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Facts
The assessee company, engaged in IT services, made substantial purchases from two vendors. The Assessing Officer (AO) disallowed 30% of these purchases on an ad-hoc basis under Section 69C, treating them as unexplained expenditure, without issuing a draft assessment order. The assessee argued that payments were made through banking channels, GST returns were filed by vendors, and it was impractical to meet them during the Covid period.
Held
The CIT(A) allowed the assessee's appeal, holding that the AO's action of treating part of the payments as genuine and the rest as ingenuine was illogical and lacked reasoning. The CIT(A) also noted that the AO incorrectly invoked Section 69C as the expenditure was accounted for and the source was not disputed. The Tribunal agreed with the CIT(A), finding the AO's estimation to be ad-hoc and not based on explained expenditure.
Key Issues
Whether the disallowance of part of the purchase payments under Section 69C by the AO was justified without proper enquiry and adherence to procedural norms, and whether the CIT(A) correctly deleted the addition.
Sections Cited
194C, 143(3), 144B, 69C, 36, 37
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH MUMBAI
Before: SHRI SATBEER SINGH GODARA & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2023-24/1055345957(1), dated 28.08.2023, against the assessment order passed by the Assessing Officer, National Faceless Assessment Centre, Delhi, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 27.12.2022 for Assessment Year 2021-22
2. Grounds taken by the Revenue are reproduced as under:
Moshau Value Research Pvt. Ltd, AY 2021-22 1. “Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in disallowing the addition of Rs. 3,27,29,258/u/s69C". 2. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the ground raised by the assessee that the assessment unit (AU) failed to give adequate opportunity to cross examine the suppliers". 3. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the issue of issuing the Final Assessment Order without issuing the Draft Assessment Order raised by the assessee. 4. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the ground of calculating the purchases from the alleged bogus suppliers which amounts to Rs. 8,62,47,027/- as against Rs. 10,90,97,527/-"
Brief facts of the case are that assessee is closely held joint stock company incorporated on 09.04.2019 carrying on the business of providing IT Services on contractual basis like system or software or project analysis and design, online or mobile game testing, programming, software testing, software quality assurance, outsourcing of IT and telecommunication services, IT consultancy, Online Marketing and Product Promotion and IT process development services. Assessee filed its return of income on 23.02.2022, reporting total income at Rs. 1,30,260/-.
3.1. Assessee made purchases from entities namely, M/s. Blue Sky Enterprises - Rs.4,42,47,027/- and M/s. Fourth Dimensions -Rs. 4,20,00,000/-, total of which comes to Rs.8,62,47,027/- for which details were called for. Assessee submitted all the information so called to claim that the entire purchases, in the year under consideration, from both the vendors located in Delhi were conducted in prime Covid period. Assessee has operations in Mumbai. According to the assessee, it was neither practical nor necessary for the management of the assessee to meet the vendors in person at their physical location. Both the vendors filed their GST returns and proper Input Tax Credit was made available and the same was duly claimed by the assessee in its GST returns. All the payments to both the vendors were duly made and the same was Moshau Value Research Pvt. Ltd, AY 2021-22 done through proper banking channel. Assessee also requested for cross examination with the said vendors which was not granted. Assessing Unit noted that excess payments were made to M/s. Fourth Dimension. On this, assessee stated that important fact is ignored about the sum of Rs.4,21,20,000/- which was payable at the start of the year and a sum of Rs.4,08,17,500/- was payable at the end of the year.
3.2 Case was selected for complete scrutiny proceedings for the following reasons-
1. 1. Large payments made under section 194C to persons who have not filed return of income.
2. Assessee made substantial purchases from suppliers who are either Non-Filers or have filed non-business ITR ITR 1, 2 or reflected a substantially lower turnover in ITR.
3.3. Assessing Unit issued a Show Cause Notice on 20.12.2022 for which assessee filed its reply on 24.12.2022. Finally, order was passed u/s 143(3) r.w.s 144B of the Act without issuing any draft assessment order as required u/s 144B(1)(xvi) (b) of the Act. In the Final Order, the Assessing Unit disallowed 30% of Rs. 10,90,97,527/- amounting to Rs. 3,27,29,258/- u/s 69C. Correct fact submitted is that purchases from the alleged bogus suppliers was only Rs. 8,62,47,027/- as against Rs.10,90,97,527/-. In the order, Assessing Unit did not dispute that either of the vendors are non filers or have offered lower turnover in their ITR. Aggrieved, assessee went in appeal before the ld. CIT(A).
Before the ld. CIT(A), assessee made elaborate submissions to point out several discrepancies in the observations and findings arrived at by the ld. Assessing Officer which demonstrates that the conclusion Moshau Value Research Pvt. Ltd, AY 2021-22 arrived at by ld. Assessing Officer is based on inadequate enquiries and without following the provisions contained in the Act and the procedure so prescribed therein.
4.1. The submissions of the assessee include- • there is no mention in the assessment order regarding issue of draft assessment order/SCN, if any to the assessee. • There is no mention in the assessment order regarding affording any opportunity to the assessee after receipt of report from verification unit. • there is no mention in the assessment order regarding confronting the assessee with the findings of the verification unit. • While AO had extracted the reasons for selection of the case for scrutiny in para-1 of the assessment order viz., 1. Large payments made under section 194C to persons who have not filed return of income.
