2025 (4) TMI 896 - AT - Income Tax

Bogus purchases - HELD THAT - From the perusal of the documents submitted it is seen that in so far as Emirates Shipping Line the same is agent of Emirates Shipping Agencies India Pvt. Ltd and the services availed by assessee are carriage handling charges terminal handling charges export document fees for which assessee had made payment through cheques and also deducted TDS. In light of these documents it cannot be held that it is a bogus party or the purchases are not genuine. If a party has not filed return of income for the year under consideration that does not mean the transaction undertaken by the assessee is bogus so as to disallow the entire payment. If the assessee has deducted TDS and also reflected the transaction in the GST return alongwith bills in support of nature of services used then how can the transaction be treated as bogus to disallow the expenses debited and thus addition made on account of bogus purchases cannot be sustained and same is deleted. With regard to other three parties also the same reasons have been given by the ld. AO. It is seen that assessee had received freight services from Namaste India Aviation Private Limited; road transport services from Lakshmanan Ramchandran; and ocean freight bunker charges sea charges port handling charges from Sea Bridge Maritime Agencies Private Limited and for availing these services assessee has deducted TDS and also filed complete invoices and bank statement to evidence the payment which was there in the DRP also. In light of these documents it is difficult to hold that these are bogus expenses. Simply because these parties might not have filed the return of income but that does not lead to inference that transaction is bogus. Thus the addition made by the ld. AO is directed to be deleted. Disallowance pertaining to reversal of provision of lease rent - assessee whenever creates a provision pertaining to the earlier years the same has been disallowed while computing taxable income for those assessment years. Once in the computation provision has been disallowed and offered to tax in the preceding year then the assessee is correct in reducing it from business income of the current year on reversal and the same has been claimed as deduction in the current year by taking the net amount of difference between closing balance and the opening balance. Once these details have been furnished we do not find any reason to make the disallowance on the reversal of the provision. When same has already been disallowed in the earlier years accordingly this issue is decided in favour of the assessee. Disallowance pertaining to reversal on profit on sale of asset - HELD THAT - The assessee had reduced the sale consideration from the block of assets as per Section 50 and the block of asset did not cease to exist and hence it was not required to consider short term capital gains while computing its taxable income. Accordingly amount which has been credited to the profit and loss account has been reduced while computing the business income because it is a capital receipt. The only manner in which it could have taxed was as per Section 50 however once assessee has reduced from the block of asset and said block of asset does not ceased to exist therefore there is no requirement to consider it for short term capital gains. Accordingly we do not find any reason for such disallowance made by the ld. AO and the same is allowed. Addition u/s.43B - leave encashment liability which was not paid during the captioned year - HELD THAT - DRP remanded back this issue to the ld. AO for verification. The ld. AO issued notice to the assessee to provide its response however while submitting the response assessee by mistake could not attach the annexure which was relevant for the submission is now being annexed before us. Since this annexure was not there before the ld. AO therefore the matter is remanded back to the ld. AO only for a limited purpose to consider the above factual aspect and grant appropriate relief. Accordingly ground is partly allowed for statistical purposes. Non-grant of self- assessment tax - It has been stated that assessee had already filed rectification application before the ld. AO. Accordingly we direct the ld. AO to verify the same and grant credit accordingly.

Summary

The core legal questions considered in this appeal pertain to the validity of additions and disallowances made by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) in the final assessment order under the Income Tax Act. The principal issues examined include: (1) whether certain purchases claimed by the assessee constitute bogus purchases warranting disallowance; (2) the correctness of disallowance of reversal of provision for lease rent; (3) the treatment of profit on sale of asset and its taxability; (4) the correctness of additions under Section 43B relating to leave encashment liability; (5) issues related to short grant of Tax Deducted at Source (TDS) and self-assessment tax; (6) the consequential interest under Section 234B; and (7) the initiation of penalty proceedings under Section 270A.

