Introduction
In Silmohan Gems Pvt. Ltd. v. DCIT[i], the ITAT upheld the disallowance of purchases computed at 5% of the purchases and deleted the addition made with respect to the alleged commission received in cash calculated at 3% of the purchases.
Brief Facts
Silmohan Gems Pvt. Ltd. (‘Assessee’) filed its income tax returns under the Income-tax Act,1961 (‘Act’). The assessing officer (‘AO’) received information from the department's investigation wing that the Assessee has obtained accommodation entries from entities controlled by Shri. Bhanwarlal Jain, who, during the search at his premises, admitted to issuing bogus bills.
The AO, therefore, reopened the assessee's assessment and added 3% of the purchases.
In revision proceedings under s. 263 of the Act, the Commissioner of Income Tax (‘CIT’) passed an order stating that the order passed by the AO was prejudicial to the interests of the revenue and directed the AO to make fresh inquiries in light of the decision of the Supreme Court in the case of N.K. Proteins[ii] and directed that the entire purchases should be held to be bogus and added to the income of the Assessee. Further, the CIT also directed that the Assessee had received a commission in cash with respect to the accommodation entries and, therefore, directed the AO to make the necessary disallowances under s. 40A(3) of the Act.
The AO made necessary inquiries and issued a notice under s.133(6) of the Act to M/s Millennium Stars (from whom the Assessee had made the purchases under consideration). The said party provided the details to the AO. Subsequently, summons were issued by the AO to the said party. However, the said party did not appear before the AO. Based on the material available, the AO added the total amount of purchases to the income of the Assessee and also disallowed an ad-hoc amount computed at 3% of the purchases towards commission under s. 40A(3) of the Act.
On appeal to the Commissioner of Income Tax Appeals [‘CIT(A)’], the disallowance was restricted to 5% of the purchases on the ground that sufficient documents were provided. However, the CIT(A) upheld the disallowance under s. 40A(3) of the Act with respect to the commission received in cash.
Both the Assessee and the Department filed appeals before the ITAT aggrieved by the order of the CIT(A).
Observations of the ITAT
The ITAT agreed with the reasoning of the CIT(A) that the AO has not doubted the sales in the present case. The ITAT, therefore, held that the purchases may have been made from some other party and only bills may have been procured from Millenium Stars. Further, the ITAT also agreed with the reasoning of the CIT(A) that necessary documentation to prove the genuineness of sales is on record and therefore held that 5% disallowance of purchases by the CIT(A) was justified.
In reaching the above conclusion, the ITAT relied on the decision of the Bombay High Court in the case of PCIT v. Mohammad Haji Adam & Co.[iii]
Regarding the disallowance under s. 40A(3) of the Act, the ITAT held that it is permitted only when an expense is recorded in the books of account. In the present case, since the Assessee did not claim any expense on account of commission, the ITAT deleted the ad hoc disallowance made by the AO and confirmed by the CIT(A).
Conclusion
The observations of ITAT regarding the ad-hoc disallowances are well reasoned, as no disallowance under s. 40A(3) was warranted in the present case. However, the ITAT's observation regarding the correctness of CIT(A)’s findings regarding the bogus purchases does not appear to be well reasoned. The observation that the purchases would have been made in cash from the other party appears to be based on an assumption and is not supported by any document. The ITAT also appears to have relied on the statement of a third party to arrive at this conclusion. This approach is at variance with other decisions of the ITAT and High Courts, wherein it is held that addition solely on the basis of a third party's statement without corroborative evidence is unsustainable.
End Note
[i] ITA 471/MUM/2023.
[ii] (2004)83TTJ(AHD)904.
[iii] Income Tax Appeal No. 1004 of 2024.
Authored by Adhijeet Neogy of Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.