A division Bench of the Income Tax Appellate Tribunal (ITAT), Ahmedabad ruled that no disallowance of entire purchases when sale of finished product is taxed.
The assessee, M/s Accra Pac(India) PvtLtd is a manufacturer of perfumes and other beauty products. During the course of assessment, the AO observed that the assessee has not furnished PAN number of the party from whom the purchase has been made and the assessee had also not produced confirmation of the party.
The assessee submitted that the party M/s Virat Enterprises had shut down its business and hence it was not possible for the assessee to produce a confirmation from the party in respect of the purchases made. However, the assessee submitted that the purchases were backed by delivery challans and also the fact that the purchases were made through banking channels.
However, the AO held that the purchases were not genuine and added back the same as bogus purchases on the ground that the assessee has not been able to prove the identity, genuineness and creditworthiness of the party. In appeal, the CIT(Appeals) confirmed the additions made by the AO.
The primary contention of the assessee is that the assessee had placed before the CIT(Appeals) copies of invoices issued by such party, Lorry receipts in support of proof of delivery of material to the assessee and bank statement of the assessee showing that the payment to such party was made by way of account payee cheques.
The argument of the assessee is that once the tax has been imposed on the sales made by the assessee, and the sales itself has not been doubted, then the entire purchase cannot be disallowed for the simple reason that it would not have been possible for the assessee to make sales in absence of the necessary raw materials, which facilitated the sales.
The Bench comprising Waseem Ahmed, Accountant Member and Siddhartha Nautiyal, Judicial Member observed that “There is always an element of guesswork on the quantum of disallowance that should be made in case in the case of purchases made from parties whom the assessee is unable to identify. However, we also note that it would not be justifiable to disallow the entire purchases when the corresponding sale of finished product (in which such which the purchases so made were utilised for making the final finished product) have been subject to tax.”
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