Assessee has made substantial purchases from suppliers who are either NonFiler(s) or have filed non-business ITR (ITR 1,2) or have reflected a substantially lower turnover in ITR.
there is no mention in the assessment order regarding nature of enquiry the reasons for selection of the case for scrutiny as the AO has not made any specific comment nor any categorical remark to prove that the vendors are non filers or that have filed non-business ITR(ITR 1,2) or that have offered lower turnover in their ITR. • All that the AO mentioned is his attempt to verify the address and that too in the case of sri Ravikumar(Fourth Dimension) through verification unit just two weeks before the time barring date which reported that the said party is not found in the address. It is not mentioned in the assessment order if the address which was sought to be verified for the purpose of serving a notice u/s 133(6) of the IT Act, is that as per the PAN or Invoice or as per bank statement or as per details furnished by the assessee. In case the address is found to be incorrect, the AO ought to have confronted the assessee with the same which the AO appears to have not done. Just because an address is found to be incorrect, it may be a pointer but it by itself ipso facto cannot lead to a conclusion that the transaction is not genuine. Moreso when the finding is not put forth to the assessee. • As regards Sri Rahul, the AO had just mentioned that whereabouts are unknown. It is not understood as to why the AO had not referred it to the verification unit. Further the assessment order does not mention as to which is the address at which verification was sought to be conducted and what led to conclude that the whereabouts are unknown. Just because whereabouts are unknown, it may be a pointer but it by itself ipso facto cannot lead to a
Apart from the above, ld. CIT(a) took note of glaring inconsistencies from inadequate enquiries conducted by the ld. Assessing Officer, which are extracted below-
1. 1. The disallowance is restricted to 30% of the payments on an ad-hoc basis which means that out of the entire payment to the said two parties 70% is genuine while the balance 30% is not.
2. The estimated disallowance of 30% of payments on ad-hoc basis are added u/s 69C of the IT Act in re-computation the total income to arrive at the assessed income.
5.1. Thus, ld. CIT(A) arrived at a conclusion based on these inadequacies and discrepancies to hold that action of the ld. Assessing Officer in treating part of the payments to the party as genuine and balance as ingenuine is preposterous, being devoid of any logic and lacks any reasoning. He noted that a payment cannot be partly true and at the same time, partly false. Ld. Assessing Officer has not spelt out any reason for arriving at adopting an estimate of 30% for disallowance which is ad-hoc and without any basis, more particularly when the same was neither confronted to the assessee nor put forth for rebuttal. He also noted that the addition has been made u/s. 69C of the Act which gets invoked in a case where source of an expenditure is not explained and the unexplained expenditure is then deemed as income in the hands of the assessee.
5.2. In the given set of facts, expenditure relates to payment to the suppliers which are accounted in the book of accounts of the assessee, details of which were furnished during the course of assessment and payments are made through banking channel. These facts are undisputed by the ld. Assessing Officer. Only because the whereabouts of the said parties could not be known, ld. Assessing Officer has disallowed part of the payments of the said two parties on ad-hoc basis Moshau Value Research Pvt. Ltd, AY 2021-22 by adopting 30% of the total amount. On these set of facts, ld. CIT(A) noted that source is not an issue since assessee has duly accounted for the expenses in its books of accounts. It is not a case where assessee has failed to offer an explanation about the source of such expenses.
5.3. By analysing the provisions of Section 36 and 37 of the Act vis-à- vis Section 69C invoked by the ld. Assessing Officer, ld. CIT(A) meritoriously concluded that ld. Assessing Officer had confused himself on disallowance of expenditure claimed by the assessee u/s. 36 and/or u/s. 37 vis-à-vis unexplained expenses deemed to be income of the assessee u/s. 69C of the Act whose source is not explained. In the first case, it a disallowance whereas in the other, it is a deemed income which operates in a different set of facts and circumstances. He thus, concluded that ld. Assessing Officer is not correct in invoking Section 69C to make addition when the claim of expenditure is made in the books of accounts and when the ld. Assessing Officer had not found any fault with the source of such expenditure nor with the books of accounts. Thus, the addition so made was deleted.
Before us, ld. Sr. DR could not bring on record any cogent material to controvert the well-reasoned meritorious findings of ld. CIT(A), based on the facts of the case and the relevant provisions in the Act. She placed reliance on the order of ld. Assessing Officer.
We have perused the orders of the authorities below. The facts as narrated above remain uncontroverted. It is a case where ld. Assessing Officer has made an ad-hoc estimation of the expenditure accounted by the assessee in its books of accounts, to treat them as unexplained expenditure u/s. 69C of the Act by adopting a rate of 30% of the expenses so recorded. Section 69C is a deeming provision which calls Moshau Value Research Pvt. Ltd, AY 2021-22 for explanation as to source of the expenditure incurred by the assessee. We are in agreement in toto with the finding of the ld. CIT(A) as to action of the ld. Assessing Officer who has held part payment as genuine and balance as ingenuine which is devoid of any logic and reasoning. There cannot be such estimation or the ad-hoc disallowance u/s. 69C which is invoked only in cases where the source of the expenditure is not explained. Considering the fact based meritorious observations and findings arrived at by the ld. CIT(A), we do not find any reason to interfere with the same. Accordingly, grounds raised by the Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.