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Facts
A search was conducted at the assessee's premises, leading to a revised income assessment with additions for VAT credits, commission expenses, and interest on advance. The assessee appealed these additions to the CIT(A).
Held
The Tribunal held that VAT credit, not claimed as an expense and disclosed as a current asset, is not income. It also found that the commission disallowance was reduced by the CIT(A) to a reasonable extent, and the notional interest deletion was justified as the advance was for a cancelled business transaction.
Key Issues
Whether VAT credit, not claimed as expense, constitutes income, and whether ad-hoc additions for commission expenses and notional interest on advances were justified.
Sections Cited
153A
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI NARENDRA KUMAR BILLAIYA, HON’BLE
O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the revenue is preferred against the order of the ld. CIT(A) – 51, Mumbai [hereinafter “the ld. CIT(A)”] dated 09/05/2025 pertaining to AY 2007-08.
The grievance of the revenue reads as under:- “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.96,21,568/- on account of VAT input credit availed on purchases held to be bogus, by treating such credit as a mere balance sheet item, even though such credit resulted in reduction of VAT liability and, therefore, conferred a benefit to the assessee?" 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred by partially deleting the addition on account of commission expenses relating to bogus purchases, despite third-party statements indicating commission at 2%, and without any credible evidence from the assessee to prove otherwise? 3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in arbitrarily estimating commission expenditure at 1% without appreciating that the AO had relied on sworn statement of entry operator who admitted to charging 2% commission for bogus transactions?
2 4. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.6,63,000/- made on account of notional interest on advances given to M/s Akruti Metals & Alloys Put Ltd., when the transaction ultimately did not materialize and the assessee failed to prove the advance was for business purposes?"
Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in relying on the presumption of availability of interest-free funds (as laid down in Reliance Industries Ltd.) to delete disallowance of notional interest, when the assessee failed to establish commercial expediency at the time of giving the advance?"
6. The appellant craves the leave to add, amend, alter and/ or delete any of the grounds of appeal as above."
3. Briefly stated the facts of the case are that a search was carried out at the premises of the assessee and its group concern on 26/07/2011. Accordingly notice u/s 153A of the Act was issued in response to which the assessee filed the return of income declaring Rs. 1,29,75,48,528/-. The returned income was assessed at Rs. 1,31,26,44,040/- by making the additions, (1) disallowance of VAT credits – Rs. 96,21,568/-; (2) addition of commission expenses – Rs. 48,10,940/- and (3) interest accrued on advance – Rs. 6,63,300/-.
4. Assessee carried the matter before the ld. CIT(A) and vehemently contended that it has not claimed any expenditure of VAT credit and set off of the same has not resulted in any reduction of income. Therefore, the addition of Rs. 96,21,568/- is uncalled for. 4.1. It was further contended that the estimated adhoc commission expenditure of Rs. 48,10,940/- is only made on the presumption that the accommodation entry of purchases made from Lakhan Traders Pvt. Ltd., the assessee must have paid some commission for taking the accommodation entry.
3 4.2. The addition on account of interest amount of Rs.6,63,300/- has been made on notional basis calculated @ 12% on interest free advance given to Akruti Metals and Alloys Ltd.
5. After considering the facts and the submissions, the ld. CIT(A) was convinced that the assessee has been maintaining books of accounts in accordance with the Mercantile system of accounting and on an exclusive basis and observed that the AO’s conclusion that the input VAT credit assumes the character of income merely because the underlying purchases are alleged to be non-genuine is fundamentally flawed. The ld. CIT(A) went on to delete the addition of Rs. 96,21,568/-. Insofar as, the ad hoc addition on account of alleged accommodation entry is concerned, the ld. CIT(A) found that the AO has estimated 2% and after considering the facts and the submissions restricted the addition to the extent of 1% of the purchase value and the addition of notional interest was deleted by the ld. CIT(A) observing that the assessee had placed a purchase order to Akruti Metals and Alloys Ltd., and accordingly advanced a sum of Rs. 1.32 Crores and as the transaction was subsequently cancelled and the advance refunded, there is no question of charging any notional interest and the addition was deleted.
Before us, the ld. D/R strongly supported the findings of the AO. The ld. Counsel reiterated what has been stated before the lower authorities.
We have carefully considered the orders of the authorities below. It is an undisputed fact that the assessee has been maintaining accounts on an exclusive basis meaning thereby that the VAT credit has not been passed through the profit and loss account and has not been claimed as expense. The VAT input credit is disclosed as current assets under the schedule of loans and advances in the balance-sheet. In our considered