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Facts
The assessee, a company trading in ferrous and non-ferrous items and diamonds, filed its return for AY 2012-13. The Assessing Officer made additions for bogus purchases, disallowance of interest expenses, and outstanding creditors, treating them under Section 41(1). The assessee failed to provide adequate evidence for these claims.
Held
The Tribunal held that the assessee failed to provide necessary evidence for purchases, interest payments, and outstanding creditors. The CIT(A)'s relief to the assessee on these grounds was found to be unjustified without proper verification or opportunity to the Assessing Officer. Therefore, the Assessing Officer's additions were restored.
Key Issues
Whether the CIT(A) was justified in restricting the disallowance of unproved purchases and deleting additions for interest and outstanding creditors without adequate evidence and opportunity to the AO.
Sections Cited
143(1), 271(1)(b), 144, 43B, 41(1), 254(1)
AI-generated summary — verify with the full judgment below
PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by Revenue is directed against the order of National Faceless Appeal Centre (NFAC) / Ld. CIT(A), Mumbai dated 18.07.2024 for assessment year (AY) 2012-13. The Revenue has raised following grounds of appeal:
“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of non-genuine and bogus purchases shown by the assessee company to 5% only without appreciating the fact that the purchases were not proved to be genuine and the assessee company was not able to produce any evidence or details in support"
2. The Ld. CIT(A) had erred in law by not appreciating the fact that the purchase made as claimed by the assessee was not substantiated by any circumstantial evidence?"
On the facts and in the circumstances of the case and in law, the CIT(A) was erred in not appreciating the fact that Clause(d), (da) or (e) of Section 43B of the Income-tax Act, 1961 do not cover interest payable on any loan or borrowing taken from World Bank/Government".
4. "On the facts and in the circumstances of the case and in law, the CIT(A) was erred in not appreciating the fact that there was a live link between the creditors and the outstanding debts, in the absence of assessee discharging the burden shifted upon him, the case of cessation of liability made out by the revenue u/s.41(1) of the income-tax Act of Rs. 12,91,24,403/- was justified".
Brief facts of the case as gathered from the orders of lower authorities that assessee is a company engaged in trading of ferrous and non-ferrous items and in trade of diamond. The assessee filed its return of income for assessment year (AY) 2012-13 on 31.03.201 declaring total income at Rs. 28,01,140/-. Initially, the return was processed under section 143(1).
Subsequently, the case was selected for scrutiny. The assessing officer in para 1 of assessment order recorded that despite serving of various notices for seeking various details, the assessee has not furnished required details.
Accordingly, penalty under section 271(1)(b) of Rs. 10,000/- was levied vide order dated 29.01.2015. The assessing officer issued final show cause notice fixing the date of hearing on 18.03.2015 intimating the assessee that in absence of reply he will proceed under section 144. The assessee failed to response such notice, therefore, the assessing officer proceeded under section 144 and complete the assessment in ex-parte proceeding. During assessment, the assessing officer noted that assessee has shown purchases of Rs. 101.66 crore, the assessee was asked to furnish party-wise details and purchases of more than 11.00 lacs, nature of purchases and the details with documentary evidence. The assessing officer recorded that vide reply dated 26.02.2015, the assessee furnished stock details of purchase parties above Rs. 10.00 lacs but no documentary evidences like copy of invoices, bills was furnished. In absence of such details, the assessing officer disallowed 25% of such purchases. The assessing officer further noted that assessee has shown interest payment to various bank and financial institutions of Rs. 3.73 crore.
The assessee was asked to furnish the documentary evidence to substantiate the claim of interest. Since, no details were furnished by assessee, the assessing officer disallowed entire interest of Rs. 3.73 crore under section 43B(e). The assessing officer, further, noted that in the balance sheet, the assessee has shown trade payable of Rs. 12.91 crore. The assessee was asked to furnish the details of creditors. The Assessing Officer noted that no such details were furnished, thus, in absence of such details, the assessing officer disallowed such claim and made it taxable under section 41(1).
3. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee challenged all the additions with other additions. The ld. CIT(A) in para 4 of his order recorded that during the appellate proceeding, the assessee was served various notices and in response to such notices, the assessee furnished copy of return of income, profit and loss account, balance sheet to the audit report. Against the disallowance of purchases, the assessee furnished relevant bills, ledger copy and bank statement. With regard to disallowance of trade payable which was treated under section 41(1), the assessee furnished relevant ledger, copies of parties and invoices. With regard to disallowance of bank interest of Rs. 3.73 crore, the assessee furnished bank account statement. The ld. CIT(A) on considering the submission of assessee, on the addition/disallowances of 25% of purchases, recorded that assessee is engaged in the business of trade of ferrous and non-ferrous items and having a turnover of Rs. 103.43 crore, the assessee has debited total purchases of Rs. 101.66 crore, thus, there was a gross profit of 2.2 crore from business. The gross profit ratio is about 2.00 % of total turnover. There may be slight possibility of over-statement of purchases. There may be possibility of debit the excess purchases to reduce the profit. The assessing officer had not brought any adverse material to justify disallowance of 25% from the total purchases. The ld. CIT(A) simply held that on considering the facts and circumstances, he hereby restricted disallowance @5% and balance was deleted. On the disallowance of interest expenses, the ld. CIT(A) held that assessee has debited interest payment to bank and financial institution. The assessee has not given any bifurcation of interest payable to various Schedule Bank and financial institution, the Assessing Officer did not bring any material to show that expenditure was actually paid or not. The Assessing Officer did not confirm whether such interest was outstanding in the balance sheet as on 31.03.2012. The assessing officer disallowed without verifying relevant fact. Action of assessing officer is highly arbitrary and not tuneable. On such observation, the ld. CIT(A) deleted the entire addition. On the addition under section 41(1), the ld. CIT(A) held that during assessment, the assessee has not furnished any detail, therefore, assessing officer proceeded to disallow entire outstanding creditors without bringing any material on record. Since, he has already disallowed 5.00% of purchases from unverifiable purchases, therefore, to that extent the addition of outstanding creditors is taking into consideration and no further addition on account of creditors is required. Aggrieved by the order of ld. CIT(A), the Revenue has filed appeal before Tribunal.
