2025 (1) TMI 862 - AT - Income Tax

Addition u/s 69C - bogus purchases - CIT(A) deleted addition - HELD THAT - As before the First Appellate Authority the assessee provided a complete list of fixed assets added to the BOA during the year under consideration along with their invoices whereupon remand report was called for and in the remand report those documents being the proof of purchase made by the assessee has been accepted. Hence, the issue was decided in favour of the assessee by deleting the addition by the Ld. CIT(A) which in our considered opinion is just and proper so as not to warrant interference. This issue as raised by the revenue, thus, is found to be frivolous and dismissed. Disallowance @ 10% of other expenses - CIT(A) deleted addition - HELD THAT - Taking into consideration the remand report furnished by the AO where the invoices have been verified on test check basis and found in correct order, the said other expenses has been deleted by the Ld. CIT(A) which is found to be just and proper so as not to warrant interference. Hence this ground of appeal rejected. Disallowance of foreign exchange loss - Addition done for the reason that the said loss was on account of foreign exchange transaction related to import and export transactions and no hedging had been done whereas the assessee s case is this that hedging cost sometime work more than the exchange earning - HELD THAT - AO has not raised any doubt on the calculation of such foreign exchange loss amount and in that view of the matter relying on the judgment passed in the case SA Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT and Dalmia Cement (Bharat) Ltd. 2001 (9) TMI 48 - DELHI HIGH COURT holding that when it has been established that there was nexus between expenditure and the purpose of business, revenue is not justified in claiming to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the role to decide how much is the reasonable expenditure, having regard to the facts and circumstances of the case and no businessmen can be compelled to maximize its profits, CIT(A) found substance in the case made out by the assessee and deleted the addition made by the AO which in our considered view is just and proper so as not to warrant interference. This ground of appeal filed by the revenue is found to be devoid of merit and hence dismissed.

1. ISSUES PRESENTED and CONSIDERED

The judgment involves the following core legal questions:

Whether the addition under Section 69C of the Income Tax Act, 1961, amounting to Rs. 6,80,46,732/- for alleged bogus purchases was justified?
Whether the disallowance of 10% of other expenses amounting to Rs. 3,15,04,500/- under Section 37(1) of the Income Tax Act was appropriate?
Whether the disallowance of foreign exchange loss of Rs. 96,70,990/- was legally sustainable?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 69C for Alleged Bogus Purchases

Relevant Legal Framework and Precedents: Section 69C of the Income Tax Act deals with unexplained expenditure, where the taxpayer is unable to substantiate the source or nature of expenditure.
Court's Interpretation and Reasoning: The court found that the assessee had provided a complete list of fixed assets and invoices, which were accepted in the remand report by the Assessing Officer (AO).
Key Evidence and Findings: The remand report confirmed the authenticity of the purchases based on the documentation provided by the assessee.
Application of Law to Facts: The court applied Section 69C and concluded that the evidence provided was sufficient to substantiate the purchases, thus negating the addition.
Treatment of Competing Arguments: The revenue's argument that the purchases were bogus was dismissed as frivolous due to lack of evidence contradicting the assessee's documentation.
Conclusions: The addition under Section 69C was unjustified and was correctly deleted by the CIT(A).

Issue 2: Disallowance of Other Expenses under Section 37(1)

Relevant Legal Framework and Precedents: Section 37(1) allows deduction of expenses incurred wholly and exclusively for business purposes.
Court's Interpretation and Reasoning: The court noted that the AO's ad hoc disallowance lacked basis as the expenses were verified and found in order.
Key Evidence and Findings: Detailed invoices were provided by the assessee, and the AO's remand report verified these on a test-check basis.
Application of Law to Facts: The court found that the expenses were legitimate business expenses and should not have been disallowed.
Treatment of Competing Arguments: The revenue's claim of unverifiable expenses was refuted by the detailed documentation and verification.
Conclusions: The disallowance of expenses was unjustified, and the CIT(A)'s decision to delete it was upheld.

Issue 3: Disallowance of Foreign Exchange Loss

Relevant Legal Framework and Precedents: The treatment of foreign exchange loss is guided by AS-11 and Section 43AA, which allow such losses to be claimed.
Court's Interpretation and Reasoning: The court emphasized that the loss was related to business transactions and was claimable under the relevant accounting standards.
Key Evidence and Findings: The AO did not dispute the calculation of the foreign exchange loss, and the assessee provided a rationale for not hedging.
Application of Law to Facts: The court applied the principles from relevant case law, affirming that the loss was a legitimate business expense.
Treatment of Competing Arguments: The revenue's argument was based on the absence of hedging, which the court found irrelevant to the legitimacy of the loss.
Conclusions: The disallowance of foreign exchange loss was not warranted, and the CIT(A)'s deletion of the addition was justified.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The issue as raised by the revenue, thus, is found to be frivolous and dismissed."
Core Principles Established: The court reaffirmed the principle that substantiated business expenses, including foreign exchange losses, are deductible under the Income Tax Act.
Final Determinations on Each Issue: The court dismissed the revenue's appeal on all grounds, upholding the CIT(A)'s decisions to delete the additions and disallowances.

In conclusion, the appellate tribunal found the revenue's appeal to be without merit and dismissed it, affirming the CIT(A)'s decisions in favor of the assessee on all contested issues.

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