2020 (10) TMI 1084 - AT - Income Tax

Bogus purchases - enquiries from the VAT Department - AO also found that both the parties have not reported any sales to the assessee in their respective returns filed to the VAT Department for the sales made to the assessee - HELD THAT - We are disallowing the purchases but on the other side we are treating the sales of such purchases as genuine - none of the authorities below has doubted on the sales made by the assessee against such purchases. We find force in the contention of the Learned AR that an element of profit can be added to the total income of the assessee prevent the loss if any to the revenue on account of such purchases. In the construction activity, it is the prevailing practice that the assessee makes purchases of the raw materials from the grey market and further made bogus purchases to record the same in the books of accounts. Accordingly, we don t incline to disallow purchases treating them as bogus in the given facts and circumstances. Determine the element of profit embodied in such purchases - In the interest of justice and fair play and to prevent any leakage to the revenue, we are of the view that the justice will be served the assessee as well as to the revenue if income of the assessee is enhanced by 5% on such purchases. Accordingly, we direct the AO to make the addition @ 5% on such bogus purchases. Addition on account of commission expenses - HELD THAT - AO was aware of all the details of the commission agents such as the addresses, PAN but he has not taken any confirmation from such agents about the genuineness of the commission received by them. The assessee by furnishing the requisite details about the commission agent shifted its onus upon the AO to prove that commission expenses was not incurred in the course of the business. AO was under the obligation to provide the opportunity for the cross-examination of the statement obtained from the flat owners to the assessee as well as to the commission agents before arriving at the conclusion that there was no involvement of the commission agents in selling the flats to the flat owners. In our considered view, the statement obtained at the back of the assessee of the flat owners cannot be a ground for making the disallowance in the given facts and circumstances - Decided in favour of assessee. Addition on account of on money - random enquiries from ten persons who have purchased flats/shops in the projects developed by the assessee, found that the buyers have made the payment for the purchase of the flats/shops through cash and cheques in the ratio of 40% to 50% - HELD THAT - AO in the remand proceedings vde letter dated 16thJune 2014 has verified all the ten owners of the flats/shops in response to the summon issued under Section 131 of the Act and reached to the conclusion that there was no cash involved in the purchase of flats/shops. Assessee has not received any cash against the sale of the flats/shops from the buyer. Accordingly, we do not find any infirmity in the order of the Learned CIT(A) and, thus, we decline to interfere in his order. Hence, the ground of appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Bogus Purchases
2. Commission Expenses
3. On Money

Issue-wise Detailed Analysis:

1. Bogus Purchases:
The first issue raised by the assessee is that the CIT(A) erred in confirming the addition made by the AO amounting to ?62,51,247/- as bogus purchases. The assessee, a partnership firm engaged in building construction and development, claimed to have made steel purchases from M/s Bharat Trading Co and M/s Laxmi Enterprises. However, the AO, upon verification, found that these parties were not available at the given addresses, their VAT registrations were canceled, and no sales to the assessee were reported in their VAT returns. Consequently, the AO treated these purchases as bogus and disallowed them, adding the amount to the assessee's total income. The CIT(A) upheld this addition, noting discrepancies in the affidavits and confirmations provided by the assessee and emphasizing the information from the Sales Tax Department that no sales were made to the assessee by these parties.

Upon appeal, the Tribunal acknowledged that while the purchases appeared bogus, disallowing them entirely would lead to double addition, as the assessee had shown these purchases in its stock register and consumed them in construction activities. Therefore, the Tribunal directed the AO to add only 5% of the bogus purchases to the assessee's income, considering it a reasonable profit margin.

2. Commission Expenses:
The second issue pertains to the addition of ?6,01,000/- on account of commission expenses. The assessee claimed to have paid commission to four parties for arranging buyers for flats. However, the AO disallowed these expenses, as the assessee could not produce the commission agents, and statements from two flat owners indicated no involvement of commission agents. The CIT(A) confirmed this disallowance, noting the assessee's failure to establish the business expediency of the commission payments and the lack of evidence of regular business activities by the commission agents.

The Tribunal, however, found that the AO did not provide the assessee an opportunity to cross-examine the flat owners whose statements were used to disallow the commission expenses. The Tribunal emphasized that the AO had the details of the commission agents and could have verified the genuineness of the commission payments directly. Therefore, the Tribunal allowed the assessee's appeal, reversing the disallowance of commission expenses.

3. On Money:
The third issue raised by the Revenue is the deletion of the addition of ?12,62,76,167/- on account of "on money." The AO, based on statements from ten flat/shop buyers, concluded that the assessee received 40% of the total consideration in cash, which was not accounted for in the books. Consequently, the AO added this amount as undisclosed income. However, during the remand proceedings, the AO recorded statements under oath from these buyers, who denied paying any "on money." The CIT(A) deleted the addition, noting that the basis for the AO's calculation of "on money" no longer existed, as the buyers denied making any cash payments.

The Tribunal upheld the CIT(A)'s decision, emphasizing the AO's remand report, which confirmed that no cash payments were made by the buyers. Therefore, the Tribunal dismissed the Revenue's appeal on this issue.

Conclusion:
In conclusion, the Tribunal allowed the assessee's appeal regarding bogus purchases and commission expenses, while dismissing the Revenue's appeal on the issue of "on money." The order was pronounced in the Court on 19th October 2020 at Ahmedabad.