Pancham Jewellers Private Limited Vs DCIT (ITAT Chandigarh)
ITAT Taxes Only 10% Profit on Bogus Purchase Bills, Deletes Section 40A(3) Disallowance
The Income Tax Appellate Tribunal (ITAT), Chandigarh, partly allowed the assessee’s appeal for Assessment Year 2014-15 against the order of the Commissioner of Income Tax (Appeals), which had confirmed three additions/disallowances of ₹13,95,927, ₹1,34,630, and ₹1,09,200 arising from an assessment framed under Section 143(3) of the Income-tax Act.
The first issue concerned the disallowance of purchases amounting to ₹13,95,927 made from M/s Nazar Impex Pvt. Ltd. The Assessing Officer treated the supplier as an accommodation entry provider based on investigation findings and disallowed the purchases. The assessee contended that the purchases were genuine, payments were made through banking channels, account confirmation had been furnished, and the goods were actually used in manufacturing activities. The Tribunal noted that the appeal of M/s Nazar Impex Pvt. Ltd. for the same assessment year had been decided by the Surat Bench of the Tribunal, which had confirmed estimated commission income for that entity in respect of local sales, supporting the Assessing Officer’s allegation. However, the Tribunal also observed that the assessee possessed relevant supporting documents, the purchases formed part of the quantitative records, the books of account were duly audited and had not been rejected, and there was no dispute regarding sales turnover or opening and closing stock. On these facts, the Tribunal concluded that the assessee had procured actual goods from the grey market while obtaining supporting bills from the said entity. Holding that only the profit element required taxation, the Tribunal estimated the addition at 10% of the purchases and directed the Assessing Officer to restrict the addition to ₹1,39,593. The grounds relating to this issue were partly allowed.
The second issue related to disallowance of ₹1,34,630 under Section 40A(3). The Assessing Officer had disallowed the expenditure on the ground that cash payments of ₹20,000 or more had been made to various parties. Before the Tribunal, it was shown that the payment of ₹25,000 to Shri Manoj Soni towards job work charges had been deposited directly into the payee’s bank account rather than paid in cash. Another payment of ₹23,880 represented telephone charges paid to Airtel, while the remaining amount of ₹63,750 had been paid to M/s Gopal Sweets Pvt. Ltd. for distribution of sweets to employees during the festival. The Tribunal recorded that all supporting documents had been placed on record and that the payments were duly substantiated and well documented. It held that the assessee had satisfactorily explained the circumstances of the payments and, accordingly, deleted the entire disallowance under Section 40A(3). The corresponding grounds were allowed.
The third issue concerned disallowance of travelling expenses amounting to ₹1,09,200 under Section 37(1). The Assessing Officer had disallowed the expenditure incurred for a customer meet on the ground that only six persons, including the company’s directors, attended the event and it could not therefore be regarded as a customer meet undertaken for business purposes. The Tribunal found no reason to interfere with this disallowance and dismissed the corresponding grounds.
Accordingly, the Tribunal partly allowed the appeal by restricting the addition relating to purchases, deleting the disallowance under Section 40A(3), and sustaining the disallowance of travelling expenses.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
1. Aforesaid appeal by assessee for Assessment Year(AY) 2014-15 arises out of an order of learned Commissioner of Income Tax (Appeals)-5, Ludhiana [CIT(A)] dated 11.08.2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s 143(3) of the Act on 18.11.2016. In this appeal, the assessee has assailed confirmation of three quantum additions for Rs.13,95,927/-, Rs.1,34,630/- & Rs.1,09,200/-. The Ld. AR advanced arguments on merits which has been controverted by Ld. Sr. DR. Having heard rival submissions and upon perusal of case records, these issues are adjudicated as under.
2. Addition of alleged bogus purchases from M/s Nazar Impex Pvt. Ltd.
The assessee made purchases of Rs.13,95,927/- from this entity. This entity, as per investigation proceedings, was found to be an entity which was involved in providing accommodationentries only. The Ld. AO proceeded to disallow the same. The assessee opposed the same on the ground that it made actual purchases against banking channels. The confirmation of account was also filed. It was stated that the goods purchased by the assessee were used in manufacturing activities. However, going by the investigation findings, Ld. AO disallowed these purchases.
3. Disallowance u/s 40A(3) for Rs.1,34,630/-
As per Ld. AO, the assessee made cash payment for Rs.20,000/- or more to various parties as tabulated at para-5 of the order. Accordingly, the expenses were disallowed u/s 40A(3).
4. Disallowance of travelling expenses for Rs.1,09,200/-
The assessee was stated to have incurred expenses for a customer meet which was disallowed y Ld. AO on the ground that there could not be customer meet with only 6 persons including the directors of the company. The same was not for business purposes and accordingly, disallowed u/s 37(1).
5. All the above three additions / disallowances stood confirmed by Ld. CIT(A) against which the assessee is in further appeal before us.
6. So far as the purchases from M/s Nazar Impex Pvt. Ltd. is concerned, we find that the appeal of this entity for AY 2014-15 has been adjudicated by Surat bench of Tribunal vide ITA No.1365/Ahd/2017 dated 29.12.2021 wherein the bench has confirmed estimated commission income for this entity for local sales. The same would evidently further the case of Ld. AO and support the allegation of Ld. AO. However, at the same time, the assessee is in possession of relevant documents and the goods so purchased by the assessee form part of quantitative details. The assessee’s books are duly audited and the books have not been rejected. No dispute has been raised on sales turnover or on opening &closing stock. On these facts, the inevitable conclusion would be that the assessee procured actual goods from grey market whereas the supporting bills were accommodated from this entity. In the whole process, the assessee would be earning some margin which need to be brought to tax. Considering the facts of the case, we estimate addition of 10% on purchase of Rs.13,95,927/- to plug possible leakage of revenue. The Ld. AO is directed to restrict the addition to the extent of Rs.1,39,593/-. The corresponding grounds of appeal stand partly allowed.
7. So far as the disallowance u/s 40A(3) is concerned, the assessee has paid job work charges of Rs.25,000/- to Shri Manoj Soni. However, the payment is not in cash but it has been deposited directly in the bank account of the payee. Another payment for Rs.23,880/-represents payment to Airtel towards telephone charges. The remaining amount of Rs.63,750/- has been paid to M/s Gopal Sweets Pvt. Ltd. for distribution of sweets to employees during festival. All the supporting documents have been placed on record. Therefore, the impugned payment of Rs.1,34,630/- is duly substantiated and well documented. The assessee has fully addressed the circumstances in which the payments have been made. Therefore, this disallowance stands deleted. The corresponding grounds stand allowed.
8. The disallowance or travelling expenses do not require any interference on our part. The corresponding grounds stand dismissed. No other ground has been urged in the appeal.
9. The appeal standspartly allowed.
Order pronounced on 06th July, 2026
