2017 (3) TMI 813 - AT - Income Tax

Bogus purchases - Held that - The assessee has failed to place on record any material evidence to controvert the findings of the learned CIT(A). In this view of the matter, we uphold the order of the CIT(A) on these issues of deleting the addition made on account of consideration for bogus purchases and in bringing to tax in the assessee s hands the profits embedded in the bogus purchases @ of 12.5% of the cost of the said purchases amounting to ₹ 28,07,058/- since the direct one to one relationship /nexus between the said purchases and utilisation thereof have not been established by the assessee either before us or the learned CIT(A). Addition under section 41(1) - Held that - In the case on hand, admittedly there were 25 creditors of the assessee to whom ₹ 1,52,29,070/- was outstanding for more than three years and in some cases 8-9 years. According to the assessee, it was unable to pay these creditors due to certain liquidity problems, but the said amounts were undoubtedly acknowledged by the assessee as payable to these parties as reflected in its Balance Sheet as on 31.03.2011. It is seen that many of the creditors had also initiated legal proceedings for recovery of their outstanding amounts and in some cases there was disputes as to the amounts payable/receivable. In our view, in this factual matrix of the case on hand it is clear that it was neither a case of cessation nor remission of liability and therefore the AO had wrongly invoked the provisions of section 41(1) of the Act. Prior period expenses - Held that - No reason to interfere with the finding rendered by the learned CIT(A) in allowing the assessee s claim for allowing its claim of prior period expenses as the appellant s business of construction and this has to be treated as normal business practice which appellant was following in the earlier years

Summary

Issues Involved:
1. Bogus Purchases
2. Addition under Section 41(1) of the Income Tax Act (Cessation of Liability)
3. Prior Period Expenses

Issue-wise Detailed Analysis:

1. Bogus Purchases:
The Revenue challenged the deletion of ?28,07,058/- added for bogus purchases, while the assessee contested the addition of 12.5% of the bogus purchases as profit. The Assessing Officer (AO) had treated the purchases from M/s. Chirag Steel Centre as non-genuine based on information from the Sales Tax Department, which indicated that the supplier was a bogus dealer. The CIT(A) deleted the full addition but upheld the addition of 12.5% of the purchase value as profit, following the Gujarat High Court's decision in CIT vs. Simit P. Sheth. The Tribunal found that the assessee failed to establish a direct relationship between the purchases and their utilization. Consequently, the Tribunal upheld the CIT(A)'s decision to tax the profit element embedded in the bogus purchases at 12.5%, amounting to ?3,50,882/-, and dismissed the appeals of both the Revenue and the assessee on this issue.

2. Addition under Section 41(1) of the Income Tax Act (Cessation of Liability):
The Revenue contested the deletion of ?1,52,29,070/- added under Section 41(1) for cessation of liability, arguing that the liabilities were barred by limitation. The AO had invoked Section 41(1) on the grounds that the liabilities were outstanding for 8-9 years without payment. The CIT(A), relying on the Gujarat High Court's decision in CIT vs. G.K. Patel & Co. and the Delhi High Court's decision in CIT vs. Jain Exports Pvt. Ltd., held that the addition was unsustainable as there was no declaration by the assessee of non-payment intention, nor any remission by the creditors. The Tribunal upheld the CIT(A)'s decision, noting that the liabilities were acknowledged in the balance sheet and many creditors had initiated legal proceedings for recovery. Thus, the Tribunal dismissed the Revenue's appeal on this issue.

3. Prior Period Expenses:
The Revenue challenged the deletion of ?12,66,805/- disallowed by the AO as prior period expenses. The AO disallowed these expenses because they did not pertain to the year under consideration. The CIT(A) allowed the expenses, citing the nature of the assessee's construction business, where delays in bill receipts are common, and following the Delhi High Court's decisions in Jagatjit Industries Ltd. and SMCC Construction (India) Ltd. The Tribunal found no reason to interfere with the CIT(A)'s decision, as the Revenue failed to provide contrary evidence. Therefore, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal on this issue.

Conclusion:
The Tribunal dismissed both the Revenue's and the assessee's appeals, upholding the CIT(A)'s decisions on all issues. The Tribunal found that the CIT(A) had appropriately addressed the issues of bogus purchases, cessation of liability under Section 41(1), and prior period expenses, following relevant judicial precedents and considering the facts of the case. The order was pronounced in the open court on 15th March 2017.