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DATE: May 16, 2019 (Date of pronouncement)
DATE: June 19, 2019 (Date of publication)
AY: 2009-10
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CITATION:
Bogus Purchases: The CIT(A) is not justified in enhancing the assessment to disallow 100% of the bogus purchases. The only addition which can be made is to account for profit element embedded in the purchase transactions to factorize for profit earned by assessee against possible purchase of material in the grey market and undue benefit of VAT against such bogus purchases (PCIT vs. Mohommad Haji Adam (Bom HC) followed

The assessee was in possession of primary purchase documents and the payments to the suppliers was through banking channels. The assessee had established corresponding sales before Ld. AO. The books of accounts were audited wherein quantitative details of stock was provided. We are of the considered opinion that there could be no sale without actual purchase of material keeping in view the fact that the assessee was engaged in trading activities. At the same time, the assessee failed to produce even a single supplier to confirm the purchase transactions. The delivery of material could not be substantiated.

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DATE: December 12, 2018 (Date of pronouncement)
DATE: December 22, 2018 (Date of publication)
AY: 2011-12
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Bogus Purchases: The fact that the vendors are not available at the given address is not sufficient to treat the purchases as bogus if the assessee has discharged primary onus and substantiated the purchases through documentary evidence and payment is made through banking channels. None of these documents have been proved to be false or untrue and thus the initial burden cast on the assessee was duly discharged

It is an admitted fact that during the course of search nothing adverse was found from the premises of the assessee regarding the purchases made from the four parties concerned. Only during post search enquiry it was found that those four parties are not available at the given address. However, it is a fact that the payments have been made through banking channel and the assessee had substantiated the purchases by providing documents such as purchase invoices, copy of the ledger accounts, evidences for having made payments through banking channels, C Form issued to the suppliers, copy of VAT return duly reflecting the said purchases, etc

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DATE: November 15, 2018 (Date of pronouncement)
DATE: December 12, 2018 (Date of publication)
AY: 2009-10
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CITATION:
S. 4/ 145: Law on accrual on income, matching concept & principles of Revenue Recognition as per Accounting Standards (AS-9, AS-22) explained in the context of sale of prepaid mobile cards (All important judgements referred)

Matching Concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that “revenues” of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years which brings in the concept of Deferred Tax Accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year. It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS 22 is to reconcile the matching principle with the Fair Valuation Principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is done only by Accounting Standards and not by provisions of the Companies Act

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DATE: June 21, 2018 (Date of pronouncement)
DATE: September 19, 2018 (Date of publication)
AY: -
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CITATION:
Strictures against CA for certifying bogus accounts with a view to mislead bankers. The matter is typical of how business is conducted in this country and why loans obtained from banks remain unpaid. The ITAT may only be faulted for not reporting the CA to the ICAI for having apparently abetted in the commission of a colossal act of misrepresentation. ICAI directed to look into the matter and take necessary action

A rosy picture as to the financial position of the applicant seeking credit facilities from a bank would be presented before the bank for the bank to assess the creditworthiness of the applicant and the desirability of extending credit facilities to such applicant; but later another balance-sheet and profit and loss accounts would be slipped into the file, possibly indicating a less robust financial position of the constituent. If such was the object on the exercise, to which Roy Ghosh and Associates appear to have been a willing accomplice, the assessee has been appropriately dealt with by the fora below. The balance-sheet and profit and loss accounts of an assessee accompanied by a certificate as to its fairness, notwithstanding the caveat as noticed in paragraph 2(A) thereof, cannot be tailor-made to suit a particular purpose or window-dressed to make it attractive for bankers to rely thereupon and all the gloss and sheen removed thereafter when it was the time to pay tax

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DATE: August 3, 2018 (Date of pronouncement)
DATE: August 7, 2018 (Date of publication)
AY: 2012-13, 2013-14
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S. 43CB/ 145: Entire law on taxation of real estate construction contracts explained in the context of 'completed contract' vs. 'percentage completion' with reference to Accounting Standards AS-7 and AS-9 and all important judgements on the point

In our considered view, provisions of AS7 cannot override the provisions of section 145 in so far as the computation of business income under the Income Tax Act for the purpose of determining income is concerned. In the instant case, we find that the learned Assessing Officer has brought no material on record to show that the system of accounting adopted by the assessee for the year under appeal was not consistently followed y the assessee or the system adopted was a defective system. In our considered view, even a project completion method is also a recognized system of accounting. Simply the Institute of Chartered Accountants of India has recommended the percentage completion method does not mean that project accounting or the same is a defective system of accounting

