2020 (9) TMI 410 - AT - Income Tax

Estimation of income - bogus purchases - CIT-A sustained 12.5 % disallowance out of the bogus purchases - HELD THAT - It is settled law that when sales are not doubted hundred percent disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from case of Nikunj Eximp Enterprises 2014 (7) TMI 559 - BOMBAY HIGH COURT . Facts of the present case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation in our considered opinion on the facts and circumstances of the case the 12.5 % disallowance out of the bogus purchases done by the learned CIT-A meets the end of justice. Accordingly we uphold the order of learned CIT-A. Disallowance u/s 43B - assessee had not paid an amount on account of VAT before filing the return of income of the year under consideration - HELD THAT - As decided in own case 2017 (8) TMI 1288 - ITAT MUMBAI CIT (A) has deleted the addition on the ground that section 43B would attract only to a case where an item is allowable as deduction but because of failure to make payment such deduction would not be allowed. Section 43B is applicable in the case of sales tax and excise duty but same could not be in case of service tax CIT (A) held that assessee never allowed deduction on account of service tax which is collected on behalf of government and paid to government account therefore service provider is merely acting as the agent of the government and is not entitled to deduction on account of service tax. CIT (A) has also considered that as per rule 6 of Service Tax Rules the service provider becomes liable to make payment of service tax by 5th of the month immediately following the calendar month which the payments are received towards value of taxable service. Therefore Ld. CIT (A) has correctly deleted the addition. - Decided against revenue.

Summary

Issues:
1. Deletion of addition on account of bogus purchases
2. Deletion of addition under section 43B for VAT and service tax

Deletion of Addition on Account of Bogus Purchases:
The case involved an appeal by the revenue challenging the deletion of an addition of Rs. 58,750 by sustaining only Rs. 7,344 disallowance on account of bogus purchases for the assessment year 2012-13. The assessing officer had made a hundred percent addition on account of bogus purchases. However, the learned CIT-A noted that the sales were not doubted and sustained a 12.5% disallowance out of the bogus purchases. This decision was based on various case laws and the facts of the case. The ITAT upheld the CIT-A's order, emphasizing that when sales are not doubted, a hundred percent disallowance for bogus purchases cannot be justified. The Tribunal also highlighted that making purchases through the grey market could lead to savings for the assessee at the expense of the exchequer. Therefore, the 12.5% disallowance out of the bogus purchases was deemed appropriate to meet the ends of justice.

Deletion of Addition under Section 43B for VAT and Service Tax:
Regarding the issue of disallowance under section 43B for VAT and service tax, the assessing officer had added amounts of Rs. 1,14,91,532 on account of VAT and service tax not paid before filing the return of income. The CIT-A relied on the assessee's own case decided by the ITAT for AY 2009-10, where it was held that section 43B would not apply to service tax as the service provider acts as an agent of the government and is not entitled to claim a deduction on account of service tax. The ITAT confirmed the CIT-A's decision based on precedent and the absence of contrary decisions. Therefore, the addition made by the assessing officer under section 43B for service tax was disallowed, while the addition for outstanding VAT was confirmed as the appellant failed to provide any explanation or relevant judgment regarding the outstanding VAT amount.

In conclusion, the ITAT upheld the decisions of the CIT-A on both issues, leading to the dismissal of the revenue's appeal.