2018 (12) TMI 1385 - AT - Income Tax

Addition of bogus purchases - concerned parties were not available at the given address as found by the department during the post search enquiries - Held that - In the present case no blank cheque books and vouchers of the alleged four concerns have been found. Therefore, the decision in the case of N.K. Proteins Ltd. 2003 (1) TMI 228 - ITAT AHMEDABAD-C cannot be applied to the facts of the present case. Similarly, in the case of Vijay Proteins Ltd. 1996 (1) TMI 144 - ITAT AHMEDABAD-C the purchases were made through brokers and such documents relating to the brokers were produced for the first time before the CIT(A) and it was also found that there was close link between the assessee company and one Mr. P. Therefore, the above decision relied on by the ld. DR is also not applicable to the facts of the present case. In view of the above discussion, we do not find any infirmity in the order of the CIT(A) deleting the above addition on account of the purchase from the four parties. Accordingly, the order of the CIT(A) is upheld and the ground of appeal No.2 of the Revenue is dismissed. Addition invoking the provisions of section 40A(2)(b) - Addition on account of disallowance of salary - Held that - Smt. Shibani Khosla was receiving salary and bonus from assessment year 2006-07 to 2010-11 ranging from ₹ 3,74,000/- during financial year 2006-07 which has gone up to ₹ 7,80,000/- in assessment year 2010-11. Even in the assessment order while the A.O. mentions that the kind of work rendered by Mrs. Khosla would have fetched her ₹ 3000/- to 5000/- per month in an industrial area of Ghaziabad. Thus, the A.O is not saying that Mrs. Khosla has not done any work for the assessee company. Therefore, he could not have disallowed the entire salary. Since the ld. CIT(A) after considering the totality of the facts of the case has restricted ₹ 1,80,000/- as against ₹ 4,20,000/- disallowed by the A.O., we are of the considered opinion that the order of the ld.CIT(A) is justified under the facts and circumstances of the case. - Decided against revenue

Summary

Issues Involved:
1. Disallowance of purchases treated as bogus.
2. Disallowance of salary paid to a related party under section 40A(2)(b) of the IT Act.

Detailed Analysis:

1. Disallowance of Purchases Treated as Bogus:

The Assessing Officer (AO) disallowed purchases amounting to ?2,79,80,857 made from four parties, citing non-existence of these entities at the given addresses during post-search enquiries. The AO relied on reports from the Investigation Wing and the Ward Inspector, which indicated these parties could not be located and might never have existed. Payments to these parties were made unusually quickly compared to other entities. The AO asked the assessee to prove the identity, creditworthiness, and genuineness of the transactions, but the assessee's explanations and documents were deemed insufficient.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the AO did not refer to any seized documents indicating adverse conclusions about the suppliers. The CIT(A) emphasized that the assessee had provided substantial evidence, including purchase invoices, ledger accounts, banking transaction records, C Forms, and VAT returns, all supporting the genuineness of the purchases. The CIT(A) concluded that the AO's disallowance was based on suspicion due to non-traceability of suppliers, which is not a valid basis for disallowance without disproving the provided documents.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, agreeing that the assessee had discharged the initial burden of proof by providing comprehensive documentation. The ITAT found no adverse evidence against the documents submitted by the assessee and noted that the AO's reliance on the non-traceability of suppliers was insufficient for disallowance. The Tribunal emphasized that the payments were made through banking channels and the goods were utilized in the manufacturing process, thus supporting the assessee's claims.

2. Disallowance of Salary Paid to a Related Party:

The AO disallowed the entire salary of ?4,20,000 paid to Smt. Shibani Khosla, the sister of the company's director, under section 40A(2)(b) of the IT Act, on the grounds that she could not justify the salary during her examination under section 131. The AO argued that the salary was excessive for the administrative work she claimed to perform.

The CIT(A) partially upheld the AO's decision, allowing a salary of ?15,000 per month (totaling ?1,80,000) while disallowing the remaining amount. The CIT(A) acknowledged that while the assessee failed to provide sufficient evidence to justify the entire salary, it was not unreasonable to believe that Smt. Khosla performed some administrative duties, given her relationship with the director.

The ITAT upheld the CIT(A)'s decision, agreeing that the AO's complete disallowance was unjustified. The Tribunal noted that the AO himself acknowledged that Smt. Khosla performed some work and that a partial allowance of the salary was reasonable under the circumstances.

Conclusion:

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The Tribunal found that the assessee had adequately substantiated the purchases and that the partial allowance of the salary paid to the related party was justified. The decision was pronounced in the open court on 12.12.2018.