Bogus Purchase- No addition for amount shown in work in progress

Vipin Madanlal Thapar Vs DCIT (ITAT Mumbai)

The assessee was engaged in the business of real estate development. During the year under consideration the assessee was engaged in construction of development of building project named ‘Swaraj Crystal’ in Navi Mumbai. The project was completed in assessment year 2012-13 and assessee has declared a total profit of Rs.30,79,372/-. The addition of Rs.1,25,60,620/- in respect of purchases made from 5 parties as referred above were made by the A.O on the ground that sales tax department has treated these as bogus. The assessee submitted before the lower authorities that the said expense were capitalized in work in progress of Rs.3,44,85,729/- as on 31.03.2011. The assessee has also submitted the copies of ledger account of the 5 parties, copy of bank statement showing payment made by account payee cheques certificate from civil engineer and site engineer etc. and submitted that without disproving these material the A.O has made the addition on the basis of information displayed on the website of the sale tax department. After taking into consideration the above facts and material on record, it is observed that assessee has not claimed such expenses as revenue expenses during the year under consideration but same were capitalized as work in progress. Therefore, any disallowance it is made its amount to reduce work in progress, since, the expenses were capitalized in the work in progress. We have considered the judicial pronouncements referred by the ld. Counsel wherein it is held that since the expenses were shown by the assessee under the head work in progress and has not been reflected in the trading account, therefore, no addition can be made. In the light of the above facts and findings, we consider that decision of ld. CIT(A) in sustaining the impugned disallowance of expenditure made by the A.O is not justified.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal filed by the assessee is directed against the order passed the CIT(A)-11, Pune, dated 14.01.2022 for A.Y. 2011-12. The assessee has raised the following grounds before us:

“1. BECAUSE the CIT(A) has erred in law in upholding the assessment order even though the underlying order under section 127 of the Income Tax Act, 1961 is bad in law.

2. BECAUSE the CIT(A) has erred in law and on facts in upholding the disallowance of 100% of the alleged bogus purchases amounting to Rs.125,60,620 ignoring the plethora of evidence placed on record mainly on the basis that the vendors did not appear before the authorities below.

3. BECAUSE the CIT(A) has erred in upholding the disallowance ignoring relevant documents like the bank certificate and the certificate of the civil engineer along with affidavit of the site supervisor.

4. BECAUSE the CIT(A) has erred in law and on facts in upholding the disallowance on the basis of certain so-called affidavits before the sales tax authorities, none of which were provided to the Appellant during the course of proceedings before the authorities below.

5. BECAUSE the CIT(A) has erred in law and on facts in upholding the disallowance on the basis of certain affidavits without providing an opportunity of cross-examination to the appellant, to test the veracity and relevance of these affidavits to the facts of the present case.

6. Without prejudice, such disallowance could only reduce the WIP and could not have been treated as income of the year.

7. BECAUSE such a huge disallowance has led to an unexpected inflation in the profit of the project being 38% of the turnover which is completely unrealistic and unattainable.

2. The fact in brief is that return of income declaring total income of Rs.13,31,371/- was filed on 30.09.2011. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 31.07.2022. The assessee was a proprietor of Shubham Builder and Developers and a director in Swaraj Formulation Pvt. Ltd. The A.O stated that as per the information received from Sale Tax Department the assessee has made purchases from the following bogus dealers listed by the Sale Tax Department during the year under consideration:

On query the assessee submitted that payment for the purchase material and payment has been made through cheques/RTGS and he submitted a copy of certificate issue by Greater Bank. The assessee further submitted that all the payments were made by account payee cheques only. The assessee has also submitted the summary of quantity wise material consumed in construction of the project. The assessee has also furnished certificate from the civil engineer, who has certified the construction work showing the quantity of total consumption of steel and cement in the project. The A.O has not agreed with the submission of the assessee and stated that it has been established by the Sale Tax Department that the parties from whom the purchases were made by the assessee were bogus. Therefore, the A.O has disallowed the amount of Rs.1,25,60,620/-as purchases made from the aforesaid parties.

3. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.

4. During the course of appellate proceedings before us the ld. Counsel contended that A.O has not made any inquiry to disprove the supporting evidences furnished by the assessee in support of the purchases made and consumed as a raw material in its project named Swaraj Crystal. The ld. Counsel further submitted that said expenditure of Rs.1,25,60,620/- were capitalized in work in progress as on 31.03.2011 and such disallowance could only reduce the work in progress and the same cannot be treated as income of the year as the project of the assessee was completed in the financial year 2011-12. The ld. Counsel has also placed reliance on the decision of CIT(A) Vs. Rajendra Prasad Jain (2015) 324 ITR 545 (P &H) and decision of ITAT, Mumbai in the case of Savall Associates Vs. ITO (2010) 35 SOT 148 (Mum) and M/s Unique Enterprises Vs. ITO vide ITA No. 5109/Mum/2010 dated 20.08.2010.

On the other hand the ld. D.R supported the order of CIT(A).

5. Heard both the sides and perused the material on record. The assessee was engaged in the business of real estate development. During the year under consideration the assessee was engaged in construction of development of building project named “Swaraj Crystal” in Navi Mumbai. The project was completed in assessment year 2012-13 and assessee has declared a total profit of Rs.30,79,372/-. The addition of Rs.1,25,60,620/- in respect of purchases made from 5 parties as referred above were made by the A.O on the ground that sales tax department has treated these as bogus. The assessee submitted before the lower authorities that the said expense were capitalized in work in progress of Rs.3,44,85,729/- as on 31.03.2011. The assessee has also submitted the copies of ledger account of the 5 parties, copy of bank statement showing payment made by account payee cheques certificate from civil engineer and site engineer etc. and submitted that without disproving these material the A.O has made the addition on the basis of information displayed on the website of the sale tax department. After taking into consideration the above facts and material on record, it is observed that assessee has not claimed such expenses as revenue expenses during the year under consideration but same were capitalized as work in progress. Therefore, any disallowance it is made its amount to reduce work in progress, since, the expenses were capitalized in the work in progress. We have considered the judicial pronouncements referred by the ld. Counsel wherein it is held that since the expenses were shown by the assessee under the head work in progress and has not been reflected in the trading account, therefore, no addition can be made. In the light of the above facts and findings, we consider that decision of ld. CIT(A) in sustaining the impugned disallowance of expenditure made by the A.O is not justified. Accordingly, the ground no. 6 of the appeal of the assessee is allowed.

6. Since, we have allowed the alternative ground of appeal of the assessee, therefore, other ground of appeal of the assessee are not required any adjudication and the same are hereby left open.

7. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 30.11.2022