ACIT Vs Armee Infotech (ITAT Ahmedabad)
In the case of Gujarat Ambuja (supra), the AO disallowed 25% of the bogus purchase, which has been reduced to 5% at the level of ITAT. This decision of the ITAT was challenged before the Hon’ble Gujarat High Court, the Hon’ble Court did not interfere in the finding of the Tribunal. Similarly, in the case of Mayank Diamonds P.Ltd. (supra), GP rate of 5% was taken by the Tribunal, which has been upheld by the Hon’ble High Court. In the case of Lulubi Steel (supra), the Tribunal has again restricted the addition at 12.5%. In all these cases, Vijay Proteins (supra) has been considered. A perusal of the decisions would reveal that major factor which weighed with the ITAT as well as Hon’ble High Court was estimation of profit in a particular transaction after considering particular line of business. Here, in this case, the assessee has purchased batteries and replaced. Quantity was not in dispute. In the past, whatever provisions remained unutilized was offered as income by the assessee. Therefore, we are of the view that there is nothing with the ld.CIT(A) to estimate the profit at 17% of the alleged bogus purchase. The ld.CIT(A) has made reference to the GP percentage shown by the assessee in the different assessment years. But while working out 17%, he has nowhere referred wither it is net profit of Rs.3.48 crores or GP out of this. GP has been shown by the assessee at 14.35% in this assessment year. But net profit is only 2.38%. The assessee has not disputed if 2.38% is being estimated as undue profit earned by it from purchase of these batteries amounting to Rs.1.56 crores. Calculation by the ld.CIT(A) are not based on any scientific formula or any evidence. There is no reference that in purchase and sale of computer batteries there could be profit margin is of 17%. It is also pertinent to note that whenever any estimation is required to be made guess-work would always be there. But such guess-work should be in consonance with overall profit shown by the assessee. It has achieved a turnover of more than Rs.102 crores, and returned income of Rs.4.13 crores. These factors are also to be kept in mind. Taking into consideration all these facts, we estimate disallowance out of these bogus purchase at 7%. In other words, 7% of the alleged bogus purchase of Rs.1,56,78,802/- will be disallowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
In assessment year 2012-13 assessee and the Revenue are in cross-appeal against order of the ld.CIT(A) dated 28.4.2016; whereas in the asstt.Year 2014-15, the assessee alone has impugned order of the ld.CIT(A)-6 dated 20.9.2018. The issues in all these three appeals are inter-connected with each other, and therefore, we heard them together and deem it appropriate to dispose of them by this common order.
2. First we take appeal of the Revenue in the Asstt.Year 2012-13 i.e. ITA No.1778/Ahd/2016. However, if any ground is found to be interconnected with any other issues agitated in rest of two appeals, then same will be taken up together.
3. Ground No.1 raised by the Revenue reads as under:
“The ld.CIT(A) has erred in law and on facts by restricting the disallowance of Rs.3,48,64,200/- in respect of provision of batteries to Rs.59,16,200/- without properly appreciating the facts of the case.”
This ground is inter-connected with ground no.1 of the assessee’s appeal i.e. ITA No.1900/Ahd/2016.
4. The ld.Assessing Officer has made a disallowance of Rs.3,48,64,200/- in respect of provision for batteries. Out of this disallowance, the ld.CIT(A) has restricted disallowance to the extent of Rs.56,16,000/- and rest has been deleted. The Revenue is in appeal against deletion of disallowance; whereas the assessee in its appeal is challenging confirmation of disallowance to the extent of Rs.59,16,000/-.
5. Brief facts of the case are that, the assessee firm at the relevant time was engaged in the business of installation of computer and providing after-sale services; sale of computers and peripheral and collection from Government department on behalf of suppliers of computers. It has filed its return of income electronically on 30.9.2012 declaring total income at Rs.4,13,53,274/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued on 7.8.2013. On scrutiny of the accounts, it revealed to the AO that the assessee has shown gross turnover of Rs.1,02,32,11,318/-. On this, a gross profit at the rate of 14.35% was shown at Rs.14,67,92,227/-. The AO further found that the assessee has shown long term provision of Rs.3,48,64,200/-. This provision was made for replacement of batteries. The ld.AO issued a show cause notice as to how this provision is admissible. The AO was of the view that expenditure which is deductible one for the purpose income-tax should be towards liability actually existing at the time. He further observed that if an assessee put aside certain amount, which may become an expenditure on the happening of an event, is not be construed as expenditure, because such liability would be contingent in nature. The AO made reference to the decision of Hon’ble Karnataka High Court in the case of Mysore Lamps Works Ltd. Vs. CIT, 52 taxman 260 (Kar). He also made reference to decision of Hon’ble Supreme Court in the case of Indian Molasses Co. P.Ltd. Vs. CIT, 37 ITR 66 (SC).
