2016 (7) TMI 688 - AT - Income Tax

Bogus purchase - genuineness & the creditworthiness of the relevant purchase parties not proved - Held that - The purchases from the supplier parties are not established, however, simultaneously, the sales corresponding to the purchases are not doubted and this obvious contradiction get resolved only when the assessee purchases goods in cash from the open market and supply to the buyer parties. The presumption in such circumstances is that purchases have been made in cash for supplying to the sales parties and at that time unexplained cash has been utilized by the assessee for purchases. The addition is required to be made for such unexplained cash payment made and not for purchases booked in books of account. The supplier parties to whom cheque payments were made for purchases booked in books of account, returns the corresponding cash back to the assessee after deducting certain commission, and this cash is available for making subsequent cash purchases. In such circumstances, only the peak of the unexplained cash utilized in cash purchases can be added to the income of the assessee. Accordingly, we restore the matter back to the file of the Assessing Officer with the direction to compute the peak of the unexplained cash utilized in making cash purchases.

Summary

Issues Involved:
1. Deletion of additions made by the Assessing Officer on account of bogus purchases.
2. Verification of the genuineness and creditworthiness of the purchase parties.
3. Examination of the procedural and evidentiary aspects of the case.

Issue-wise Detailed Analysis:

1. Deletion of Additions Made by the Assessing Officer on Account of Bogus Purchases:
The Revenue's primary contention was that the Commissioner of Income Tax (Appeals) erred in deleting the additions of ?1,44,53,981/- made by the Assessing Officer (AO) on account of bogus purchases. The AO had observed that the assessee, engaged in trading surgical items, had shown purchases from local suppliers who were not traceable or did not appear to conduct any business activities from their reported addresses. The AO's investigation included sending an inspector to verify the suppliers' addresses, which revealed that the suppliers were either untraceable or operated from residential areas without any visible business activities. Consequently, the AO concluded that the purchases were bogus and represented a method to route the assessee's own money back into the business.

2. Verification of the Genuineness and Creditworthiness of the Purchase Parties:
The AO challenged the genuineness and creditworthiness of the suppliers, noting that the suppliers' bank accounts showed transactions only with the assessee and no corresponding purchases. The AO also found discrepancies in the Permanent Account Numbers (PAN) provided by the suppliers. The assessee argued that the goods were received and payments were made through account payee cheques, and the sales corresponding to these purchases were not doubted by the AO. The Commissioner of Income Tax (Appeals) accepted the assessee's contention that the goods were indeed purchased, albeit possibly from different sources than those listed, and that the sales of these goods were genuine.

3. Examination of the Procedural and Evidentiary Aspects of the Case:
The Commissioner of Income Tax (Appeals) forwarded the assessee's submissions to the AO for a remand report, which did not yield any specific adverse comments. The Commissioner of Income Tax (Appeals) concluded that since the sales were not doubted, the purchases must have been made, and the discrepancies in the suppliers' details did not necessarily imply that the purchases were bogus. The Tribunal, however, found that the assessee likely purchased goods in cash from unlisted suppliers and obtained bills from the listed suppliers. The Tribunal held that the purchases from the listed suppliers were not substantiated with necessary documentary evidence, and thus, the purchases were not genuine. However, since the sales were genuine, the Tribunal concluded that the assessee made cash purchases and utilized unexplained cash for these transactions. The Tribunal directed the AO to compute the peak of the unexplained cash utilized for these purchases.

Conclusion:
The Tribunal partly allowed the Revenue's appeals for statistical purposes, restoring the matter to the AO to compute the peak of the unexplained cash utilized in making cash purchases. The Tribunal's decision underscores the importance of substantiating purchases with proper documentation and the complexities involved in verifying the genuineness of transactions in cases involving alleged bogus purchases.