Quashing of Bogus Purchase Additions Based on GST Records and Allowability of Compensatory Interest on TDS

ORDER

Nikhil Choudhary, Accountant Member.- This is an appeal filed by the Revenue against the order of the ld. CIT(A)-wherein the ld. CIT(A) has deleted the additions made by the ld. Assessing Officer vide his order under section 143(3) r.w.s. 144B dated 17.12.2022 and allowed the appeal of the assessee. The grounds of appeal are as under:-

2. The facts of the case are that the assessee is an individual engaged in the business of trading of Gold, Silver and Bullion in the name and style of M/s Shri Ganesh Bullions and Jewellers. It filed a return of income on 7.03.2022 on a total income of Rs. 22,94,540/-. The case was selected for scrutiny to examine the issue of substantial purchases from suppliers who were either non filer or had filed non business ITR. The ld. AO records that he issued several notices to the assessee. However, only two of these notices were replied to. In response to the notices, the assessee submitted copy of his balance-sheet, profit and loss account, computation of income, bank statement, purchase register, expenses ledger, TCS return, stock summary etc,. The ld. AO gave the assessee an opportunity to demonstrate the genuineness of the purchases with corroborative evidences such as a confirmation of ITR, ledgers, bills etc,. He pointed out that he had issued notices under section 133(6) of the Income Tax Act to eight parties, out of which only three parties had submitted their responses. The assessee was therefore, required to furnish confirmations from the remaining parties or suffer an addition of Rs.06,93,81,546/-. The ld. AO did not describe the response of the assessee to the said show cause notice but pointed out that the assessee had miserably failed to discharge its onus to prove the genuineness of the said transactions and had instead relied upon the selfsaving statements. He pointed out that the assessee had made purchases from a number of parties of which one party i.e. Mohammad Ashraf Mandal proprietor of A.N. Ornaments had not filed any reply nor any ITR was evident. The said party was a non-filer and the total purchases made from the said party being to the extent of Rs. 4,40,80,499/-. Relying upon by the judgments of the Hon’ble Bombay High Court in the case of Arunkumar J. Muchhala v. CIT [IT Appeal No. 363 of 2015, dated 24-8-2017], the Hon’ble Delhi High Court in the case of CIT v. La Medica (Delhi) the Hon’ble Allahabad High Court in the case of Kaveri Rice Mills v. CIT (All) and the ITAT Mumbai Bench in the case of Lifeline Drugs and Intermediates (P.) Ltd. v. Dy. CIT [IT Appeal No. 5535 (Mum.) of 2007, dated 30-4-2010], the ld. AO made an addition of Rs. 88,16,120/- being 20% of the amount purchased from this party which he treated as bogus purchases and added back to the income of the assessee as the assessee had failed to substantiate the same with cogent evidence. He also brought it to tax under section 115BBE. He also made an addition of Rs. 6,893/-holding that the interest paid on late deposit of TDS was violative of Explanation 1 to sub section 1 of section 37. Accordingly, the assessee was assessed at the total income of Rs.1,11,20,530/-.