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DATE: April 24, 2018 (Date of pronouncement)
DATE: April 26, 2018 (Date of publication)
AY: 1999-00
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CITATION:
Bifurcation of lease rentals into interest and loan recovery: An assessee can only be taxed on "real income". The bifurcation of lease rental is not an artificial calculation. Lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax. The Guidance Note issued by the ICAI carries great weight. The method of accounting prescribed in such a Guidance Note, in order to compute real income and offering the same for taxation, cannot be disregarded by the AO unless such action falls within the scope and ambit of S. 145(3) of the IT Act

The method of accounting followed, as derived from the ICAI’s Guidance Note, is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting, and is in fact, incorporated in the ICAI’s Accounting Standards on Disclosure of Accounting Policies being accounting standards which is a kind of guidelines for accounting periods starting from 01.04.1991. It is a cardinal principle of law that the difference between capital recovery and interest or finance income is essential for accounting for such a transaction with reference to its substance. If the same was not carried out, the Respondent would be assessed for income tax not merely on revenue receipts but also on non-revenue items which is completely contrary to the principles of the IT Act and to its Scheme and spirit

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DATE: May 4, 2017 (Date of pronouncement)
DATE: May 13, 2017 (Date of publication)
AY: -
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S. 145: If the AO has not rejected the books of account, it means that the assessee has maintained the books of accounts in accordance with the prescribed standards as per s. 145 of the Act. If so, the AO is not entitled to make any addition on account of sale of goods out of books or for investment in stock out of undisclosed sources

On perusal of the impugned judgment and order of the Tribunal dated 27.10.2009 reveals that the assessee has maintained the books of accounts in accordance with the prescribed standard as per Section 145 of ‘the Act’. The account books have not been rejected by the assessing officer. In view of the above, the Tribunal formed an opinion where once the account books are expected to be maintained in the prescribed accounting standard, the assessing officer could not have made any additions towards the sale of rice treating it to be outside the books of accounts or towards investing in stock of rice and wheat outside the books of accounts

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DATE: March 6, 2017 (Date of pronouncement)
DATE: March 10, 2017 (Date of publication)
AY: 2009-10
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S. 145: The average cost method of valuing inventories is an accepted method of valuation approved by the accounting standards issued by the ICAI. The AO is not entitled to disregard the method if the assessee has consistently followed the method

The Assessing Officer sought to question the method of accounting only because the assessee has not been regularly following the same or the income is not computed in accordance with the standards notified under subsection (2). We do not find that there was any material with regard to the standards and notified. It is only whether the assessee was consistent in following the method of accounting provided in subsection (1) of Section 145 of the Income Tax Act, 1961. If that is the other eventuality in which the Assessing Officer derives his power in terms of Section 145, then, in para 12 the Tribunal has found that the assessee has maintained proper books of account. No defect has been pointed out by the Assessing Officer either in the purchases or in the sales

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DATE: February 2, 2016 (Date of pronouncement)
DATE: April 10, 2016 (Date of publication)
AY: -
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S. 145: Books of account cannot be rejected on an arbitrary basis

It is a subsidiary of a Korean Company and, therefore, the authorities below had to be circumspect before arriving at such a conclusion, particularly when there is no iota of material to doubt the quantitive details, audited results vis-a-vis the turnover and profit declared so as to warrant rejection. Instances of irregularities in cash payment cannot warrant ipso facts rejecting of books of accounts, at best disallowance could have been made u/s 40A (3) of the Act

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DATE: March 27, 2015 (Date of pronouncement)
DATE: April 1, 2015 (Date of publication)
AY: 2010-11
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CITATION:
Addition towards bogus purchases cannot be made solely on the basis of statements of seller before sales-tax authorities. The AO has to conduct own enquiries and give assessee opportunity to cross-examine the seller

Where the AO has made addition merely on the basis of observations made by the Sales tax dept and has not conducted any independent enquiries for making the addition especially in a case where the assessee has discharged its primary onus of showing books of account, payment by way of account payee cheque and producing vouchers for sale of goods, such an addition could not be sustained

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