2020 (11) TMI 926 - AT - Income Tax

Bogus purchases - estimation of income - HELD THAT - As relying on M/S MOHOMMAD HAJI ADAM CO. 2019 (2) TMI 1632 - BOMBAY HIGH COURT addition in respect of purchases which were found to be bogus in the case of the assessee before them was to be worked out by bringing the G.P. rate of such bogus purchases at the same rate of other genuine purchases. We thus respectfully following the aforesaid judgment of the Hon ble High Court direct the A.O to restrict the addition insofar the bogus/unproved purchases aggregating to ₹ 2,08,51,002/- in the case before us is concerned, by bringing the G.P. rate on the amount of such bogus purchases at the same rate as that of other genuine purchases. Accordingly, for the limited purpose of giving effect to our aforesaid directions the matter is restored to the file of the A.O. Disallowance u/s 40A(3) - cash purchases against which payments in excess of ₹ 20,000/- on any single day were made - HELD THAT - In the case of Western India Bakers (P) Ltd. 2002 (10) TMI 231 - ITAT BOMBAY-E had concluded, that when a provision of law is to be applied, it is to be seen that all the circumstances alliunde to the application of such provision did exist. It was observed by the Tribunal, that if it was not possible to find out how the violation of the provision was done, then addition could not be made on the basis of inferences and surmises. Observing, that in the case before them, as it was not known at what point of time and how the assessee had violated the provisions of Sec. 40A(3), therefore no addition on that count was warranted. Accordingly, in the backdrop of our aforesaid observations, we are of the considered view that as the revenue had failed to dislodge the claim of the assessee, and therein prove to the contrary that he had made payments towards purchase of goods from the open/grey market exceeding the prescribed limits contemplated in Sec. 40A(3), therefore, the disallowance made by the A.O cannot be sustained and is liable to be vacated. Deduction u/s 80IB - Increase in profit due ot disallowance of expenses - HELD THAT - Claim of the assessee for deduction u/s 80IB is in order and the disallowance of the same by the A.O cannot be sustained. Accordingly, the order of the CIT(A) is set aside and the disallowance of the assessee s claim for deduction u/s 80IB is vacated - there is substantial force in the claim of the assessee that deduction u/s 80IB has to be allowed on the amount of profits and gains derived by him the eligible business within the meaning of the said statutory provision, as finally determined.Disallowance of expenses claimed by the assessee as regards his eligible business would increase its income which again will be exempt u/s 80IB. Penalty u/s 271(1)(c) as regards such addition/disallowance above which in itself is backed by a process of estimation cannot be sustained and is therefore deleted.

Summary

Issues Involved:
1. Bogus Purchases
2. Unexplained Credits u/s 68
3. Disallowance u/s 40A(3)
4. Deduction u/s 80IB
5. Penalty u/s 271(1)(c)

Detailed Analysis:

1. Bogus Purchases:
The assessee was found to have booked bogus purchases aggregating to ?2,08,51,002/- in the name of two concerns, M/s Balaji Impex and M/s S.K Impex. The AO added the entire value of these purchases to the assessee's income, which was upheld by the CIT(A). However, the Tribunal observed that the assessee had indeed procured the goods from the open/grey market and accounted for the sales correlated to these purchases in the books. Therefore, the entire value of the purchases could not be added. The Tribunal directed the AO to restrict the addition to the profit element involved in procuring goods at a discounted value from the open/grey market, following the Bombay High Court's judgment in Pr. Commissioner of Income Tax-17 Vs. M/s Mohhomad Haji Adam & Company.

2. Unexplained Credits u/s 68:
The AO added ?1,05,56,012/- as unexplained credits shown as sundry creditors in the balance sheet against the names of M/s Balaji Impex and M/s S.K Impex. The CIT(A) upheld this addition. The Tribunal, however, noted that since the purchase transactions with these parties were bogus, the corresponding liabilities could not be held as unexplained credits. The liabilities were related to actual purchases from the open/grey market. Therefore, the addition of ?1,05,56,012/- u/s 68 was vacated.

3. Disallowance u/s 40A(3):
The AO disallowed ?41,62,600/- under Section 40A(3) for cash purchases exceeding ?20,000/-. The CIT(A) upheld this disallowance. The Tribunal observed that the AO did not provide any concrete evidence to rebut the assessee's claim that no single payment exceeded ?20,000/-. Therefore, the disallowance under Section 40A(3) was vacated.

4. Deduction u/s 80IB:
The AO disallowed the assessee's claim for deduction u/s 80IB, arguing that the conversion of 24 carat gold into 22 carat gold ornaments did not amount to manufacturing. The CIT(A) upheld this disallowance. The Tribunal, however, followed its earlier decision in ACIT, Circle, Srinagar Vs. Sh. Lokesh Handa, Jammu, and other precedents, concluding that such conversion does amount to manufacturing. The Tribunal allowed the deduction u/s 80IB.

5. Penalty u/s 271(1)(c):
The AO imposed a penalty of ?1,18,25,384/- u/s 271(1)(c) for concealing income related to bogus purchases, unexplained credits, and disallowance u/s 40A(3). The CIT(A) upheld the penalty except for the disallowance u/s 80IB. The Tribunal vacated the penalty related to unexplained credits and disallowance u/s 40A(3) as the corresponding additions were deleted. For bogus purchases, the penalty was deleted since the addition was based on estimation.

Conclusion:
The appeals of the assessee for A.Y 2008-09 and A.Y 2009-10 were partly allowed, and the appeal of the revenue for A.Y 2009-10 was dismissed. The Tribunal directed the AO to restrict additions related to bogus purchases to the profit element and vacated the additions and penalties related to unexplained credits and disallowance u/s 40A(3). The deduction u/s 80IB was allowed.