2017 (5) TMI 915 - AT - Income Tax

Estimation of possible profit out of purchase made through non-genuine parties - Held that - We found that in the instant case stock and sales and the quantity-wise stock and purchases / sales were tallied to the last KG therefore, we directed to take the A.O. 12% of the sales as gross profit accordingly re-compute the business of the assessee. We find that CIT(A) has directed to take the G.P. @ 10% of the sales but to cover up all the decisions of the books of accounts. We modify the order of the CIT(A). We direct him to take the 12.5% sales gross profit accordingly the Departmental appeal is partly allowed. Outstanding Sundry Creditors - addition u/s 41 - Held that - We find that the A.O. observed that the assessee ask to fail the confirmation in respect of outstanding Sundry Creditors but the assessee failed to file the confirmation letter the non-filing confirmation as the supplier were from abroad and the Assessing Officer was of a view non-filing of confirmation attracts provision of Section 41(1). We find that in the case of ITAT Mumbai in case of Maharashtra State Co-operative Consumer Federation 2011 (8) TMI 258 - ITAT MUMBAI wherein it is held that in absence of contrary material placed by the Revenue for no such liability exist in the books of account or the assessee has obtain any benefit by case or any other manner merely because said liability was more than 5 years old it cannot be said that there was cessation of liability. Therefore, we are of the view that CIT(A) is justified in deleting the same. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(3A) of the Income Tax Act.
2. Addition of bogus purchases.
3. Confirmation of outstanding creditors under Section 41(1) of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 40A(3A) of the Income Tax Act:
The assessee contested the disallowance of ?43,63,221/- made under Section 40A(3A) of the IT Act. The CIT(A) sustained this disallowance, but the assessee argued that no separate disallowance was necessary since the books of account were rejected and income was computed on an estimated basis. The CIT(A) had directed the AO to adopt a gross profit rate of 10% of sales, thereby making a separate disallowance under Section 40A(3A) unwarranted. The tribunal ultimately accepted the assessee's contention that once the books are rejected and income is estimated, no separate disallowance under Section 40A(3A) should be made.

2. Addition of Bogus Purchases:
The department contended that the CIT(A) erred in deleting the addition of ?2,13,99,331/- for bogus purchases, arguing that detailed enquiries had established the purchase bills as bogus. The AO had found that cheques issued to M/s Navkar Enterprises were encashed by various entities, indicating bogus purchases. The CIT(A) noted that while the purchases were bogus, the sales and stock were not disputed. Therefore, the CIT(A) directed to estimate the income by taking 10% of sales as gross profit. The tribunal modified this to 12.5%, citing the Gujarat High Court judgment in CIT vs. Simit P. Sheth, which held that only the profit element embedded in such purchases should be added to the income, not the entire purchase amount.

3. Confirmation of Outstanding Creditors under Section 41(1):
The AO added ?15,38,837/- against five parties as the assessee failed to file confirmations for certain creditors outstanding as of 31st March 2009. The CIT(A) deleted this addition, stating that the AO had not shown that any benefit in cash or kind was obtained by the assessee against these creditors. The tribunal upheld the CIT(A)'s decision, referencing the ITAT Mumbai case of Maharashtra State Co-operative Consumer Federation, which held that merely because a liability is old does not mean it ceases to exist without contrary evidence.

Conclusion:
The tribunal partly allowed the department's appeals by modifying the CIT(A)'s order to estimate the gross profit at 12.5% instead of 10%. The tribunal dismissed the department's appeal regarding the addition of outstanding creditors under Section 41(1) and upheld the CIT(A)'s deletion of the addition. The assessee's appeal regarding disallowance under Section 40A(3A) was dismissed as it was not pressed. The judgment was pronounced on 18th May 2017.