2022 (3) TMI 891 - AT - Income Tax

Estimation of income - bogus purchases - Addition @ 12.5% of the Gross Profit - HELD THAT - In the present case though the assessee filed various details / evidences in order to prove genuineness of the purchases but the vendors could not be produced despite being afforded several opportunities. Therefore looking into the entirety of facts especially the fact that the sale of flats has been accepted as being genuine and the books of accounts of the assessee are audited by chartered accountant who has not found any defect in purchases made by the appellant we think it is fit to restrict the disallowance to 5% of the purchases in the interest of justice. Disallowance of total depreciation on adhoc basis as personal expenditure - assessee claimed depreciation on motor cars - HELD THAT - Considering the facts of the present case in the absence of any log book/register maintained by the appellant showing movement of vehicle from one place to another it is not established that the car was used exclusively for the purpose of business of the appellant. Thus for the sake of consistency we restrict the disallowance to 10% of depreciation on motor vehicles for personal use as being fair and reasonable. Disallowance of petty cash expenses on adhoc basis - HELD THAT - In our view in the absence of supporting evidences genuineness of payment made in cash is not established and therefore disallowance upheld by the ld. CIT(A) at 10% of total cash expenses is found to be quite reasonable and justified. In our view the ld. CIT(A) has not erred in disallowing a sum of 10% of total cash expenses. Disallowance towards travelling expenses - assessee has not provided any supporting bills regarding visit of the partners to China and Dubai for the business purposes - HELD THAT - Before us assessee reiterated the arguments which were submitted before the lower authorities. However we are not convinced with the arguments of the assessee and we are of the view that in the instant facts the assessee has not been able to substantiate the purpose of visit to Dubai and China and in absence of any details/ supporting evidences we find no infirmity in the order of the ld. CIT(A) who dismissed the assessee s appeal due to lack of any supporting documents or evidences in support of the fact that the partner had travelled for official performances. Assessee appeal dismissed. Disallowance of interest expenditure - diversion of funds where borrowed amounts have been diverted for non-business purposes and given to various parties as interest free advances - HELD THAT - We are in agreement with the contentions of the ld. counsel for the assessee that where the assessee was having substantial interest free funds at its disposal there is no reason to hold that the borrowed money was utilized for purposes of giving interest free advances and no disallowance of interest was warranted - in the case of CIT vs. Raghuvir Synthetics Ltd. 2013 (7) TMI 806 - GUJARAT HIGH COURT held that where huge funds were available without any interest liability with assessee and there was no evidence to hold that borrowed money was utilized for purpose of advance to sister concerns no disallowance of interest was warranted. Since the assessee had substantial interest free funds at its disposal it would be incorrect to presume that interest bearing funds were used for giving interest free advances to parties. Therefore no disallowance u/s. 36(1)(iii) is called for in the instant set of facts.- Decided in favour of assessee. Addition u/s. 68 - Whether assessee has discharged the primary onus cast upon it wherein he has identified the parties by furnishing their PAN details/certificates of OCI? - HELD THAT - In the case of CIT v. Ranchhod Jivabhai Nakhava 2012 (5) TMI 186 - GUJARAT HIGH COURT has held that where lenders of assessee are income-tax assessee whose PAN have been disclosed Assessing Officer cannot ask assessee to further prove genuineness of transactions without first verifying such fact from income-tax returns of lenders. Further in the case of CIT v. Chanakya Developers 2013 (10) TMI 7 - GUJARAT HIGH COURT held that where assessee in order to prove genuineness of transactions relating to receipt of booking amount of flats supplied address and PAN of concerned persons it had discharged its primary onus and therefore Assessing Officer could not make addition of said amount to assessee s taxable income without making proper inquiries under section 133(6). In view of the above Rulings and the totality of facts of the present case we are of the view that the Ld. CIT(Appeals) has not erred in deleting the addition made u/s. 68 of the Act - Decided against revenue.

