2022 (10) TMI 1218 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - As in respect of bogus purchases the assessee had not produced an supporting documents in the form of delivery challan, lorry receipt stock register in support of such purchases, therefore we don t find any reason to interfere in the decision of ld. CIT(A) in restricting such purchases to the extent of 12.5% of the purchase amount. We restrict the addition in respect of purchases made from Abishek Enterprises also to the extent of 12.5% of such purchases. Sundry creditors even during remand report proceedings the assessee has failed to make any compliance in spite of opportunity provided by the ld. CIT(A). The assessee had failed to furnish the confirmation from the sundry creditors. These facts demonstrate that the assessee had failed to furnish even basic document like confirmation from the creditors before the lower authorities, therefore, we don t find any reason to interfere in the decision of ld. CIT(A). Disallowance out of household expenses and other miscellaneous expenses we find that the A.O has not substantiate the reason for such disallowance with relevant break up and defect in the nature of detail submitted by the assessee during the course of assessment proceedings, therefore, we consider that decision of ld. CIT(A) in sustaining these addition is not justified. Accordingly, we direct the A.O to delete the addition on account of low household withdrawal and on account of discrepancy in expenses. Appeal of the assessee is partly allowed.

Summary

Issues:
1. Validity of order based on Circular No. 19/2019
2. Estimation of profit from alleged Hawala purchases
3. Disallowance of sundry creditors and expenses
4. Ad hoc additions on household withdrawal and expenses
5. Jurisdictional ITAT and High Court ratio application
6. Impact of additions on Gross Profit rate
7. Theory of contemporary correlation

Issue 1: Validity of Order based on Circular No. 19/2019
The appellant contended that the order was against Circular No. 19/2019, which mandated the use of a Document Identification Number (DIN) in communications from income-tax authorities. Failure to include DIN rendered the communication invalid. However, the Tribunal did not find merit in this argument.

Issue 2: Estimation of Profit from Alleged Hawala Purchases
The Assessing Officer (A.O) disallowed a significant amount for alleged Hawala purchases due to lack of evidence and compliance by the parties involved. The CIT(A) estimated profits at 12.50% of the alleged bogus purchases based on information from the sales tax department's website. The Tribunal upheld the CIT(A)'s decision regarding the estimation of profits, considering the lack of supporting documents from the appellant.

Issue 3: Disallowance of Sundry Creditors and Expenses
The A.O disallowed unexplained sundry creditors and various expenses due to lack of compliance and supporting documentation. The CIT(A) confirmed these disallowances as the appellant failed to provide necessary confirmations and details. The Tribunal found no reason to interfere with the CIT(A)'s decision on these disallowances.

Issue 4: Ad Hoc Additions on Household Withdrawal and Expenses
The A.O made ad hoc additions on household withdrawal and various expenses, which the CIT(A) upheld as the appellant did not provide detailed submissions. However, the Tribunal found the CIT(A)'s decision unjustified and directed the A.O to delete these additions due to lack of substantiation.

Issue 5: Jurisdictional ITAT and High Court Ratio Application
The appellant argued that only the profit element from alleged bogus purchases should be taxed, not the entire amount. The Tribunal considered this argument in light of jurisdictional ITAT and High Court decisions but did not find sufficient grounds to deviate from the CIT(A)'s decision on the matter.

Issue 6: Impact of Additions on Gross Profit Rate
The appellant raised concerns about the impact of additions on the resulting Gross Profit rate, deeming it unrealistic in normal business activities. However, the Tribunal did not find substantial evidence to support this argument.

Issue 7: Theory of Contemporary Correlation
The appellant contended that the theory of contemporary correlation should have been applied, highlighting the inevitable consequences of treating imaginary situations as real. The Tribunal considered this argument but did not find it compelling enough to alter the decision.

In conclusion, the Tribunal partly allowed the appeal, making adjustments to the additions on household withdrawal and expenses while upholding other decisions regarding Hawala purchases, sundry creditors, and profit estimations.