2021 (9) TMI 765 - AT - Income Tax

Estimation of income - Bogus purchases - assessee has failed to prove the genuineness of the purchases and consumption/utilization of the materials purchased - CIT(A) enhanced the addition to100% of the bogus purchases as against 12.5% applied by the AO - HELD THAT - We note that in case of bogus purchases the entire purchases can not be brought to tax as has been held in a series of decisions of the co-ordinate Bench wherein it has been held that only profit element can be brought to tax despite the purchases being bogus. After taking into account the facts of the assessee s case, we are of the considered opinion that CIT(A) has wrongly enhanced the addition to 100% and the same can not be sustained. Accordingly, we are setting aside the order of Ld. CIT(A) on this issue by restoring the assessment order. Addition invoking the provisions of section 40A(3) - assessee has made various cash payments exceeding ₹ 20,000/- to various parties -Need to develop identity of the agent as well as suppliers - HELD THAT - Assessee is engaged in the business of water proofing and labour job work. It was submitted before us that sand is purchased by the assessee from agent who arranged the loaded truck of sand at the site of the assessee on the condition that payment would be accepted in cash only. These transporters are not having any fixed place of business but bring sand filled lorries and come to the site through some reference. These truck drivers are not having any PAN numbers and therefore we find merit in the contention of the assessee that keeping in view of the nature of business of the assessee and nature of material purchase, it is impracticable to make payment otherwise than in cash. We are therefore not in agreement with the conclusion drawn by the Ld. CIT(A) that the identity of the agent as well as suppliers were required to be established in order to claim the expenditure where the payments are made in cash. Only in three cases the payment has exceeded ₹ 20,000/- and in all other cases the payments were below ₹ 20,000/-.Even in three cases the reasonable cause has been explained by the assessee before us that payment had to be made out of business emergencies and practical difficulties. - Decided in favour of assessee.

Summary

Issues:
1. Enhancement of addition of bogus purchases by CIT(A) to 100%.
2. Disallowance of cash payments exceeding limit under section 40A(3) by AO and CIT(A).

Analysis:
1. Issue 1 - Enhancement of addition of bogus purchases by CIT(A) to 100%:
The assessee appealed against the CIT(A)'s decision to enhance the addition of ?15,373 made by the AO to ?1,22,985, which constituted 100% of bogus purchases. The AO had reopened the case based on information regarding hawala purchase entries. The CIT(A) directed the AO to apply a 100% rate on the ground of failure to prove the genuineness of purchases. However, the ITAT noted that only the profit element of bogus purchases can be taxed, not the entire amount. Citing precedents, the ITAT concluded that the CIT(A) erred in enhancing the addition to 100% and set aside the decision, restoring the assessment order.

2. Issue 2 - Disallowance of cash payments exceeding limit under section 40A(3) by AO and CIT(A):
The AO disallowed cash payments exceeding ?20,000 to various parties, invoking section 40A(3). The assessee explained that payments were made in cash due to operational requirements, providing vouchers but lacking PAN, names, and addresses of agents. The CIT(A) upheld the disallowance, emphasizing the necessity to establish unavoidable circumstances for cash payments exceeding the limit. However, the ITAT found merit in the assessee's argument regarding the impracticality of making non-cash payments in the business context. After reviewing the details provided by the assessee, the ITAT concluded that the disallowance was unwarranted, as the payments were justified by business emergencies and practical difficulties. Accordingly, the ITAT directed the AO to delete the disallowance, partially allowing the assessee's appeal.

In conclusion, the ITAT ruled in favor of the assessee on both issues, setting aside the CIT(A)'s decisions and providing detailed justifications for its findings.