2016 (2) TMI 1204 - HC - Income Tax

Bogus purchases - purchases from grey market - Held that - AO without rejecting the books of account of the assessee for the year under consideration has observed that the genuineness of the purchases is not established and has made the addition whereas the Tribunal has proceeded on the footing that the AO has recognised the purchases made by the assessee and the question is not of quantitative details. Tribunal has also observed that the AO has accepted the sales made by the assessee and if that be so it would indicate that the assessee must have made purchases otherwise it would not be possible for the assessee to make the sales. Thus even as regards the basic facts the Tribunal has proceeded on an erroneous footing. As regards the cheque issued in favour of A.K. Textile which is withdrawn by the proprietor of A.K. Textile named Aaisha a perusal of the table at paragraph 4 of the assessment order shows that an amount of 50140/- has been withdrawn in cash in respect of cheque No.446893 and an amount of 52451/- has been withdrawn in cash in respect of cheque No.446894 and the assessee in his reply has clearly admitted that payment was made in cash and has stated that 20% thereof be disallowed. However the same has been totally disregarded by the AO as well as the Tribunal. The court is of the view that the Tribunal while passing the impugned order has lost sight of the directions contained in its previous order and has recorded findings which are not in consonance with the record of the case and are therefore perverse. The impugned order of the Tribunal which suffers from various infirmities as noted hereinabove therefore cannot be sustained. - Decided against the revenue.

Summary

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was right in holding that purchases of Rs. 73,29,278/- out of the total purchases of Rs. 1,01,83,331/- of grey cloth were bogus.
2. Whether 25% of the said purchases should be disallowed and added as income of the appellant.

Issue-wise Detailed Analysis:

1. Bogus Purchases:
The appellant, engaged in the business of purchase and sale of grey cloth, filed a return of income for the assessment year 2003-04. The Assessing Officer (AO) disallowed 25% of the purchases amounting to Rs. 73,29,278/- as bogus and added Rs. 18,32,319/- to the appellant's income. The AO's decision was based on the inability of the appellant to produce the seller and the fact that the cheques were encashed by someone else. The Commissioner (Appeals) confirmed this disallowance. However, the Income Tax Appellate Tribunal (ITAT) restored the issue to the AO for further examination, emphasizing the need to ascertain who encashed the cheques and the actual receipt of goods.

Upon re-examination, the AO concluded that the purchases were not genuine and disallowed 25% of the said purchases. The Commissioner (Appeals) disagreed with the AO, highlighting that the mandatory requirement for payment by account payee cheque was not applicable for the assessment year 2003-04 and that no defects were found in the books of accounts or stock register, indicating that purchases and sales were genuine. The ITAT, however, set aside the Commissioner (Appeals)'s decision and restored the AO's order.

2. Disallowance and Addition to Income:
The appellant argued that the findings of the Commissioner (Appeals) were in line with the ITAT's previous directions, and the ITAT failed to appreciate the evidence properly. The appellant emphasized that at the relevant time, there was no mandatory requirement for payment by account payee cheque, which was introduced only from 13.7.2006, while the case pertains to the assessment year 2003-04.

The respondent argued that the appellant failed to produce the seller and that the cheques were encashed by someone else, raising doubts about the genuineness of the purchases. The respondent supported the ITAT's decision to confirm the AO's findings.

Court's Observations:
The court noted that the AO did not reject the books of accounts and accepted the same. The AO's findings were based on the issuance of cross/bearer cheques and the endorsement of cheques to other parties, which did not conclusively prove that the purchases were bogus. The Commissioner (Appeals) found no defects in the books of accounts or stock register and noted that the mandatory requirement for payment by account payee cheque was not applicable for the relevant assessment year. The ITAT's findings were contrary to the record, as the AO did not claim that the appellant produced purchase bills from one concern and procured goods from another.

The court observed that the ITAT failed to follow its previous directions, which required the AO to verify from the party in whose favour the cheque was endorsed. The Tribunal's findings were not in consonance with the record and were deemed perverse.

Judgment:
The court allowed the appeal, answering the question in favor of the appellant and against the revenue. The impugned order of the ITAT dated 17.7.2015 was quashed and set aside, and the order passed by the Commissioner (Appeals) was restored. The court concluded that the ITAT's decision was not sustainable due to various infirmities and the failure to adhere to its previous directions.