2023 (6) TMI 1459 - AT - Income Tax

Bogus purchase - CIT(A) has restricted the disallowance to 5% of the purchase amount - HELD THAT - Hon ble High Court in Mohommad Haji Adam Co. 2019 (2) TMI 1632 - BOMBAY HIGH COURT held it appropriate to make addition for the benefit assessee has obtained by way of making purchases in cash from the market and for which a reasonable amount of addition could have been made. CIT(A) has made addition on the reasonable estimate basis @ 5 % of bogus purchase, which in our opinion is justified. The ratio in the case of N.K. Proteins Ltd. 2017 (1) TMI 1090 - SC ORDER is not applicable in the case of the assessee as assessee has produced the stock registers to substantiate that amount of goods corresponding to the bills were duly entered in the stock register and after manufacturing same have been sold. In our opinion, the finding of the CIT(A) on the issue in dispute is justified and we accordingly uphold the same. Addition of cash commission u/s 40A(3) - payment in cash more than the prescribed limit - HELD THAT - Under the provisions of section 40A(3) of the Act, disallowance for payment of expenses in cash exceeding prescribed limit can be made, when the expenses are entered into the books of accounts of the assessee. Whereas in the instant case, there is no such entry for claim of the expenses @ 3% for commission in relation to accommodation entries in books of account. In absence of any claim of expenditure under books of accounts, no disallowance u/s 40A(3) is warranted. When the AO has not treated the expenditure of commission payment for obtaining accommodation entry as unexplained u/s 69C of the Act, the consequent addition u/s 40A(3) of the Act made by the Assessing Officer is also unjustified. We set aside the finding of the Ld. CIT(A) on the issue in dispute and addition made by the Assessing Officer is accordingly deleted.

Summary

Issues Involved:
1. Disallowance of bogus purchases.
2. Disallowance under Section 40A(3) of the Income-tax Act.
3. Levy of interest under Sections 234A, 234B, and 234C of the Income-tax Act.
4. Principles of natural justice and procedural fairness.

Detailed Analysis:

1. Disallowance of Bogus Purchases:
The primary issue revolved around the disallowance of alleged bogus purchases made by the assessee from M/s Millennium Stars. The Assessing Officer (AO) initially treated the entire amount of purchases as unexplained based on information from the Income-tax Department's Investigation Wing, which indicated that the purchases were accommodation entries from entities controlled by a third party. The Commissioner of Income-tax (Appeals) [CIT(A)] restricted the disallowance to 5% of the purchase value, citing jurisdictional precedents and the principle of consistency. The Tribunal upheld this decision, noting that while the assessee failed to substantiate the purchases by producing the party, the corresponding goods were reflected in the stock register and were part of subsequent sales, which were not disputed by the Revenue. The Tribunal agreed with the CIT(A) that only a reasonable estimate of the benefit derived from such purchases should be added back, aligning with the jurisdictional High Court's view in similar cases.

2. Disallowance under Section 40A(3):
The AO made an additional disallowance under Section 40A(3) for alleged cash commission payments at 3% of the purchase amount, as admitted by the third party during search proceedings. However, the Tribunal found that such disallowance was unwarranted because there was no entry for the commission expense in the assessee's books of account. Furthermore, since the AO did not treat the commission payment as unexplained expenditure under Section 69C, the consequent addition under Section 40A(3) was deemed unjustified. Thus, the Tribunal deleted the addition, emphasizing that disallowance under Section 40A(3) requires an actual claim of expenditure in the books.

3. Levy of Interest under Sections 234A, 234B, and 234C:
The assessee contested the levy of interest under Sections 234A, 234B, and 234C, which relate to defaults in furnishing return of income, payment of advance tax, and deferment of advance tax, respectively. However, the judgment did not provide specific details or a separate ruling on this issue, suggesting that it was not a central point of contention in the appeals.

4. Principles of Natural Justice and Procedural Fairness:
The assessee argued that the lower authorities erred by not considering various submissions and failing to provide an opportunity for a virtual hearing. The Tribunal's decision implicitly addressed these concerns by thoroughly examining the evidence presented and ensuring that the principles of natural justice were upheld through its detailed analysis and rationale for upholding or dismissing the disallowances.

Conclusion:
The appeals were partly allowed for the assessee, with the Tribunal upholding the CIT(A)'s decision to restrict the disallowance of bogus purchases to 5% and deleting the disallowance under Section 40A(3). The Revenue's appeals were dismissed, as the Tribunal found no merit in the arguments for a 100% disallowance of the purchase amount. The judgment emphasized the importance of substantiating purchases and the applicability of disallowance provisions based on actual entries in the books of account.