Summary

Issues Involved:
1. Addition of ? 5,50,656/- as bogus purchases.
2. Disallowance of ? 6,04,326/- out of total depreciation on an ad hoc basis as personal expenditure.
3. Disallowance of ? 2,62,053/- out of petty cash expenses on an ad hoc basis.
4. Disallowance of ? 4,80,278/- towards traveling expenses.
5. Disallowance of ? 18,53,888/- out of total interest expenditure calculated on a proportionate basis.
6. Deletion of the addition of ? 1,09,50,000/- made under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of ? 5,50,656/- as bogus purchases:
The assessee and the department both appealed against the addition of ? 5,50,656/- as bogus purchases calculated at 12.5% of the gross profit. The assessee argued that the purchases were genuine, supported by various documents, and that the disallowance was excessive. The department contended that the entire amount of ? 44,05,259/- should have been disallowed as bogus purchases. The tribunal noted that while the assessee provided various details to prove the genuineness of the purchases, the vendors could not be produced for verification. Considering the facts and previous judgments, the tribunal restricted the disallowance to 5% of the purchases, partly allowing the assessee's appeal and dismissing the department's appeal.

2. Disallowance of ? 6,04,326/- out of total depreciation on an ad hoc basis as personal expenditure:
The assessee claimed depreciation on motor cars, but the Assessing Officer disallowed 20% of the depreciation, considering the possibility of personal use. The CIT(A) upheld this disallowance. The tribunal, referencing previous judgments, found that a 10% disallowance for personal use was fair and reasonable. Consequently, the tribunal allowed the assessee's appeal in part, reducing the disallowance to 10%.

3. Disallowance of ? 2,62,053/- out of petty cash expenses on an ad hoc basis:
The Assessing Officer disallowed 10% of the petty cash expenses, noting that many were self-vouched and lacked supporting documents. The CIT(A) upheld this disallowance. The tribunal, referencing similar cases, agreed that the disallowance was reasonable given the lack of supporting evidence. Thus, the tribunal dismissed the assessee's appeal on this ground.

4. Disallowance of ? 4,80,278/- towards traveling expenses:
The Assessing Officer disallowed a portion of the traveling expenses, considering them personal and unsupported by evidence. The CIT(A) upheld this disallowance. The tribunal noted that the assessee failed to substantiate the business purpose of the travel expenses with supporting documents. Consequently, the tribunal found no reason to overturn the CIT(A)'s decision and dismissed the assessee's appeal on this ground.

5. Disallowance of ? 18,53,888/- out of total interest expenditure calculated on a proportionate basis:
Both the assessee and the department appealed against the disallowance of interest expenditure. The Assessing Officer disallowed 40% of the interest expenses, claiming that interest-bearing funds were used for non-business purposes. The CIT(A) reduced this disallowance to ? 14,54,580/- based on a proportionate calculation. The tribunal found that the assessee had substantial interest-free funds, and there was no evidence to suggest that borrowed funds were used for non-business purposes. Hence, the tribunal allowed the assessee's appeal and dismissed the department's appeal, ruling that no disallowance was warranted.

6. Deletion of the addition of ? 1,09,50,000/- made under Section 68 of the Income Tax Act:
The Assessing Officer added ? 1,09,50,000/- as unexplained cash credit under Section 68, questioning the genuineness and creditworthiness of the transactions. The CIT(A) deleted this addition, noting that the assessee provided sufficient evidence, including confirmations, PAN details, and bank statements, to prove the genuineness of the transactions. The tribunal upheld the CIT(A)'s decision, finding that the assessee had discharged the primary onus of proving the identity, genuineness, and creditworthiness of the transactions. Thus, the tribunal dismissed the department's appeal on this ground.

Conclusion:
The appeal of the assessee was partly allowed, and the department's appeal was dismissed. The tribunal made adjustments to the disallowances based on the evidence and precedents, ensuring a fair and reasonable outcome.