2023 (5) TMI 1100 - AT - Income Tax

Additions towards Bogus purchases - Estimation of profit - companies are engaged in providing accommodation entries or sending bogus foreign remittances to entities based in Hong Kong and UAE in guise of bogus import purchases - HELD THAT - CIT- A has correctly considered that the purchases from these parties is genuine when part of purchases from the same parties is not disputed, even otherwise, even if it is held that the purchases from these parties are bogus, then also, the proper course would be to determine the profit arising from the purchases by looking at corresponding sales and what amount of gross profit is earned on alleged bogus purchases. If the alleged bogus purchases show gross profit higher than the regular gross profit shown by the assessee, no further addition is required to be made in the hands of the assessee. The logic behind this is that sale is already accounted for on the credit side of the profit and loss account. Purchases are to be removed, the corresponding sale is also required to be removed from the profit and loss account, sales is higher than the purchases in rupees terms, therefore, the addition would be only required to be made to the extent of lower gross profit on alleged bogus purchases then the regular gross profit. It is not the case of the AO that amount invested in acquiring the bogus purchases should also be considered as an addition, because the only addition is disallowance of bogus purchases, no further addition is warranted. Disallowance of commission expenditure - HELD THAT - As commission has been paid on export of diamond stating the details of exports made by the assessee, respective commission and details of service tax collected thereon. The assessee has also produced the details of other commission expenditure incurred by the assessee at page number 65 onwards, which are also identical. There is no reason to differentiate between the nature of services rendered by the commission expenditure accepted by the assessee as genuine and the details of alleged bogus commission expenditure. We do not find any infirmity in the order of the learned CIT A in deleting the disallowance of commission expenditure. Therefore, ground number 3 of the appeal is dismissed.

Issues Involved:

1. Deletion of disallowance of suspected bogus purchases.
2. Non-appreciation of reliance on the charge sheet filed by the Enforcement Directorate regarding bogus purchases.
3. Deletion of disallowance of commission expenses as alleged to be bogus.

Summary:

Issue 1: Deletion of Disallowance of Suspected Bogus Purchases

The Deputy Commissioner of Income Tax, Central Circle 2(3), Mumbai (the AO) appealed against the order of the Commissioner of Income Tax (Appeals) - 48, Mumbai (CIT-A), which deleted an addition of Rs. 116,624,231 on account of accommodation entries and consequent commission of Rs. 8,315,211. The AO had based the addition on information received from the Investigation Directorate, Surat, and Mumbai, indicating that the assessee company made bogus payments to certain entities without actual business activities. The AO issued a notice under section 148 after recording reasons and obtaining approval from the Principal Commissioner of Income Tax, Central - 1, Mumbai.

The CIT-A found that the assessee had provided sufficient evidence, including ledger accounts, purchase invoices, bank statements, and one-to-one mapping of corresponding purchases and sales. The AO acknowledged these evidences but did not reject them. The CIT-A noted that the AO failed to establish that the entities involved were bogus or provided accommodation entries. The CIT-A also referred to the charge sheet by the Enforcement Directorate, which did not mention the parties from whom the assessee purchased material. The CIT-A concluded that the purchases were genuine, and even if considered doubtful, no addition was warranted as the gross profit from these purchases exceeded the gross profit from genuine purchases.

Issue 2: Non-Appreciation of Reliance on Charge Sheet by Enforcement Directorate

The AO argued that the CIT-A erred in not appreciating the reliance on the charge sheet filed by the Enforcement Directorate regarding bogus purchases. The CIT-A found that the AO did not provide any evidence establishing that the entities were working in coordination to issue bogus bills. The CIT-A noted that the names of the parties from whom the assessee purchased material were not mentioned in the charge sheet. The CIT-A emphasized that the AO did not reject the sales made by the assessee against the purchases, nor did he find any defects in the books of accounts maintained by the assessee.

Issue 3: Deletion of Disallowance of Commission Expenses

The AO disallowed commission expenses of Rs. 8,315,211 paid to four parties, claiming they were shell companies providing accommodation entries. The CIT-A found that the assessee had provided sufficient evidence, including debit notes, details of tax deducted at source, bank statements, and financial statements of the parties. The CIT-A noted that the AO accepted the commission income shown by these parties in their respective assessments. The CIT-A also referred to the order under the Prohibition of Benami Property Transactions Act, 1988, which held that these entities were not bogus. The CIT-A concluded that the commission expenses were genuine and deleted the disallowance.

Conclusion:

The appeal filed by the AO was dismissed, and the order of the CIT-A deleting the additions on account of bogus purchases and commission expenses was upheld. The CIT-A's decision was based on the assessee's submission of substantial evidence and the AO's failure to establish the non-genuineness of the transactions. The CIT-A's reliance on judicial precedents and the findings of the Adjudicating Authority under the Prohibition of Benami Property Transactions Act further supported the deletion of the additions.

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