2017 (9) TMI 1919 - AT - Income Tax

Estimation of income - bogus purchases - CIT-A estimating 12.5% as profit element on the alleged bogus purchase - HELD THAT - It is the averments of the Revenue that the assessee has purchased material from grey market in cash while bills are organized from these bogus hawala dealers. No such details of grey material suppliers are brought on record from whom the assessee has allegedly purchased material in cash and also no trail of money to evidence flow of cash is brought on record by authorities below and these are all in the realm of suspicion which is not permissible. The assessee had sought cross examination of these hawala parties who have given incriminating statements before Maharashtra VAT authorities but the cross examination was not granted to the assessee by the A.O./CIT(A). The assessee has discharged its primary burden by bringing on record all details w.r.t. purchase and utilization/consumption of material covered under these purchases and there is no adverse comments of the authorities below as to the same and the assessee is sought to be prejudiced by Revenue solely based on statement of third parties i.e. selling dealers which incriminating statement was recorded by Maharashtra VAT authorities at the back of the assessee , while no statement has been recorded by the Revenue nor any enquiry whatsoever u/s 133(6)/131 was conducted by Revenue itself, under these factual matrix of the case , the right of cross examination of the assessee has become absolute and no prejudice can be done to the assessee in these circumstances till the said parties are offered by Revenue for cross examination before the assessee, which despite specifically being asked by the assessee, the Revenue did not allow assessee to cross examine these hawala parties. Under these circumstances keeping in view entire factual matrix of the case, in our considered view, the additions as were upheld by learned CIT(A) cannot be sustained in the eyes of law and is hereby ordered to be deleted - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of reopening the assessment under Section 147 of the Income-tax Act, 1961.
2. Genuineness of purchases from alleged hawala operators.
3. Right to cross-examine the parties whose statements were used against the assessee.
4. Justification for the addition of profit element on alleged bogus purchases.

Issue-wise Detailed Analysis:

1. Legality of Reopening the Assessment:
The assessment was reopened under Section 147 of the Income-tax Act, 1961, based on information received from the Directorate General of Income Tax (Investigation) that the assessee was involved in booking bogus purchases from hawala operators. The reopening was within four years from the end of the assessment year, and no scrutiny assessment was originally framed under Section 143(3). The assessee did not challenge the reopening before the tribunal.

2. Genuineness of Purchases from Alleged Hawala Operators:
The assessee, a manufacturer of weaving quality glass fibre yarn, was alleged to have made bogus purchases amounting to ?39,43,800 from two parties identified as hawala operators by the Maharashtra Sales Tax Department. The Assessing Officer (AO) observed that these parties had admitted to issuing bogus bills without actual delivery of goods. The assessee produced various documents, including invoices, bank statements, stock registers, and delivery challans, but could not produce the said parties for verification. The AO concluded that the purchases were made in cash from undisclosed parties, and the assessee obtained bogus bills from hawala operators.

3. Right to Cross-Examine the Parties:
The assessee contended that the principles of natural justice were violated as cross-examination of the hawala operators was not allowed. The AO relied solely on the statements recorded by the Maharashtra Sales Tax Department, which were not subjected to cross-examination by the assessee. The tribunal emphasized that if the Revenue intends to rely on such statements, the parties should be made available for cross-examination. The Revenue did not make any effort to issue notices or summons to these parties under Sections 133(6) or 131, nor did they conduct any field inquiries.

4. Justification for the Addition of Profit Element:
The AO initially added ?9,03,420 as peak credit under Section 69C for unexplained expenditure, which was later reduced by the Commissioner of Income Tax (Appeals) [CIT(A)] to ?4,92,975 by estimating a 12.5% profit element on the alleged bogus purchases. The CIT(A) relied on the Gujarat High Court's decision in CIT v. Simit P Shah, which allowed part relief to the assessee. However, the tribunal found that the assessee had discharged its burden by providing comprehensive evidence of the purchases and their utilization in production. The tribunal noted that no adverse comments were made by the authorities regarding these evidences, and the Revenue's reliance on statements recorded at the back of the assessee without allowing cross-examination was not permissible. Consequently, the tribunal ordered the deletion of the addition upheld by the CIT(A), referencing the Supreme Court's decision in Andaman Timber Industries v. Commissioner of Central Excise.

Conclusion:
The tribunal allowed the appeal of the assessee, concluding that the additions made by the AO and partly upheld by the CIT(A) could not be sustained due to the lack of cross-examination and insufficient evidence to prove the purchases were bogus. The assessee's appeal for the assessment year 2011-12 was allowed, and the order was pronounced on 1st September 2017.