ITAT Mumbai Quashes Bogus Purchase Addition and Ad-hoc Expense Disallowance Based Only on MVAT Information
Background of the Dispute
The matter before the Mumbai Bench of the Income Tax Appellate Tribunal involved an assessee, proprietor of an event management concern “M/s. Evepro”, who was subjected to reassessment proceedings under Section 147 of the Income Tax Act 1961. The reassessment was triggered exclusively on the basis of information shared by the MVAT/Sales Tax Department through the office of DGIT(Inv.), Pune.
According to the information, certain dealers were flagged as “hawala” or suspicious MVAT dealers who were allegedly issuing accommodation bills without actual supply of goods. Based on this, the Assessing Officer (AO) concluded that the assessee had taken accommodation bills from one such dealer, Adinath Enterprises, and had consequently inflated purchases.
The AO:
- Treated purchases of ₹15,47,224/- from Adinath Enterprises as bogus and made an addition under
Section 69C, and - Further disallowed 20% of several business expenses on an ad-hoc basis under
Section 37(1).
Both issues were sustained by the Commissioner of Income-tax (Appeals), which led the assessee to file an appeal before the ITAT.
Issues Raised in Appeal
The assessee challenged the order of the CIT(A) broadly on the following grounds:
Bogus purchases:
- The CIT(A) erred in confirming the full disallowance of alleged bogus purchases of ₹15,47,224/- solely because the supplier appeared on the MVAT suspicious dealers list,
- No independent inquiry or verification was undertaken by the AO,
- The assessee had shown that the materials purchased were actually used for rendering event management services and that the billing to the client was on a reimbursement/cost basis.
Alternative plea on estimation:
- Without prejudice, even if the purchases were to be doubted, only a reasonable profit element embedded in such purchases could be added and not the entire purchase amount.
Ad-hoc disallowance of expenses:
- The 20% disallowance amounting to ₹56,569/- on various expenses (like telephone, conveyance, staff welfare, travelling, office expenses and sales promotion) was made purely on presumption of possible personal use and presence of self-made vouchers, without pinpointing any specific defect.
Facts and Business Model of the Assessee
The assessee, operating as proprietor of M/s. Evepro, was engaged in the event management business. The assessee:
- Filed a return of income on 25.09.2011 declaring total income of ₹7,31,202/-;
- Maintained regular books of account duly audited under the Act;
- Reported total sales of ₹60,42,291/- with a gross profit of ₹13,97,641/- and net profit of ₹8,46,519/-.
Total purchases were ₹41,60,578/-, out of which purchases of ₹15,47,224/- were recorded from Adinath Enterprises, the party later labelled as a hawala dealer in MVAT data.
Nature of Events and Reimbursement Structure
The assessee explained his business model in detail:
- He organized events for corporate clients and earned service fees for event management.
- For executing these events, he had to procure various materials, such as sports goods and other event-related items, on behalf of clients.
- In one such assignment, a client, Direxions Marketing Solutions Private Ltd., engaged him to organize a cricket match. For this specific event:
- The assessee purchased sports equipment and allied materials from Adinath Enterprises;
- These purchases were billed to the client on a cost-to-cost reimbursement basis, without any profit element;
- The main income of the assessee arose from separate service fees for managing the event, and not from trading margin on such purchases.
Because Adinath Enterprises did not discharge its MVAT liability, the assessee was denied MVAT credit in MVAT proceedings, leading to MVAT-related alerts. However, for income-tax purposes, the assessee asserted that:
- There were actual events carried out,
- The materials were indeed procured and used,
- Corresponding sales/billing to the client were duly recorded and accepted by the department.