2017 (11) TMI 1138 - AT - Income Tax

Disallowance u/s 69C on account unexplained purchases - CIT-A restricting the disallowance to 15% against the peak credit made by AO detected during the course of survey u/s 133A of the Act - Held that - Admittedly, there cannot be sale without purchases. Admittedly, in such type of cases, there is no option but to estimate the profit which depends upon the subjective/objective approach of an individual and the material facts available on record. In the appeal for Assessment Year 2007-08, the Ld. Assessing Officer disallowed ₹ 23,34,801/- on account of alleged bogus purchases by invoking the provisions of section 69C of the Act on the plea that the assessee could not substantiate the genuineness of the purchases and thus the income was assessed at ₹ 1,15,53,461/-. Likewise, for Assessment Year 2008-09, the income was assessed at ₹ 1,27,79,350/- and for Assessment Year 2009-10, it was assessed at ₹ 4,25,21,584/-. For Assessment Year 2010-11, the income was assessed at ₹ 6,31,87,980/-. The Ld. Assessing Officer took the year-wise peak credit as has been mentioned in the respective assessment order. It is noted that while adjudicating the issue, the Ld. Commissioner of Income Tax (Appeal) sought remand report from the Ld. Assessing Officer and the same was duly considered. Admittedly, the necessary documents just like purchase bills, sale invoices, process flow chart, contract agreements, inspection notes inward and outward register of the material and the disputed purchases were debited to sewage treatment plant and the authenticity of the documents was not disputed by the Ld. Assessing Officer. Thus, we find no infirmity in the conclusion of the Ld. Commissioner of Income Tax (Appeal), because, the assessee has proved consumption, consequently, this ground of the Revenue is without any merit, therefore, dismissed. Allow deduction u/s 80IA of the Act in respect of addition made u/s 69C - Crux of arguments on behalf of the assessee is that any disallowance of purchases made in the assessment order would increase in profit and gains eligible business as a result of which the assessee would be entitle to claim the increased deduction u/s 80IA(4)- Held that - We find that finally, the Assessing Officer was directed to re-compute the profit and gains of STP Unit. We may add here that considering the language of section 80IA, the Ld. Assessing Officer is directed to examine the factual matrix and also whether the assessee has satisfied/fulfilled the conditions enumerated in the section then decide in accordance with law. This ground of the Revenue is allowed for statistical purposes.

Issues Involved:
1. Restriction of disallowance under Section 69C of the Income Tax Act, 1961 on account of unexplained purchases.
2. Allowability of deduction under Section 80IA of the Income Tax Act, 1961 on profit and gains of eligible business as a result of disallowance of purchases.

Detailed Analysis:

1. Restriction of Disallowance under Section 69C:

The Revenue challenged the First Appellate Authority's decision to restrict the disallowance of unexplained purchases to 15% against the peak credit detected during a survey under Section 133A of the Income Tax Act. The Departmental Representative (DR) defended the addition made by the Assessing Officer (AO), while the counsel for the assessee supported the First Appellate Authority's order.

The Tribunal examined various judicial precedents to reach a conclusion. The Hon'ble Gujarat High Court in *Sanjay Oilcakes Industries vs CIT* held that the sellers were not traceable, and the purchases were likely inflated. The Tribunal concurred with the Commissioner of Income-tax (Appeals) that a 25% disallowance was reasonable.

In *CIT vs Bholanath Poly Fab. Pvt. Ltd.*, the Tribunal concluded that the purchases were not bogus, but the profit margin embedded in such purchases would be taxed. The Tribunal followed this reasoning, restricting the disallowance to the profit element rather than the entire purchase amount.

The Tribunal also referenced *CIT vs Vijay M. Mistry Construction Ltd.*, where the disallowance was restricted to 25% based on the estimate of inflated purchases. The Tribunal noted that an element of guesswork is inevitable in such cases, as observed by the Apex Court in *Kachwala Gems vs JCIT*.

The Tribunal considered the jurisdictional High Court's decision in *CIT vs Ashish International Ltd.*, where the addition was deleted due to the lack of opportunity for cross-examination of the concerned party. Similarly, in *CIT vs Nikunj Exim Enterprises Pvt. Ltd.*, the Tribunal found that the purchases were genuine based on substantial evidence, despite the suppliers not appearing before the authorities.

The Tribunal also cited *CIT vs M.K. Brothers*, where the purchases were deemed genuine despite certain doubtful features. The Tribunal emphasized that suspicion alone cannot replace evidence, as seen in *DCIT vs Rajeev G. Kalathil*.

The Tribunal highlighted that in such cases, the profit estimation depends on the available material facts. For the assessment years in question, the AO disallowed significant amounts on account of alleged bogus purchases. However, the First Appellate Authority found that the necessary documents were provided and the authenticity of the documents was not disputed by the AO.

Therefore, the Tribunal found no infirmity in the First Appellate Authority's conclusion and dismissed the Revenue's ground.

2. Allowability of Deduction under Section 80IA:

The Revenue contested the direction to allow deduction under Section 80IA on the addition made under Section 69C, arguing that the income under Section 69C was not earned from the eligible business activities.

The Tribunal considered the arguments and noted that the issue pertains to the allowability of deduction under Section 80IA(4) on the profit and gains of the eligible business resulting from the disallowance of purchases. The assessee argued that any disallowance would increase the profit and gains of the eligible business, thereby entitling them to an increased deduction under Section 80IA(4).

The Tribunal directed the AO to re-compute the profit and gains of the STP Unit, considering the language of Section 80IA. The AO was instructed to examine the factual matrix and ensure that the assessee fulfilled the conditions enumerated in the section before deciding in accordance with the law.

This ground of the Revenue was allowed for statistical purposes.

Conclusion:

The appeals of the Revenue were partly allowed for statistical purposes, with the Tribunal dismissing the ground related to the restriction of disallowance under Section 69C and allowing the ground related to the deduction under Section 80IA for re-computation. The order was pronounced in the open court on 11/10/2017.

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