6. In response to the show cause notice of the AO, it was contended that the assessee has a total turnover of more than Rs.102 crores. It has shown GP margin at 13.35%. It has made sales mostly to schools, colleges and different computerization projects. The assessee pointed out that purchase orders were received by it from IL&FS Education. As per the technical configuration of UPS, stabilizer and site net working it was required to replace batteries. The assessee has placed on record details of battery replacement as per annexure-2 before the AO. It has also submitted copies of agreement exhibiting as to why batteries were required to be replaced.
7. The ld.AO has gone through all these details. He has disallowed claim of the assessee for two reasons, viz. it is a contingent liability which is to be materialized after five years, and secondly, he has verified purchases of batteries, and out of total purchases, he found batteries purchased to the extent of Rs.1,56,78,802/- from five entities were not genuine. Vendors have not been confirmed sales made to the assessee. On the basis of this reasoning, the ld.AO disallowed the claim of the assessee.
8. Dissatisfied with finding of the AO, the assessee carried the matter in appeal before the ld.first appellate authority. The assessee had raised two fold of submissions. In the first fold of submissions, it was contended that provision made by it was in consonance with Accounting Standard 29 issued by the Institute of Chartered Accountants of India. It has made this provision on the basis of contractual liabilities, and this provision has been made in a scientific manner. The assessee relied upon the latest judgment of Hon’ble Supreme Court in the case of Rotork Control India P.Ltd. Vs. CIT,314 ITR 62 (SC). In its next fold of submissions, it was contended that in the Asstt.Year 2010-11, similar provision was made. The ld.AO has disallowed claim of the assessee. The assessee took the matter before the ld.CIT(A) who partially allowed the claim. Assessee and Revenue approached the Tribunal, who set aside issue to the file of the AO for verification.
9. The ld.AO on re-verification has allowed claim of the assessee vide assessment order dated 31.3.2016 passed under section 143(3) r.w.s. section 254 of the Act. The ld.CIT(A) has considered these three fold of submissions, and was satisfied with the explanation of the assessee. The ld.CIT(A) has reproduced clause of agreement under which the assessee was required to replace batteries. The ld.CIT(A) thereafter made reference to the proposition laid down by the Hon’ble Supreme Court in the case of Rotork Control India P.Ltd. Vs. CIT (supra). The ld.CIT(A) also took cognizance of the assessment passed in the Asstt.year 2010-11 in set aside proceedings and after perusing the impugned assessment order, the ld.CIT(A) has reproduced the finding of the order on page no.12 of the impugned order. However, thereafter, the ld.CIT(A) observed that certain purchases were not found to be genuine and he confirmed the disallowance at 17% of the alleged bogus purchases. This exercise worked out to disallowance of Rs.59,16,000/- out of the total disallowance made by the AO. In this way, the ld.CIT(A) has partly deleted disallowance and partly confirmed.
10. Before us, the ld.DR relied upon the finding of AO. He contended that the liability was contingent in nature. The assessee failed to prove genuineness of the expenditure incurred for replacement of batteries, and therefore the AO has rightly disallowed.
11. On the other hand, the ld.counsel for the assessee relied upon the order of the ld.CIT(A) as well as stand of the AO in the Asstt.Year 201011. He took us through assessment order passed on 30.3.2016 in the Asstt.Year 2010-11 which is available on page no.83 to 89 of the paper book.
12. We have duly considered rival submissions and gone through the record carefully. The assessee has turnover of more than Rs.102 crores. It has made provision for replacement of batteries qua the computers sold by it. The clause of the agreement on which it was required to replace has been taken note by the ld.CIT(A), and such clauses read as under:
