2018 (5) TMI 2106 - AT - Income Tax

Bogus purchases - as per DR two companies are only issuing accommodating entries without there being actual sale and therefore, the AO was justified in disallowing the bogus purchases - HELD THAT - As assessee has made the payments to the parties through banking channels and therefore, the party was rightly identified. Further, the assessee has made the sales of these items and offered the income therefrom to tax. Once the Department accepts the sale, it cannot disallow the corresponding purchases. When all the documents were on the file of the AO, he ought to have verified the genuineness of the sale instead of depending solely on the statement of the Rajendra Jain Group. In view of the same, we deem it fit and proper to remit the issue to the file of the AO for verification of the documents filed by the assessee and if it is found that the payment has been made by the assessee through banking channels and the purchases and sales have also been recorded in the books and the net profit has been offered to tax, then there cannot be any disallowance of the purchases. Appeal of the assessee is treated as allowed for statistical purposes.

Summary

Issues:
1. Disallowance of alleged bogus purchases.
2. Failure to conduct independent inquiries before disallowing purchases.
3. Reliance on information from DGIT (Inv.), Mumbai without independent verification.
4. Lack of opportunity for cross-examination of witness suppliers.
5. Disallowance of entire purchases instead of only profit element.

Analysis:

Issue 1: Disallowance of alleged bogus purchases
The assessee company, engaged in trading in bullion, gold, and diamond ornaments, filed its return for A.Y 2013-14. The AO disallowed purchases made from two companies operated by Rajendra Jain Group, alleging them as bogus. The CIT (A) confirmed the disallowance, leading to the assessee's appeal. The Tribunal found that the purchases were made through banking channels, recorded in books, and sales were offered for tax, questioning the disallowance when all documents were on record. The issue was remitted to the AO for verification, and the appeal was treated as allowed for statistical purposes.

Issue 2: Failure to conduct independent inquiries
The AO relied on information received from DGIT (Inv.), Mumbai regarding a search and seizure operation in Rajendra Jain Group's case without conducting independent inquiries. The Tribunal emphasized the need for verification of documents filed by the assessee to determine the genuineness of transactions, highlighting the AO's failure in independently assessing the sales' authenticity.

Issue 3: Reliance on DGIT (Inv.), Mumbai information
The AO's disallowance was based on information from DGIT (Inv.), Mumbai, indicating bogus transactions by Rajendra Jain Group. The Tribunal stressed the importance of independent verification, especially when payments were made through banking channels and transactions were recorded in books. The reliance solely on external information was deemed insufficient for disallowance.

Issue 4: Lack of opportunity for cross-examination
The AO disallowed purchases without affording the assessee an opportunity to cross-examine witness suppliers. The Tribunal noted this procedural lapse and highlighted the importance of providing such opportunities to ensure a fair assessment process and safeguard the assessee's rights.

Issue 5: Disallowance of entire purchases
The AO disallowed the entire purchase amount instead of only the profit element, which was deemed excessive by the CIT (A). The Tribunal emphasized that disallowing the entire purchase without considering the profit element was unjustified and directed a reevaluation by the AO to ensure a more accurate assessment.

In conclusion, the Tribunal's judgment focused on procedural fairness, independent verification, and the need for a thorough examination of documentary evidence before disallowing purchases. The decision aimed to uphold the principles of natural justice and ensure a balanced and just assessment process.