3. Aggrieved with the said order, the assessee went in appeal before the ld. CIT(A), NFAC. Before the ld. CIT(A), it was submitted that the assessee was a proprietorship firm engaged in the business of Gold, Bullion and Gold ornaments. Its accounts were audited under section 44AB of the Income Tax Act. During the entire financial year, the assessee had not done a single sale / purchase in cash. All the sale purchases were either through banking channels or through sale / purchase adjustment. Furthermore, it was submitted that 7 of the 8 parties from whom purchases had made had confirmed the said purchases. Only M/s A.M. Ornaments, from whom the assessee had purchased goods of Rs. 4,40,80,599/-, had not replied. The addition had been made by treating the said purchase as bogus only because the party had not replied. It was submitted that non-compliance of notice did not make the expenditure disallowable. The goods purchased from the said party were trading goods which had been purchased and thereafter sold. The said party was registered on the GST Portal, filed GST return regularly and all the details of purchases were appearing on the GST Portal in Form 2A. The assessee had got the credit of GST as per the purchase invoice. Furthermore, all the sale entries of the assessee were appearing in GST R-1. Both the assessee and M/s A.M. Ornaments had paid GST on their account. A copy of the ledger of M/s A.M. Ornaments alongwith the screenshots of the respective GST forms were submitted. It was further submitted that the total purchase consideration of goods made from M/s A.M. Ornaments of Rs. 4,54,03,017.04/- alongwith opening balance of Rs. 26,21,484/- had been squared up from the sales made by the assessee worth Rs. 5,98,94,852/- and payment receipts of Rs. 1,18,70,349/-. Thus, the contention of the ld. AO in considering the purchase from M/s A.M. Ornaments as bogus purchases, is altogether wrong. The assessee further clarified that he had purchased gold ornaments from M/s A.M. Ornaments and sold him Gold Bullion. The gold ornaments purchased from M/s A.M. Ornaments were sold to other dealers and gold bullion sold to M/s A.M. Ornaments were purchased from dealers. Every gram of metal / jewellery was contained in the inventory ledger including details from whom it was purchased and from whom it was sold. All the transactions were genuine. On the issue of disallowance of TDS payments, it was submitted that the late payment of TDS was a compensatory payment and not a penal levy and therefore it did not attract Explanation 1 of sub section 1 of section 37. Accordingly, it was prayed that both additions deserve to be deleted. The ld. CIT(A) considered the matter and pointed out that the addition of 20% purchases from a single party was harsh and that the assessee had produced the whole documents before him which made it fit enough for him to direct the AO to delete the addition. Therefore, he did so. With regard to the ground taken by the assessee about addition under 37(1) of the Act, he held that interest on late payment of TDS, not being penal in nature, could not be disallowed on account of the provisions of section Explanation 1 of sub section 1 of section 37. Accordingly, the ld. CIT(A) allowed the appeal.

4. The Department is aggrieved at this order of the ld. CIT(A) and has accordingly filed this appeal. Sh. R.R.N. Shukla, Addl CIT DR (hereinafter referred to as the ld. DR) appearing on behalf of the Revenue submitted that the ld. CIT(A) had not passed a reasoned and speaking order refuting the issues raised by the ld. AO in his assessment. He pointed out that the said party namely Mohammad Ashraf Mandal had not filed any reply to the notice sent by the ld. AO. Furthermore, on a verification from the Insight portal of the Department, it had been found that the above party was a non-filer. This created doubt with regard to the purchases made from the said party as any party that was making sales of Rs. 4,40,80,599/- could not be a party that would not be required to file a return. The assessee had been given an opportunity to produce a confirmation from the said party but had failed to do so. Since, the assessee had failed to substantiate the purchase with cogent evidence, the ld. CIT(A) was not justified in deleting the addition, and that too without recording any reasons for deleting the same. He accordingly prayed that the ld. AO having established the bogus nature of the purchase, the addition made by him should be confirmed.

5. On the other hand, Sh. Rakesh Garg, Advocate (hereinafter referred to as the ld. AR) drew our attention to the paper book filed by him on 23.08.2025 which contained the submissions made before the CIT(A), NFAC, Delhi. He submitted that the concerned party was duly registered with the Central Board of Indirect Taxes and Customs under the goods and services tax, and was regularly filing returns with the GST authorities, which was evident from the fact that the assessee was getting the input credit of GST as per the purchase invoice, which was only possible once the seller had filed his GST returns. He pointed out that as per the GST Portal, the trader was active and regularly filing GST returns. The assessee was in a position to account for every gram of precious metal that it handled and he maintained an inventory for each of those items in which he traded. Quantitative details of each items traded had been furnished in the tax audit report furnished with the income tax return and the details of the same were given in paragraph 35(A) of the tax audit report. It was submitted that the assessee had purchased gold ornaments from M/s A.M. Ornaments and sold him gold bullion. The gold ornaments so purchased from him were sold to other dealers while the bullion sold to M/s A.M. Ornaments were purchased from other dealers. The inventory ledger of gold ornaments and gold bullion had been submitted before the ld. CIT(A) and again as part of the paper book filed before us. It showed the movement of every gram of metal/jewellery from whom it was purchased and whom it was sold. The ld. AO had not been able to point out any mistake in any of the details filed by the assessee. Thus, there was not any doubt about the genuineness of a party nor was there any doubt about the genuineness of the transaction. There was, therefore, no occasion to treat any part of the purchases made from the said party as bogus only on account of the fact that he had not filed an income tax return. The reasons for not filing of the income tax return could be enquired from the said party and action taken if found necessary, but could not be a ground to make an addition in the hands of the assessee. The ld. AR also drew our attention to various case laws that were contained in his paper book namely:-

