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2024 (6) TMI 573 - AT - Income TaxEstimation of income - bogus purchases - CIT(A) restricted addition to 5% - HELD THAT - In the case in hand, due to clandestine activities of the assessee, he does not deserve any leniency and it appears reasonable to apply GP @5% of the said bogus purchases to bring the additional income on bogus purchases to tax which the assessee may have made by purchasing the goods from grey market. We are not inclined to disturb the findings arrived at by the impugned order passed by learned CIT(A), who has directed the AO to apply GP rate @5% on the said bogus purchases. Addition of interest u/s 36(1)(iii) - assessee paid interest on borrowed funds and by giving interest free advances, undue benefits to the concerned parties was provided to reduce tax liability - HELD THAT - The assessee intended to expand his business, which is his fundamental right under Article 19(1)(g) of the Indian Constitution, which provides right to practice any profession or to carry on any occupation, trade or business to all citizens subject of course to the restrictions that can be imposed U/A 19(2) of the constitution by the state. Since, the advances were made out of interest bearing funds, then the allowability of interest should be examined from the angle of commercial expediency. The Assessing Officer cannot be justified in view of aforesaid scenario in rejecting the appellant s explanation that the aforesaid advances were not intended for the purpose of business expediency. Learned CIT(A) was thus, right in deleting the addition of Rs. 13,08,000/ of u/s.36(1)(iii) of the Act, in view of commercial expediency with respect of the expansion of the assessee s business. The facts of Phatan Sugar Work Ltd. 1993 (8) TMI 41 - BOMBAY HIGH COURT referred by the revenue are not attracted to the facts of the instant case, hence for no avail to the revenue. The second point is also determined accordingly in negative against the revenue.
Issues Involved:
1. Reduction of addition to 5% of total bogus purchases. 2. Deletion of addition of interest u/s 36(1)(iii) of the Act. Summary: Issue 1: Reduction of Addition to 5% of Total Bogus Purchases The appeal was filed against the impugned order where the CIT(A) reduced the addition to 5% of the total bogus purchases of Rs. 5,76,30,455/- as against the 100% addition made by the Assessing Officer (AO). The AO found that the assessee derived income from business and received purchases from 25 entities declared as non-genuine by the Maharashtra Sales Tax Department. The AO made a 100% addition of Rs. 5,76,30,455/- as non-genuine bogus purchases from hawala parties and disallowed interest paid on the diversion of borrowed funds u/s 36(1)(iii) of the Act. The CIT(A), however, restricted the addition to 5% based on the order of ITAT Mumbai in ITA No. 5917/MUM/2018 for A.Y. 2011-12, which observed that in the case of ferrous and non-ferrous items, the profit is very meager ranging from 2% to 4%. The Tribunal upheld the CIT(A)'s decision, stating that the 100% addition was unreasonable and excessive and that a GP rate of 5% was reasonable to bring the additional income on bogus purchases to tax. Issue 2: Deletion of Addition of Interest u/s 36(1)(iii) of the ActThe AO disallowed interest paid on the diversion of borrowed funds u/s 36(1)(iii) of the Act and calculated interest @12% on the interest-free advance of Rs. 1,09,00,000/- amounting to Rs. 13,08,000/-. The CIT(A) deleted this addition, stating that the advances were trade advances given for commercial expediency with the intention to expand the assessee's business. The Tribunal agreed with the CIT(A), citing the Supreme Court's decision in S.A. Builders vs. CIT, which held that if the interest-free advances are given for commercial expediency, the assessee is entitled to a deduction of interest paid. The Tribunal found that the advances were made for commercial expediency and that the AO was not justified in making the addition of Rs. 13,08,000/- u/s 36(1)(iii) of the Act. Conclusion:The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to restrict the addition to 5% of the total bogus purchases and to delete the addition of interest u/s 36(1)(iii) of the Act. Order pronounced on 11.06.2024.
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