2017 (4) TMI 107 - AT - Income Tax

Bogus purchases - CIT-A retaining part addition - Held that - the assessee has made purchases from three parties and these three parties were declared as bogus Hawala dealers and the assessee was unable to produce these three parties before the Assessing Officer. The assessee has made payment by cheque to these parties and thus the purchases have been made by the assessee. Moreover, the assessee has sold this much goods which he has purchased from the above parties therefore, it is rightly concluded that the purchases shown by the assessee is not in doubt, but the assessee might have not purchased from these parties who he might have purchased it from the grey market. Therefore, we are of the view that entire purchases cannot be added to the total income of the assessee Addition on account of capitalization of interest in respect of capital expenses incurred - Held that - As seen from the record that credit obtained by the assessee firm Canara Bank has been utilized for financing overseas export. Similarly, cash credit facility of ₹ 36 lakh have been utilized for day to day business. Therefore, the entire interest expenditure cannot be disallowed. The assessee himself has capitalized the expenditure of ₹ 6,96,075/- as per the working given by the assessee. The CIT(A) has not pointed out any defect in the working given before CIT(A) therefore, we direct the AO to capitalize interest expenditure of ₹ 6,96,075/- in the result ground of assessee s appeal is allowed. Disallowance of Administration and Selling expenses - Held that - The total administrative expenses for the year ended 31/03/2010 was ₹ 1,60,40,916/-. This year the expenditure has increased. The total expenditure had increased by 10% as against this sales have increased by 72.93%. All the major expenses have been shown under the heading Administration and selling expenses . Such expenses are advertisement and sales promotion freight on sales, freight and other commission on sales. Thus we are of the view that there is no scope of estimating the expenditure, therefore, we deleted the same. - Decided in favour of assessee

Summary

Issues:
1. Addition of unexplained investment in purchases
2. Capitalization of interest on capital expenses
3. Treatment of expenses related to work in progress

Issue 1: Addition of unexplained investment in purchases
The Assessing Officer added ?18,58,622 as unexplained investment in purchases from three parties. The assessee failed to produce these parties for verification, leading the AO to consider the purchases as questionable. The CIT(A) partly allowed the appeal, citing previous court decisions that only the profit element embedded in such purchases should be added to income, not the entire purchase price. The Hon'ble Gujarat High Court's decision in similar cases was referenced. The Tribunal upheld the CIT(A)'s decision, emphasizing that the purchases were not entirely bogus but might have been made from sources other than those claimed. The Tribunal approved the adoption of a 12.5% profit rate, reducing the addition to ?2,32,328.

Issue 2: Capitalization of interest on capital expenses
The AO questioned the capitalization of interest on work in progress, noting a significant increase in capital work in progress and loans. The assessee explained that the funds were used for overseas export sales and day-to-day business, proposing to capitalize ?6,96,075. The Tribunal agreed with the assessee, directing the AO to capitalize this amount, as the funds were utilized for business purposes.

Issue 3: Treatment of expenses related to work in progress
The AO disallowed ?10 lakh of expenses related to work in progress, capitalizing them. The CIT(A) allowed 10% of such expenses to be treated as capital expenditure, sustaining the addition of ?5,21,358. The assessee argued that the expenses were closely related to the increase in turnover, with no scope for estimation. The Tribunal agreed with the assessee, deleting the disallowed amount, as the expenses were directly linked to the rise in sales.

In conclusion, the Tribunal partly allowed the assessee's appeal, addressing each issue comprehensively and applying relevant legal precedents to determine the appropriate treatment of unexplained purchases, interest capitalization, and work in progress expenses. The judgment emphasized the need for a detailed examination of transactions and expenses to ensure accurate income assessment.