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2016 (5) TMI 104 - AT - Income TaxBogus purchases of goods - Held that - The assessee was able to link the closing stock with the relevant purchase bills. When the entire purchases made from TTPL was available as stock as at the year end, then the disallowance of purchases should result in corresponding reduction of the closing stock, the result of which would have NIL effect on profit and hence there was no requirement of making any addition. However, this proposition should be applied only if the purchases were held to be non-genuine. In view of the foregoing discussions, we are of the view that there is no reason to suspect the claim of purchases of goods from TTPL, particularly when the assessee is able to support the said claim with documentary evidences, stock register, confirmations etc and more particularly in view of the fact that the assessee has exported the very same goods. In our view, the theory of human probability has been applied to only part of transactions and not to the whole round of transactions. In any case, it cannot be said that the claim of the assessee defies the human probabilities, when one examines the documents furnished by the assessee. Accordingly, we are of the view that the Ld CIT(A) was not justified in confirming the addition made by the AO. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the impugned addition. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of purchase of Rs. 7.56 crores. 2. Non-rejection of books of accounts by the assessing officer. 3. Application of Section 40A(3) of the Income Tax Act. 4. Genuineness of documents and transactions. 5. Application of human probability in assessing transactions. 6. Adherence to principles of natural justice. Detailed Analysis: 1. Disallowance of Purchase of Rs. 7.56 Crores: The assessee, a partnership firm engaged in trading and exporting diamonds, faced disallowance of Rs. 7.56 crores in purchases from TTPL. The AO's investigation revealed that TTPL was not available at the given address, leading to the disallowance. The CIT(A) upheld this decision, despite the assessee's submission of various documents and stock registers proving the purchase and subsequent export of goods. 2. Non-rejection of Books of Accounts: The assessee argued that the AO made the addition without rejecting the books of accounts and provided a stock reconciliation statement. The CIT(A) did not address this aspect, but the tribunal found merit in the assessee's submission, emphasizing that disallowance without rejecting books of accounts was not justified. 3. Application of Section 40A(3) of the Income Tax Act: The AO suggested disallowance under Section 40A(3) on a presumption basis. The assessee contended that such disallowance cannot be made on presumptive grounds, citing legal precedents. The tribunal agreed, noting that Section 40A(3) is a legal fiction requiring strict interpretation. 4. Genuineness of Documents and Transactions: The AO suspected the genuineness of documents and sent them to CFSL Hyderabad for verification. The CFSL report, received post the CIT(A) order, did not find any fabrication. The tribunal noted that the tax authorities disregarded the evidence furnished by the assessee, including invoices, ledger accounts, and export documents, without disproving them with credible material. 5. Application of Human Probability in Assessing Transactions: The tax authorities doubted the transactions based on human probability, suggesting that it was improbable for TTPL to extend credit to an unknown party. The tribunal emphasized that the entire transaction, including the export and re-import of goods, should be considered. The tribunal found that the tax authorities' selective application of human probability led to misleading conclusions. 6. Adherence to Principles of Natural Justice: The tribunal highlighted that the AO relied on a report from DGIT and statements made before the Sales Tax authorities without independent verification or providing the assessee an opportunity for cross-examination. The tribunal underscored that principles of natural justice demand that the assessee be allowed to counter such evidence. Conclusion: The tribunal concluded that the assessee provided sufficient documentary evidence to support the claim of purchases from TTPL. The tax authorities failed to disprove these documents or link the closing stock to any other purchases. The tribunal found no reason to suspect the genuineness of the transactions, noting that the theory of human probability was applied selectively. Consequently, the tribunal set aside the CIT(A)'s order and directed the AO to delete the impugned addition. Result: The appeal filed by the assessee was allowed, and the order was pronounced in the Open Court on 09.03.2016.
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