Bogus purchases u/s 69C - No evidences showing physical movement of goods - HELD THAT - Assessee produced bills raised by all the six parties and in some cases credit notes given by the said parties before the AO. AO added entire purchases only on the ground that the assessee could not produce any evidences showing physical movement of goods. AO made addition only on the pretext that there was no evidence showing the physical movement of goods purchases, in our opinion, is not correct to treat the entire purchases as bogus and gross profit should be determined at 10%. Therefore, by following the finding of Co-ordinate Bench in the case of Dilawar R. Shaikh 2017 (8) TMI 1658 - ITAT PUNE we direct the AO to determine gross profit at 10% on such alleged purchases. Thus, the ground Nos. 1 to 3 raised by the assessee are allowed. Disallowance made u/s. 14A - HELD THAT - We deem it proper to remand the issue to the file of AO for computing the disallowance of expenditure relating to the investments yielded exempt income. The assessee is liberty to file evidences, if any, in support of his claim. Thus, ground Nos. 4 and 5 raised by the assessee are allowed for statistical purpose.

Summary

Issues:
1. Challenge to addition made on account of hawala purchases under section 69C of the Income Tax Act.
2. Disallowance made under section 14A of the Income Tax Act.

Analysis:

Issue 1: Challenge to addition on account of hawala purchases
The assessee challenged the addition made by the Assessing Officer (AO) on account of purchases treated as hawala purchases under section 69C of the Act. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO's order. The assessee contended that the AO added entire purchases as hawala purchases without considering gross profit. The Tribunal noted that the assessee produced bills and credit notes from the parties but failed to provide evidence of physical movement of goods. Referring to a previous case, the Tribunal held that adding entire purchases without evidence of physical movement is incorrect. The Tribunal directed the AO to determine gross profit at 10% on the alleged purchases. Therefore, the grounds raised by the assessee were allowed.

Issue 2: Disallowance under section 14A
The AO disallowed expenses under section 14A as the assessee received exempt income from mutual funds and dividends. The assessee argued that no expenditure was incurred to earn the exempt income. However, the AO applied Rule 8D of the Rules to disallow expenses. The Tribunal found discrepancies in the AO's calculation of disallowance. The CIT(A) confirmed the AO's decision without addressing the errors in calculation. The Tribunal observed that the investments held by the assessee did not yield dividend income but earned taxable income. As the AO did not record the exempt income earned by the assessee, the Tribunal remanded the issue for proper computation of disallowance related to investments yielding exempt income. Therefore, the grounds raised by the assessee were allowed for statistical purposes.

In a separate appeal, the Tribunal found the facts and issues to be identical to the first appeal and allowed the appeal of the assessee accordingly.

In conclusion, the appeal in the first case was allowed for statistical purposes, and the appeal in the second case was also allowed.