He, therefore, prayed that the order of the ld. CIT(A) deserved to be upheld on this account. With regard to the disallowance of TDS, the ld. AR drew our attention to the submission placed before the ld. CIT(A) and the decision of the Hon’ble Supreme Court in the case of Lachmandas Mathuradas v. CIT (SC) wherein the Hon’ble Supreme Court had held that interest on arrears of tax was compensatory in nature and not penal. Hence, the ld. AR submitted that no disallowance was called for under Explanation 1 to sub section 1 of section 37 on this account. He further submitted that all these facts had been placed before the ld. CIT(A) and it was only after consideration of all these facts that the ld. CIT(A) had passed his order. The assessee could not dictate how speaking an order should be, but it was clear that all the materials have been placed before the ld. CIT(A) and been duly considered before coming to the conclusion that no addition was warranted. Accordingly, the ld. AR prayed that the order of the ld. CIT(A) deserves to be upheld.

6. We have duly considered the facts and circumstances of the case. Once the Trader is registered with the GST authorities and is seen to be regularly filing its GST returns for purchases of sales and another party is the beneficiary of such returns in the form of input credit, it cannot be said that the said party is bogus only on account of the fact that the said party is not filing an income tax return. The assessee has furnished its purchase register, expenses register and stock summary before the ld. AO. The ld. AO has not found any default in the same. It has also furnished its inventory ledger of gold metal and gold jewellery for the entire assessment year where all sales and purchases have been taken into account. No discrepancy has been observed in the same. In the circumstances, when the sales are not doubted and the complete details are furnished and no fault found therein, only because the party from whom the purchases were made was not filing income tax returns or had not furnished a reply, it cannot be held that the purchases had not been made by the assessee. It is clear that the assessee has replied to the notices of the Assessing Officer. The ld. AO has not discussed what the reply of the assessee was and how it was not acceptable to him. Therefore, his order is also a non-speaking order and even while we accept the fact that the order of the ld. CIT(A) was not a speaking order, it is evident that all the material that was placed before him was duly considered by him before coming to the conclusion that no addition could be made only because of the non-filing of a reply or of the failure to furnish the return. We, therefore, see no merit in the appeal filed by the Revenue on this ground and therefore, ground nos. 1, 2 and 3 are accordingly dismissed. On the issue of disallowance because of late deposit of TDS, we note that the Hon’ble Supreme Court in the case of Lachmandas Mathuradas (supra) after referring to judgments of the Hon’ble Allahabad High Court in the case of Triveni Engineering Works Ltd. v. CIT ITR 732 (All) and the decision of the Hon’ble Supreme Court in the case of Saraya Sugar Mills (P.) Ltd. v. CIT [Civil Appeal No. 830 of 1979, dated 29-2-1996] has held that interest on arrears of tax is compensatory in nature and not penal. In the circumstances, there does not appear to be any reason to sustain the disallowance made on account of Explanation 1 to sub section 1 of section 37 of the Income Tax Act and therefore, the same is deleted. Ground nos. 4 and 5 are therefore, dismissed.

7. In the result, the appeal of the Revenue is dismissed.