By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi
Chartered Accountants
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Bogus purchases — Assessee made payments by cheques to two parties, received cash against the cheque payments and utilised such cash to purchase cloth from the grey market and the same has been recorded in the closing stock — Such purchases are allowed as deduction and cannot be treated as bogus.
Facts:
At the time of search and seizure, it was found that the assessee had made purchases amounting to Rs.30,80,730 for which the assessee had issued cheque and in lieu thereof he received cash. The assessee admitted the fact that such cash received was actually used to purchase fabric from the grey market. Thus the purchase bills were taken from parties to cover up the purchase actually made in the grey market. The fabric was purchased in the previous year and was lying in stock as on the last day of the previous year. The AO treated the same as bogus purchases and disallowed the same. The CIT(A) stated that as long as the stock is reflected in the books of account to that extent the credit for fabrics purchased ought to be given. But the CIT(A) disallowed 20% of total purchase u/s.40A(3) on the ground that the assessee had admitted that the purchases were from grey market.
Held:
In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than the purchases or the entry recorded in the closing stock is found to be fictitious or false, the assessee has made cash purchases of Rs.30,80,730 and the same needs to be allowed since they were undisputedly found recorded in the inventory of the assessee.
Regarding the application of provisions of section 40A(3), no such material was found to show that the assessee had made cash payments in the violation of section 40A(3). Disallowance cannot be merely based on a presumption basis.
