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2021 (11) TMI 361 - AT - Income TaxAddition on profits of the project 'Ellora Castle' - the said project has been completed on 26.10.2010 i.e during the F.Y.2010-H relevant to A.Y.2011-12 and during the year under consideration, the assessee has not declared any profit on one unit sold for total consideration - CIT-A deleted the addition - HELD THAT - AO cannot take up an arbitrary figure of undisclosed profit. Moreover, as rightly pointed out by Ld.CIT(A), AO is not mentioning as to under what method of project accounting he is computing the profit. Moreover when Ld.CIT(A) is giving a finding that AO has accepted the actual profit in respect of the project in AY 2013-14, there is no reason to make a further addition without any cogent basis for the year. Hence uphold the order of Ld.CIT(A) Addition u/s. 41(1) - CIT-A deleted the addition - HELD THAT - AO has invoked the provision of section 41(1) without bringing on record any cogent material. For how long the account is outstanding and on what basis of his enquiry, AO has come to the conclusion that these accounts are not payable. Devoid of these details, the assessment is simply based upon conjecture surmise not sustainable in law. Hence, we do not find any infirmity with the order of Ld.CIT(A). Estimation of income - bogus purchases - CIT(A) directing the A.O, to restrict the addition of bogus purchases to 12.5% as against 100% addition made by the AO - HELD THAT - Sales have not been doubted it is settled law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from Hon ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises 2014 (7) TMI 559 - BOMBAY HIGH COURT In this case, the Hon ble High Court has upheld 100% disallowance for the purchases said to be bogus, when sales are not doubted. However, the facts of the present case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation, in our considered opinion on the facts and circumstances of the case the 12.5% disallowance out of the bogus purchases done by the Ld.CIT(A) meets the end of justice. Accordingly, we uphold the order of Ld.CIT(A). Assessee appeal allowed.
Issues Involved:
1. Deletion of addition on account of assessing the profits of the project 'Ellora Castle'. 2. Deletion of addition under Section 41(1) of the Income Tax Act for cessation of liability. 3. Direction to restrict the addition of bogus purchases to 12.5% instead of 100%. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Assessing the Profits of the Project 'Ellora Castle': The Assessing Officer (AO) made an addition of ?12,19,969 by calculating the profit from the sale of one unit of the 'Ellora Castle' project. The AO observed that the project was completed in FY 2010-11, and the appellant had not declared any profit on the unit sold for ?3,01,00,000. The AO calculated the cost of one unit based on the closing stock value and additional expenses incurred during the year, concluding that the appellant had a profit of ?12,19,961 which was not offered for taxation. Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, stating: - The actual profit for the project was determined in AY 2013-14 as ?2,58,52,940, recorded by the AO. - The AO did not reject the books of account, and the profit figure cannot be varied based on estimates. - The AO accepted the actual profit in AY 2013-14, and the Occupation Certificate (OC) for the project was not yet received, indicating that significant risks and rewards had not been transferred to the customer. - The AO's method of accounting was not aligned with any prescribed method. The Tribunal upheld the CIT(A)'s decision, agreeing that without rejecting the books of account, the AO could not arbitrarily determine undisclosed profit and that the AO failed to specify the method of project accounting used. 2. Deletion of Addition under Section 41(1) for Cessation of Liability: The AO disallowed ?16,79,981 under Section 41(1) of the Income Tax Act, treating it as cessation of liability, as the sundry creditors' amounts remained outstanding without any repayment. The CIT(A) deleted the addition, stating: - No event in the year under consideration indicated remission or cessation of liabilities. - The appellant continued to recognize the amount in its books of accounts. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not provided any material evidence or conducted sufficient enquiry to conclude that the liabilities had ceased. The assessment was based on conjecture and surmise, which is not sustainable in law. 3. Direction to Restrict the Addition of Bogus Purchases to 12.5% Instead of 100%: The AO treated purchases amounting to ?10,58,583 as unexplained expenditure under Section 69C, based on the fact that some suppliers were listed as hawala dealers by the Sales Tax Department and notices issued to some suppliers were returned unserved. The CIT(A) restricted the disallowance to 12.5%, reasoning: - The appellant provided bills, ledger accounts, delivery challans, and payments made through banking channels, which the AO did not rebut. - The purchases were used in the appellant's regular business, and the AO did not provide evidence from the Sales Tax Department categorically stating that the suppliers provided bogus bills. - The appellant showed onward sales, which were not doubted by the AO, indicating that purchases were made from undisclosed parties in the grey market at lower rates. The Tribunal upheld the CIT(A)'s decision, citing that when sales are not doubted, 100% disallowance for bogus purchases is not justified. The Tribunal referenced the Hon'ble Gujarat High Court's decision in CIT vs. Simit P. Sheth, which held that only the profit element embedded in such purchases should be disallowed. The Tribunal found the 12.5% disallowance reasonable and aligned with judicial precedents. The Tribunal also distinguished the decision in N.K. Proteins Ltd. vs. DCIT, explaining that it was a dismissal of an SLP by the Hon'ble Supreme Court and had been distinguished by the Hon'ble Bombay High Court in Mohammad Hazi Adam & Co. Conclusion: The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The judgment emphasized the importance of proper accounting methods, the necessity of rejecting books of accounts before making arbitrary profit additions, and the need for substantial evidence when invoking Section 41(1) for cessation of liabilities.
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