2022 (5) TMI 1085 - AT - Income Tax

Bogus purchases of cloth - Addition made as invoices are self-made - CIT(A) upheld the addition to the extent of 50% , by taking view that the assessee failed to explained the mismatch in voucher numbers and their dates - HELD THAT - Before us, the assessee in its written submission filed, contended that it is a clerical mistake and that the payment were made through cheque and assessee has also filed bank statement showing some purchase through cheques. It is settled law that in absence of corroborative evidence, the payment made through cheque is not sacrosanct. However, keeping in view this settled legal position that even if the purchase is found to be bogus only profit element embedded in such purchase is to be disallowed to avoid possibility of revenue leakage and not the substantial part of transaction. In our view, the disallowance @ 50% of purchase sustained by Ld. CIT(A) is on higher side. Considering the nature of trade, we deem it appropriate to restrict the disallowance @ 20% which in our view will be sufficient to avoid the possibility of revenue leakage. The Assessing Officer is directed to re-compute the same. In the result, ground No.1 is partly allowed. Disallowance of renovation expenses - CIT(A) confirmed the action of Assessing Officer by taking view that there is no debit balance in bank statement of assessee - HELD THAT - We find that assessee has placed on record the invoice of Shri Hari Corporation, showing the payment of Rs.2,06,401/- vide cheque No.178 drawn in favour of Laxmi Vilas Bank. We find that assessee has also furnished invoice of cement confirmation. The assessee also filed the confirmation of work undertaking by Naklang Construction. We also find that payment of such repair works was made through account payee cheque on 05.12.2015 which is duly reflected in the account statement of assessee. In view of aforesaid facts, we find that assessee has substantiated the expense since the repairs of small modification carried out at the premises are small scale repair which cannot be classified with capital expenditure. Therefore, Ground No.2 of the assessee is allowed. The Assessing Officer is directed to re-compute the same.

Summary

Issues:
1. Disallowance of purchase expenses
2. Disallowance of renovation expenses

Issue 1: Disallowance of purchase expenses

The appeal was against the order of the CIT(A) for the assessment year 2016-17, challenging the disallowance of purchase expenses by the Assessing Officer. The Assessing Officer disallowed the entire purchase amount of Rs. 3,60,250 for GPO cloth due to discrepancies in the invoices. The invoices were found to be self-made, lacking essential details like TIN, telephone number, and seller's signature. The CIT(A) upheld 50% of the disallowance, citing the mismatch in invoice numbers and dates. The appellant argued that the purchases were supported by bills, payments made through cheques, and presented ledger accounts and confirmations. The Tribunal found the 50% disallowance to be excessive and reduced it to 20% to prevent revenue leakage. The decision was based on the principle that only the profit element in a bogus purchase should be disallowed.

Issue 2: Disallowance of renovation expenses

The Assessing Officer disallowed Rs. 2,06,400 claimed as construction/repair expenses, treating it as capital expenditure. The appellant contended that the expenses were for minor repairs like renovation of staff rooms and toilets, not capital in nature. The CIT(A) upheld the disallowance due to the absence of details in the bank statement. The Tribunal noted that the renovation expenses were minor and not disputed. The appellant provided invoices, bank statements, and confirmations of payments made through cheques to support the expenses. The Tribunal found that the repairs were small-scale and not capital expenditure, allowing the appeal on this ground. The Assessing Officer was directed to re-compute the expenses accordingly.

In conclusion, the Tribunal partially allowed the appeal, reducing the disallowance percentage for purchase expenses and allowing the renovation expenses claimed by the appellant. The decision was based on the principles of substantiation of expenses, nature of transactions, and prevention of revenue leakage.