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2021 (5) TMI 299 - AT - Income TaxEstimation of income - Bogus purchases - CIT(A) restricting the addition to the extent of 12.5% - HELD THAT - CIT(Appeals) has decided the matter of controversy on the basis of the decision of Gujarat High Court in the case of CIT vs. Simit P. Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT and on the basis of the decision in case of Ratnagiri Steels 2017 (4) TMI 402 - ITAT MUMBAI . The CIT(A) has restricted the addition to the extent of 12.5% on the basis of the gross profit (G.P.) of the Assessee under year consideration shown in the regular books of accounts. Thus finding of the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with - Decided against revenue. Disallowance u/s 14A r.w.r. 8D - assessee has voluntarily disallowed the expenses to earn the exempt income - HELD THAT - In this year the exempt income has been shown by assessee nil. Anyhow, voluntarily offered and assessed by CIT(A) seems justifiable which is not even challenged by assessee, hence, we find it justifiable to restrict the addition to the extent of ₹ 2,17,682/-. No illegality and infirmity found, therefore, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, this issue is decided in favour of the assessee against the revenue.
Issues Involved:
1. Restriction of addition to 12.5% of bogus purchases. 2. Deletion of disallowance under Section 14A of the Income Tax Act read with Rule 8D. Issue No. 1: Restriction of Addition to 12.5% of Bogus Purchases The revenue challenged the CIT(A)'s decision to restrict the addition to 12.5% of the bogus purchases amounting to ?52,68,07,513 from M/s Ragini Trading and Investments Pvt. Ltd. The CIT(A) found that M/s RTIPL was involved in layering tainted purchases from hawala/bogus suppliers and circular trading transactions. Despite the confirmation of transactions by M/s RTIPL, the CIT(A) determined that only the profit element embedded in the transactions should be taxed, not the entire purchase amount. This decision was based on the business model of the assessee, which involved back-to-back sales corresponding to the purchases. The CIT(A) referenced the Gujarat High Court's decision in the case of CIT vs. Simit P. Sheth and the ITAT Mumbai's decision in the case of Ratnagiri Steels, which supported taxing only the profit element in such transactions. The CIT(A) applied a profit rate of 12.5%, allowing a set-off of the gross profit already shown in the books. The ITAT upheld the CIT(A)'s decision, affirming that the matter was decided judiciously and correctly, and thus, the issue was decided in favor of the assessee against the revenue. Issue No. 2: Deletion of Disallowance under Section 14A read with Rule 8D The revenue also challenged the deletion of the disallowance under Section 14A read with Rule 8D. The CIT(A) noted that the AO had made disallowances on the grounds that the assessee maintained a common pool of funds and accounts for all activities. However, the CIT(A) found that the AO did not correctly apply Rule 8D, as the disallowance of ?1,37,491 under Rule 8D(2)(i) included expenses not directly related to exempt income. The CIT(A) restricted this disallowance to ?27,172, which was related to DMAT charges. Regarding the disallowance under Rule 8D(2)(ii) amounting to ?2,84,294, the CIT(A) found that the entire interest expenditure was incurred for business purposes and directed its deletion. For the disallowance under Rule 8D(2)(iii), the CIT(A) upheld the AO's original assessment of ?1,90,150. The total disallowance was thus determined to be ?2,17,682, which the assessee had already voluntarily offered. The ITAT found no exempt income for the year and agreed with the CIT(A)'s assessment, which seemed justifiable. The ITAT concluded that the CIT(A) had decided the matter judiciously and correctly, and thus, this issue was also decided in favor of the assessee against the revenue. Conclusion: The appeal filed by the revenue was dismissed, and the order pronounced in the open court on 07/04/2021 upheld the CIT(A)'s decisions on both issues.
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