Facts of the Case

The assessee, Binoy Agarwal, is engaged in the business of trading in furnishing items and filed his return of income for Assessment Year 2021-22 on 01.03.2022 declaring total income of ₹1,33,64,769. The case was selected for scrutiny and notices under Sections 143(2) and 142(1) were issued. During assessment, the Assessing Officer alleged that purchases aggregating to ₹4,38,61,650 from four parties were not verifiable due to deficiencies in supplier details and PAN data. The Assessing Officer treated the entire amount as bogus purchases and added it to the income. The CIT(A), NFAC deleted the addition. The Revenue preferred an appeal before the Tribunal.

Issues Involved

Whether the CIT(A) was justified in deleting the entire addition made on account of alleged bogus purchases, whether purchases can be disallowed in full when sales are accepted and books of account are not rejected, and whether disallowance of commission and contract expenses paid to related parties was justified under Section 37.

Petitioner’s Arguments

The Revenue contended that the assessee failed to furnish complete and verifiable details of suppliers and therefore the purchases were non-genuine. It was argued that the CIT(A) erred in deleting the addition without appreciating the deficiencies pointed out by the Assessing Officer. The Revenue also argued that commission and contract expenses paid to related parties, including the assessee’s HUF, were not proved to be incurred wholly and exclusively for business purposes and were rightly disallowed by the Assessing Officer.

Respondent’s Arguments

The assessee submitted that purchases were genuine and supported by GST returns, e-way bills, invoices, bank payments and books of account. It was argued that sales made to a semi-government department, namely the Gorkha Hill Council, Darjeeling, were accepted by the Assessing Officer and therefore purchases corresponding to such sales could not be treated as bogus. The assessee further submitted that no purchases were made from certain parties and affidavits were filed to that effect. Regarding commission and contract expenses, it was contended that complete details of recipients, PAN, bank statements and returns of income were furnished and the payments were regularly offered to tax by the recipients.

Court Order / Findings

The ITAT Kolkata held that the CIT(A) had correctly deleted the addition on account of alleged bogus purchases. The Tribunal noted that the Assessing Officer had not doubted the sales made by the assessee and had not rejected the books of account. The Tribunal observed that the assessee had furnished cash book, bank book, ledger accounts, GST returns, e-way bills and supplier details, and payments were made through banking channels. Relying on settled judicial principles, the Tribunal held that where sales are accepted, entire purchases cannot be disallowed and at most only the profit element could be brought to tax. Since even such estimation was not warranted on the facts, deletion of the entire addition was upheld.

On the issue of disallowance of commission and contract expenses, the Tribunal held that the assessee had furnished sufficient documentary evidence to establish that the expenses were incurred wholly and exclusively for business purposes. The Tribunal noted that the Assessing Officer failed to bring any material on record to show that the payments were bogus or excessive and that the recipients had duly offered the income to tax. Accordingly, the deletion of disallowance by the CIT(A) was also upheld.

Important Clarification

The Tribunal clarified that mere doubt about suppliers or non-production of parties cannot justify disallowance of entire purchases when sales are accepted, books are not rejected and transactions are supported by documentary evidence including GST records. It was further clarified that payments to related parties cannot be disallowed under Section 37 in absence of evidence showing that such expenditure is bogus or unreasonable.

Final Outcome

The appeal filed by the Revenue was dismissed in entirety. The order of the CIT(A), NFAC deleting the addition of ₹4,38,61,650 on account of alleged bogus purchases and allowing commission and contract expenses was upheld.

Source Link- https://itat.gov.in/public/files/upload/1767344749-K5WA9H-1-TO.pdf

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