Brief of the Case
The ITAT Ahmedabad in the case of M/s Ruchi Developers vs. ITO, where Assessee has failed to produce creditor parties in respect of alleged Bogus Purchases while he submitted all other details and evidences and additions been made, It was held that where explanation of the assessee has not been accepted by the Department, The levy of penalty is merely on disallowance of expenditure and not finding of concealment of any particulars or mala fide intention to reduce the taxable income. The addition made on this count automatically cannot justify the penalty levied u/s 271(1)(c).
Facts of the Case
The case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 was framed vide order dated 24/12/2009, thereby the Assessing Officer made addition in respect of bogus purchases amounting to Rs.1,04,16,233/-. Against this, the assessee filed an appeal before the ld.CIT(A), who after considering the submissions dismissed the appeal. During the course of first appellate proceedings, the assessee has raised an additional ground before the ld.CIT(A) claiming the higher remuneration of Rs.45,77,944/- payable to the partners of firm. Subsequently, AO levied a penalty of Rs.35,06,103/- u/s.271(1)(c) of the Act in respect of disallowance of bogus purchase. Against the said assessment order, assessee filed an appeal before the ld.CIT(A), who after considering the submissions, dismissed the appeal.
Hence, the two appeals (quantum and penalty) filed by the assessee against the order of CIT(A) is now being heard and decided by the Tribunal by a common order.
Contention of the assessee
The Ld. Counsel of the assessee submitted that the books of accounts were maintained in the regular course of business and they were audited u/s.44AB of the Act and Audit report was filed on record. The AO has also accepted the GP of 10.34% on the receipts of Rs.1,86,50,000/- as noted by him in Para 3 of his order. He submitted that gross receipts from construction business of Rs.1,86,50,000/- declaring net profit of Rs.8,97,380/- which works out to 8.49% as against 8% net profit on receipts as per section 44AD applicable to construction business. In addition the assessee submitted that the addition of alleged bogus purchases of Rs.1,04,16,233/- would result in net profit at 64% which was not real.
Against dismissal of additional ground with regard to claim of higher remuneration payable to partners as per section 40(b)(v)(2) of the Act, the ld.counsel for the assessee submitted that the ld.CIT(A) was not justified in rejecting the ground.
With respect to appeal regarding penalty proceedings, it was submitted that the penalty has been levied on the ground that the ld.CIT(A) has confirmed the bogus purchases. The ld.CIT(A) failed to appreciate the fact that the assessee has provided the addresses, PANs, GST Nos, etc. before the AO. The reliance was also placed on the decision of Coordinate Bench (ITAT “A” Bench Ahmedabad) rendered in the case of ACIT vs.Manish Organics India Ltd. reported at (2012) 17 taxmann.com 25 (Ahd.) and on the judgement of Hon’ble Gujarat High Court rendered in the case of National Textiles vs. CIT reported at (2001) 249 ITR 125(Guj.).
Contention of the Revenue
The ld.Sr.DR supported the orders of the authorities below and submitted that the AO made addition on the basis that the assessee failed to establish the purchases from the concerned parties with corroborative evidences in spite of various opportunities given to the assessee. He submitted that the AO has also observed that the assessee has not maintained any corroborative details regarding purchases and consumption of various items used for construction. Under these facts, disallowance of expenditure was justified. The assessee has not placed any material on record suggesting that the higher remuneration was payable to the partners.
Held by Tribunal
It was held by the Tribunal that it is the settled position of law with regard to any expenditure claimed to have been incurred by the assessee, the onus is on the assessee to prove that such expenditure was for the business purpose. In the case in hand, the assessee has claimed certain purchases however the assessee has not placed any corroborative details of the raw-material so purchased. Moreover, the purchases so made from the parties could not be verified by the AO. The AO has made efforts by sending letters to the given address, but the letters so sent and the information as sought by the AO was not furnished by the assessee or the parties concerned. Under these facts, the tribunal did not found any infirmity in the order of the ld.CIT(A) and accordingly order of disallowing bogus purchase was upheld.
The assessee has not made the claim in the original return in respect of the higher remuneration payable to the partners. The assessee has not revised its return and no correction has been made in the account. The ld.CIT(A) has rejected the ground on the basis that the ground has been raised as an afterthought to negate the tax made by the AO. Therefore, the assessee cannot blow hot and cold, therefore, there was no infirmity in the order of the ld.CIT(A) and the same was also upheld.
Coming to the penalty appeal, the Tribunal found that the assessee has placed on record the letters addressed to ITO with account of the alleged bogus party. PAN is also written in case of Umiya Traders and in case of Maruti Traders. The assessee has also placed on record the confirmations by the concerned parties. The AO made addition on the basis that the assessee failed to produce the parties. However, other details in the nature of PANs and confirmations of concerned parties were furnished. Since the AO has not made further enquiry to verify the correctness of confirmations, the arguments of the Revenue was not accepted under these facts. In the instant case, the addition has been confirmed in the quantum proceedings on the basis that the parties from whom purchases were made, was reported to be left by the postal authorities. This reason may be sufficient to sustain the addition, but this basis was not sufficient in the light of the decision of the Coordinate Bench in the case of ACIT vs. Manish Organics India Ltd. wherein the Hon’ble Coordinate Bench has held “This is a case where explanation of the assessee has not been accepted by the Department. The levy of penalty is merely on disallowance of expenditure and not finding of concealment of any particulars or mala fide intention to reduce the taxable income.” The Hon’ble Gujarat High Court in the case of National Textiles v. CIT has held that “section 68 permits the AO to treat unexplained cash credits as income for making certain additions if there is failure by the assessee to give an explanation. However, the addition made on this count automatically cannot justify the penalty levied u/s 271(1)(c).” In the light of above, Tribunal was of considered view that the ld.CIT(A) was not justified to confirm the penalty. Therefore, order of ld.CIT(A) was set aside.
As a result quantum appeal of the assessee dismissed whereas penalty appeal allowed.