Notice of hearing of this appeal was sent to the assessee on the address of assessee mentioned in Form 36 on more than 4 occasions. The revenue has mentioned same address on Form-36, which is mentioned on assessment order and order of ld CIT(A). However, all such notices were returned back with the remark of postal authority “not known”. Notice through ld. DR was also sent for service at the given address i.e. “205, Jolly Bhavan No. 2 Near Marine Line, Mumbai – 400020”. Inspector from the office of ITO 1(2)(3) reported that he visited the address of assessee to serve the notice but no such address was found. The notices were also sent through emails on more than four occasions as per email provided on Form-36. Consideration the fact that, the notices sent on the address of assessee has been returned back, therefore, we left no option except to proceed on the basis of material available on record and hearing the submission to ld. CIT DR for the Revenue.
The ld. CIT-DR for the Revenue submits that they have basically challenged the order of ld. CIT(A) on three issues, number one, in restricting the disallowance of unproved purchases from 25% to 5.00% without any evidence on record. The assesse was ex-parte before the Assessing Officer and has not proved the purchases. The ld. CIT(A) restricted the addition to the extent of 5.00% of the impugned purchases without giving any finding of fact or opportunity to the assessing officer to make any comment on any evidence, if any filed before ld. CIT(A). Similarly, issue of addition of interest payment, the assessee has not furnished any detail before assessing officer. The ld. CIT(A) allow relief to the assessee without giving any opportunity to the assessing officer. Lastly, and thirdly on the addition of outstanding creditors, the ld. CIT(A) allow relief to the assessee without seeking any details of creditors or allowing any opportunity to the assessing officer, if any submissions were filed. The ld CIT-DR for the revenue prayed for setting aside the order of ld CIT(A0 and to restore the order of Assessing Officer on all three grounds of appeal.
6. We have considered the submissions of ld. CIT-DR for the Revenue and perused the order of lower authorities carefully. Ground No. 1 of appeal relates to restricting the disallowance of purchases from 25.00% to 5.00% of unproved purchases. We find that before assessing officer, the assessee has not filed any response to prove the purchases. The ld. CIT(A) allow part relief to the assessee that assessing officer has not brought any adverse material to justify the disallowance of 25% of purchases. We find that ld. CIT(A) has not discussed if the assessee has filed any evidence to substantiate the genuineness of purchases and delivery of such goods. Primary onus to prove the purchases before Assessing Officer were on the assessee, which was not discharged by the assessee. No opportunity was allowed by ld CIT(A) before allowing part relief to the assessing officer to make any comment on the submission of assessee or if any evidence was filed. Therefore, we do not find any justification in reducing the disallowance, therefore, the finding of ld.
CIT(A) is reversed and finding of assessing officer is restored.
Ground No. 2 relates to disallowance of bank interest under section 43B. We find that assessing officer has made addition for the want of any explanation or any evidence to substantiate the interest paid to the bank and financial institution. The ld. CIT(A) allow relief to the assessee by holding that the assessing officer made addition without verifying the relevant fact. We find that no facts or evidence was furnished before assessing officer. The ld. CIT(A) has not allowed opportunity to the assessing officer if any explanation, submission or evidence to substantiate the genuineness of bank interest or filed before or not. Thus, we do not find any justification in allowing relief to the assessee, hence, finding of ld. CIT(A) is reversed and assessing officer is restored.
Ground No. 3 relates to deleting the addition of outstanding creditors. Before Assessing Officer, no details of creditors or nature of credit was furnished. The assessing officer treated the outstanding trade payable as cessation trade liability. The ld. CIT(A) allow relief to the assessee without examining the basic fact qua the creditors. The ld. CIT(A) allow relief to the assessee by taking view that he has already confirmed the disallowance of 5.00% of purchases.
Thus, no further addition is required. In our view, in absence of independent finding about the trade outstanding or details of creditors. The ld. CIT(A) was not justified in allowing relief to the assessee, thus, the order of ld. CIT(A) is reversed and assessing officer is restored. In the result, all the grounds of appeal of Revenue are allowed.
In the result, the appeal of Revenueis allowed.
Order pronounced in the open Court on 18/06/2025.