Regarding the issue of bogus purchases, the AO had disallowed purchases amounting to Rs. 85,87,489/- from four vendors on the ground that these vendors had not filed income tax returns or business returns, and in one case, the assessee failed to produce documentary evidence and bank statements. The DRP upheld this disallowance despite the assessee's submission of invoices, bank payment proofs, TDS deductions, and GST returns. The Court examined the evidence, which included invoices (pages 124-172 of the paper book), bank statements (pages 173-179), TDS reflected in Form 16A, and GST returns (Form 2A). It was noted that payments were made through banking channels, TDS was deducted and reported, and the vendors were either active or amalgamated subsequently. The Court held that non-filing of returns by vendors alone cannot render transactions bogus. The presence of documentary evidence, banking transactions, TDS compliance, and GST filings were sufficient to establish genuineness. The Court explicitly stated: "If the assessee has deducted TDS and also reflected the transaction in the GST return alongwith bills in support of nature of services used, then how can the transaction be treated as bogus to disallow the expenses debited." Accordingly, the addition on account of bogus purchases was deleted.

On the reversal of provision for lease rent amounting to Rs. 53,91,234/-, the AO disallowed the deduction on the ground that the assessee failed to produce computations of earlier years. The assessee explained that provisions were created and disallowed in earlier years, and the reversal in the current year was claimed as deduction, consistent with accounting principles and tax treatment. The Court reviewed detailed financial statements and computations for assessment years 2014-15 through 2018-19 (notably pages 202-217 of the paper book), which showed opening and closing balances of lease rent provisions and their treatment in respective years. The Court reasoned that since the provision was disallowed and taxed in earlier years, the reversal rightly reduces income in the current year. The Court concluded that "once these details have been furnished, we do not find any reason to make the disallowance on the reversal of the provision" and decided the issue in favour of the assessee.

Regarding the profit on sale of asset of Rs. 19,660/-, the assessee sold an asset from the block of plant and machinery and reduced the sale consideration from the block as per Section 50 of the Act. Since the block did not cease to exist, short-term capital gains were not required to be computed separately. The DRP disallowed the deduction for failure to submit provisions of past years. The Court noted the tax audit report (page 72) and schedules of other income (pages 218-219), confirming that the profit was accounted for correctly and that the sale consideration was reduced from the block of assets. The Court held that the amount credited to profit and loss account was capital receipt and rightly excluded from taxable income, stating: "The only manner in which it could have taxed was as per Section 50 however, once assessee has reduced from the block of asset and said block of asset does not ceased to exist therefore, there is no requirement to consider it for short term capital gains." The disallowance was thus reversed.

In relation to Section 43B disallowance of Rs. 9,33,311/- pertaining to leave encashment liability, the AO noticed a variance between the return of income (ROI) and the Tax Audit Report (TAR). The assessee claimed deductions for pre-existing and current year leave encashment liabilities under Section 43B, duly reported in the TAR. The difference of Rs. 9,33,311/- was added to taxable income by the AO. The DRP remanded the matter to the AO for verification. The assessee submitted an annexure before the Tribunal which was not before the AO. The Court remanded the matter to the AO for limited purpose of considering the factual aspect and granting appropriate relief. The ground was partly allowed for statistical purposes.

Grounds relating to short grant of TDS of Rs. 5,62,031/- and non-grant of self-assessment tax of Rs. 8,49,68,000/- were addressed on the basis that the assessee had filed rectification applications. The Court directed the AO to verify and grant credit accordingly, allowing these grounds for statistical purposes.

The consequential ground relating to interest under Section 234B was directed to be recomputed by the AO after granting TDS credit and self-assessment tax relief.

The initiation of penalty proceedings under Section 270A was held to be premature and dismissed.

Significant holdings include the principle that non-filing of income tax returns by vendors does not ipso facto render transactions bogus if the assessee has produced sufficient documentary evidence, banking proofs, TDS deductions, and GST returns. The Court emphasized the importance of examining the totality of evidence rather than relying solely on the vendor's compliance status. The Court also clarified the correct tax treatment of reversal of provisions, holding that provisions disallowed and taxed in earlier years can be deducted upon reversal in subsequent years. Furthermore, the Court confirmed that profits on sale of assets from a block of assets that continues to exist need not be separately taxed as capital gains if the sale consideration is adjusted under Section 50.

The final determinations were as follows: additions on account of bogus purchases were deleted; reversal of lease rent provisions was allowed as deduction; disallowance of profit on sale of asset was reversed; the Section 43B disallowance was remanded for verification; short grant of TDS and non-grant of self-assessment tax were allowed for statistical purposes; interest under Section 234B was to be recomputed; and penalty proceedings under Section 270A were dismissed as premature. The appeal was partly allowed accordingly.