The Chennai Bench of Income Tax Appellate Tribunal(ITAT) upheld the deletion of bogus expenditure additions made by the Commissioner of Income Tax (Appeals) [CIT(A)]. This decision reinforced the principle that any disallowance of expenses must be supported by substantial evidence.
The revenue-appellant filed an appeal for AY 2015-16 against the order of the CIT(A), dated March 5, 2024, concerning an assessment made by the Assessing Officer (AO) under Section 143(3) read with Section 153A of the Act, finalized on February 18, 2021.
V.V. Titanium Pigments Pvt.Ltd ,the respondent-assessee, founded in 1994 and specializing in the production of titanium dioxide, was subjected to a tax assessment following a search action on October 25, 2018. Notices were issued for various assessment years, prompting the company to file income returns.
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The Assessing Officer (AO) identified significant additions related to alleged bogus expenses totaling Rs. 32.30 crores. This claim stemmed from a WhatsApp conversation suggesting the use of fictitious vendors to generate unaccounted cash. The AO also flagged a separate payment of Rs. 25 lakhs to M/s Sree Chandra Auto Components Pvt. Ltd. without adequate support.
In response, the company argued that the AO failed to conduct thorough inquiries with the vendors and that the disputed expenses were not reflected in its financial records. The Commissioner of Income Tax (Appeals) [CIT(A)] reviewed the situation, found that the company did not claim the expenses in question, and subsequently deleted the AO’s addition.
While the CIT(A) acknowledged the possibility of inflated expenses, he also noted the lack of sufficient evidence to uphold the total amounts claimed. Instead, he estimated a reasonable disallowance of 12.5% of the bogus expenses based on judicial precedents. This resulted in a total sustained addition of Rs. 403.81 lakhs for the relevant assessment years.
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The tribunal upheld the CIT(A)’s findings, agreeing that the AO had not conducted adequate inquiries to support the additions. They emphasized that the WhatsApp conversations were not sufficient evidence to justify the disallowances, as the expenses were not recorded in the company’s accounts. Ultimately, the bench affirmed the CIT(A)’s estimated disallowance of 12.5% as reasonable, reinforcing the need for corroborative evidence in such assessments.
The two member bench comprising Mahavir Singh(Vice President) and Manoj Kumar Aggarwal(Accountant Member) dismissed the revenue’s appeal, confirming the CIT(A)’s conclusions.
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