2018 (10) TMI 1780 - AT - Income Tax

Bogus purchases - addition to 20% of the purchases as profit earned by the assessee on these purchases by CIT-A - HELD THAT - As decided in UNIQUE METAL INDUSTRIES VERSUS INCOME-TAX OFFICER, WARD 39 (3) , NEW DELHI. 2015 (10) TMI 2753 - ITAT NEW DELHI purchases and sales were within the walled city of Delhi where the transportation is by manual driven cans and the charges for the same are debited under the head cartage. Further when sales are accepted as genuine, then definitely the transactions have occurred and movements of goods have taken place. It is also not the case of the CIT(A) that transactions has not happened. Thus transportation on such facts cannot be a basis to draw adverse inference against the assessee. CIT(A) has upheld the allegation of the Assessing officer of the bogus purchases by making an observation that the appellant's dealing with these parties is not free from any doubt. It is a settled law that doubt cannot be a basis for sustaining the allegation. On the contrary the assessee had lead sufficient evidences in support of its purchases which the Assessing Officer in my view has not been able to rebut. Accordingly in the facts and circumstances of the case it cannot be said that the purchases made by the assessee are bogus. As regards the addition of sustained by the CIT(A)since purchases are not bogus, the addition on this account cannot be sustained. Even otherwise the addition of 20% on the facts and circumstances is apparently too high. Once the purchases are held to be bogus then the trading result declared by the assessee cannot be accepted and right course in such case is to reject books of accounts and profit has to be estimated by applying a comparative profit rate in the same trade. Though there can be a little guess work in estimating profit rate but such profit rate cannot be punitive. - Decided in favour of assessee.

Issues Involved:
1. Reopening of assessment.
2. Addition of ?79,86,868/- on account of bogus purchases.
3. Enhancement of addition by ?3,93,705/- for commission paid on accommodation entries.
4. Enhancement of addition by ?15,97,431/- for understatement of profit.
5. Opportunity to cross-examine the witnesses.
6. Material collected at the back of the assessee.
7. Principles of natural justice.

Detailed Analysis:

1. Reopening of Assessment:
The initial reopening of the assessment for AY 2006-07 was challenged by the assessee. The ITAT initially held the reopening as bad in law. However, the High Court reversed this decision, stating that the reassessment was validly based on fresh material, which constituted "tangible material" unavailable at the time of the original assessment. Consequently, ITAT was directed to examine the merits of the appeal.

2. Addition of ?79,86,868/- on Account of Bogus Purchases:
The AO made an addition of ?79,86,868/- alleging bogus purchases from four entities. The CIT(A) confirmed this addition, stating that these firms were not engaged in actual business despite evidence of substantial inventory found during searches. The ITAT, however, noted that similar issues in other cases had led to deletions of such additions. It emphasized that the assessee maintained complete books of accounts and made purchases in the normal course of business, and the AO's allegations were based on surmises and conjectures.

3. Enhancement of Addition by ?3,93,705/- for Commission Paid on Accommodation Entries:
The CIT(A) further enhanced the addition by ?3,93,705/- on the presumption that the assessee paid commission for obtaining bogus accommodation entries. The ITAT found this enhancement unsustainable, noting that the CIT(A) had relied on statements recorded at the back of the assessee without allowing cross-examination, thus violating principles of natural justice.

4. Enhancement of Addition by ?15,97,431/- for Understatement of Profit:
The CIT(A) also enhanced the addition by ?15,97,431/- (20% of the purchases) on the presumption of understatement of profit. The ITAT found this enhancement arbitrary and without basis, emphasizing that the purchases and sales were fully documented and correlated. The ITAT reiterated that doubt alone cannot substantiate an addition without concrete evidence.

5. Opportunity to Cross-examine the Witnesses:
The ITAT highlighted that the AO's reliance on statements from individuals like Sh. Rakesh Gupta and others, recorded at the back of the assessee, without providing an opportunity for cross-examination, was improper. The absence of cross-examination rendered the statements unreliable for substantiating the additions.

6. Material Collected at the Back of the Assessee:
The ITAT noted that the addition was based on material collected without the assessee's knowledge, which is against the principles of natural justice. The assessee was not given an opportunity to rebut the evidence, making the addition unsustainable.

7. Principles of Natural Justice:
The ITAT emphasized adherence to principles of natural justice, noting that the assessee was not given a fair opportunity to present its case or cross-examine the witnesses whose statements were used against it. This procedural lapse invalidated the basis for the additions.

Conclusion:
The ITAT followed precedents from similar cases where additions were deleted, and found the present case identical in facts. It directed the AO to delete the entire additions made and enhanced by the CIT(A), thereby allowing the appeal of the assessee. The judgment underscored the importance of fair procedure and substantial evidence in tax assessments.

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