In a significant ruling, the Income Tax Appellate Tribunal ( ITAT ) in Ahmedabad has affirmed that purchases supported by proper documentation—such as bills, recorded entries in books of accounts, and payments made through cheques—cannot be deemed as bogus transactions. This decision arose from the appeals of M/s. Patel Kenwood Pvt. Ltd., challenging the additions made by the Assessing Officer ( AO ) regarding certain purchases.
In the assessments for the financial years 2017-18 and 2018-19, the AO had identified purchases worth ₹43,95,474 from a supplier as dubious, primarily due to the latter being flagged as a defaulter on the Gujarat Sales Tax portal. Consequently, the AO had issued summons under section 133(6) of the Income Tax Act, but the responses were deemed inadequate, prompting the addition of these amounts to the company’s taxable income.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The tribunal held that the mere listing of a supplier as a defaulter does not automatically render transactions with them as bogus.
The tribunal noted that the assessee provided adequate evidence, including payment details and invoices, which substantiated the legitimacy of the purchases.
In fact, the tribunal bench of Accountant Member Ramit Kochar and Judicial Member T R Senthil Kumar highlighted that under established judicial precedents, as long as there are invoices, banking records, and entries in the company’s books, the onus lies on the authorities to prove otherwise.
The tribunal also scrutinised the rental payments made by Patel Kenwood for accommodations used by staff and visiting clients. Although the AO initially disallowed a substantial portion of the rental expenses, the ITAT ruled that the company’s documentation and justifications sufficiently supported the rental payments, thus limiting any disallowance to a fair market assessment.
This ruling reinforces the importance of maintaining comprehensive records and transparency in transactions. It further clarifies that the tax assessment authorities must exercise due diligence before labelling transactions as fraudulent.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
In conclusion, the Income Tax Appellate Tribunal directed the deletion of the addition made by the AO, underlining that valid documentation substantiates the legitimacy of financial transactions.
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