2024 (12) TMI 1343 - HC - Income Tax

Addition of expenses claimed towards the purchase of paddy - burden of proof - appellant herein had not discharged the burden by adducing evidence with regard to the actual incurring of the stated expenses while purchasing paddy from unregistered farmers - HELD THAT - As rightly noticed by the First Appellate Authority it is not in dispute that the assessing authority did not verify the books of accounts including the Stock Register Ledger Cash Purchase Register etc. to see whether the allegation regarding bogus purchases of raw material (paddy) was justified or not. In the absence of such verification we are of the view that there was no justification for proceeding on the assumption that there was no purchase of paddy from unregistered farmers and for making additions to the income declared by the assessee by disallowing the expenses claimed u/s 37 (1). In our view the findings to the contrary of the Appellate Tribunal cannot be legally sustained and it is only the order of the First Appellate Authority that confines the disallowance that can be legally sustained - impugned order of the Appellate Tribunal setaside restoring the order of the First Appellate Authority - Decided in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment revolves around the following core legal questions:

a) Was the tribunal justified in confirming the disallowance of the assessee's claim of purchase expenses of Rs. 5,53,20,069 for paddy, treating it as not genuine?

b) Did the tribunal err in treating the entire purchase of paddy as bogus without disturbing the trade results of production as revealed in the Audited Report?

c) Did the tribunal fail to appreciate that disallowing the purchase while accepting production results would result in more yield than raw material used?

d) Did the tribunal err by not considering precedents where only the profit embedded in purchases is liable to tax, not the entire purchase price?

2. ISSUE-WISE DETAILED ANALYSIS

a) Disallowance of Purchase Expenses

Relevant legal framework and precedents: The tribunal relied on several precedents, including CIT v. Calcutta Agency Ltd. and others, which generally address the disallowance of unproven business expenses. However, these cases did not specifically address expenses related to raw material purchases.

Court's interpretation and reasoning: The court noted that the tribunal's reliance on the cited cases was misplaced as they did not pertain to raw material purchase expenses. The court emphasized that verifying the books of accounts is crucial when disallowing such expenses.

Key evidence and findings: The First Appellate Authority found no defects in the audited books, including the Stock Register and Cash Purchase Register. The tribunal, however, did not verify these records before disallowing the expenses.

Application of law to facts: The court opined that without rejecting the appellant's books of accounts, the tribunal's disallowance of expenses was unjustified.

Treatment of competing arguments: The court favored the appellant's argument that the tribunal erred in not verifying the books of accounts and in relying on precedents irrelevant to the case.

Conclusions: The court concluded that the tribunal's disallowance of the entire purchase expense was unjustified without verifying the appellant's records.

b) Treatment of Entire Purchase as Bogus

Relevant legal framework and precedents: The appellant argued that precedents from the High Courts of Bombay and Gujarat suggest that only the profit embedded in purchases should be taxed, not the entire purchase amount.

Court's interpretation and reasoning: The court found that the tribunal failed to consider these precedents and did not provide justification for treating the entire purchase as bogus.

Key evidence and findings: The First Appellate Authority had confined the disallowance to Rs. 16,14,411 based on price discrepancies, not the entire purchase amount.

Application of law to facts: The court applied the principle that without rejecting the books of accounts, the entire purchase cannot be deemed bogus.

Treatment of competing arguments: The court sided with the appellant, noting the tribunal's oversight in not considering relevant precedents.

Conclusions: The court determined that the tribunal erred in treating the entire purchase as bogus without proper verification and consideration of precedents.

c) Discrepancy Between Purchase and Production Results

Relevant legal framework and precedents: The appellant highlighted the inconsistency in disallowing purchases while accepting production results.

Court's interpretation and reasoning: The court agreed that such a discrepancy would result in an illogical outcome of more yield than raw material used.

Key evidence and findings: The First Appellate Authority had acknowledged the appellant's maintenance of comprehensive records, which the tribunal overlooked.

Application of law to facts: The court found that the tribunal's approach led to an unreasonable conclusion regarding the yield and raw material usage.

Treatment of competing arguments: The court favored the appellant's argument, finding the tribunal's approach flawed.

Conclusions: The court concluded that the tribunal's decision was inconsistent with the logical assessment of production and purchase records.

d) Consideration of Precedents on Taxation of Embedded Profit

Relevant legal framework and precedents: The appellant cited decisions from the High Courts of Bombay and Gujarat, which held that only the profit embedded in purchases should be taxed.

Court's interpretation and reasoning: The court found that the tribunal failed to consider these precedents, which were relevant to the case.

Key evidence and findings: The tribunal did not address the appellant's argument regarding the taxation of embedded profit.

Application of law to facts: The court applied the principle that the tribunal should have considered the relevant precedents before making its decision.

Treatment of competing arguments: The court sided with the appellant, noting the tribunal's oversight in not considering relevant precedents.

Conclusions: The court determined that the tribunal erred by not considering relevant precedents on the taxation of embedded profit.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "In the absence of such verification, we are of the view that there was no justification for proceeding on the assumption that there was no purchase of paddy from unregistered farmers, and for making additions to the income declared by the assessee by disallowing the expenses claimed under Section 37 (1) of the Income Tax Act."

Core principles established: The court established that verification of books of accounts is crucial before disallowing purchase expenses and that relevant precedents should be considered in taxation matters.

Final determinations on each issue: The court allowed the appeal, setting aside the tribunal's order and restoring the First Appellate Authority's decision, thus answering the questions of law in favor of the appellant and against the revenue.