2019 (6) TMI 584 - AT - Income Tax

Addition u/s 68 - unsecured loans - HELD THAT - Assessee has discharged initial burden by filing various documents to prove identity, genuineness of transactions and creditworthiness of the parties. Therefore, we are of the considered view that the AO was erred in making additions towards unsecured loan u/s 68. The Ld. CIT(A) without appreciating these facts simply confirmed the addition made by the AO. Hence, we reverse the findings of the CIT(A) and direct the AO to delete the additions made towards unsecured loans u/s 68. Disallowance of interest and estimation of commission on unsecured loans obtained from companies controlled and operated by Shri Bhanwarlal Jain - AO has disallowed interest paid the ground unsecured loans are bogus - AO has also estimated 0.2% commission on total unsecured loans - HELD THAT - As the issue of unsecured loans has been decided in preceding paragraphs, where we held that the transactions between the parties are genuine which cannot be considered as unexplained cash credit u/s 68 of the Act, consequently, additions made towards disallowance of interest and estimation of commission on such unsecured loans is also needs to be considered in the light of discussions in the preceding paragraphs. Therefore, we are of the considered view that the AO as well as the Ld. CIT(A) was erred in making additions towards interest on unsecured loans and commission on such unsecured loans. Accordingly, we direct the AO to delete the additions made towards disallowance of interest and estimation of commission. Bogus purchases - assessee has filed basic evidences including confirmations from the parties - notice u/s 133(6) were issued, such notices were returned unserved with a remark address not known - HELD THAT - When the AO has not pointed out any discrepancies in the books of accounts or stock details filed by the assessee merely for the reason that notices issued u/s 133(6) were returned unserved, no adverse inference could not be drawn against the assessee, when assessee has filed sufficient material in order to prove the purchases from the above parties, no doubt, it is an admitted fact that the parties were never responded to notice u/s 133(6), but that by itself would not be a ground for holding the purchases as bogus in nature, that too when materials furnished by the assessee proves otherwise. The assessee has done its at best and filed whatever information available with it. The appearance of the parties is not within the control of the assessee. Further, when the parties are not appeared before the AO in response to notices, then separate procedure is provided under the Act to deal with those parties. For this purpose, the assessee cannot be blamed or made responsible for non-appearance of parties and also purchase from the parties cannot be considered as bogus when the assessee has filed all other evidences to prove the purchases from the parties. In this case, the assessee filed complete details including confirmations from the parties. The AO never disputed this fact. The AO also accepted sale declared by the assessee. Therefore, we are of the considered view that it is difficult to accept the arguments of the AO that purchases from above parties are bogus in nature. What is the amount of additions required to be made when both parties failed to conclusively prove the purchases in their favour? - Hon ble Gujarat High Court in the case of Ld. Vijay Proteins vs CIT 2015 (1) TMI 828 - GUJARAT HIGH COURT had taken similar view and held that where purchases are considered to be bogus, then only profit element embedded need to be taxed. In these cases, the assessee is in the business of real estate development. The profit element of real estate business is in the range of 8 to 15% depending upon the type of projects and places where project is executed by the parties. Therefore, considering all we deem it appropriate to direct the AO to estimate 12.5% profit on alleged bogus purchases. Accordingly, we direct the AO to estimate 12.5% profit on total alleged bogus purchases.

Issues Involved:
1. Principles of natural justice and opportunity of being heard.
2. Reliance on statements made by third parties.
3. Addition of unsecured loans as unexplained credits.
4. Disallowance of interest on unsecured loans.
5. Addition of commission on accommodation transactions.
6. Disallowance of alleged bogus purchases.
7. Set-off of loss against additions/disallowances.

Issue-wise Detailed Analysis:

1. Principles of Natural Justice and Opportunity of Being Heard:
The assessee argued that the Assessing Officer (AO) failed to follow the principles of natural justice by not providing an effective opportunity to be heard and not sharing material gathered during the search/survey proceedings. The tribunal noted that the AO did not provide the assessee with the statements or evidence relied upon, nor did they allow the assessee to cross-examine the parties involved. This was a significant procedural lapse.

2. Reliance on Statements Made by Third Parties:
The AO's primary basis for the additions was the statements made by Shri Bhanwarlal Jain during a search operation, where he admitted to providing accommodation entries. However, these statements were later retracted by Shri Bhanwarlal Jain. The tribunal emphasized that retracted statements, without corroborating evidence, should not be the sole basis for additions.

3. Addition of Unsecured Loans as Unexplained Credits:
The AO added ?10,45,00,000/- as unexplained credits under Section 68 of the Income Tax Act, based on the alleged accommodation entries provided by companies controlled by Shri Bhanwarlal Jain. The assessee provided various documents, including PAN details, bank statements, and affidavits, to prove the genuineness of the transactions. The tribunal found that the assessee had discharged the initial burden of proof, and the AO failed to provide contrary evidence linking the credits to the search findings conclusively. Thus, the tribunal directed the deletion of the additions.

4. Disallowance of Interest on Unsecured Loans:
The AO disallowed ?98,30,414/- as interest paid on the unsecured loans, treating the loans as bogus. Since the tribunal found the loans to be genuine, it consequently directed the deletion of the interest disallowance.

5. Addition of Commission on Accommodation Transactions:
The AO estimated a commission of ?20,20,000/- at 0.2% on the unsecured loans based on Shri Bhanwarlal Jain's statement. Given the tribunal's finding that the loans were genuine, it also directed the deletion of the commission addition.

6. Disallowance of Alleged Bogus Purchases:
The AO disallowed ?90,81,012/- as bogus purchases from M/s Aniket Enterprises and M/s Akash International, based on unserved notices and non-existent parties at the given addresses. The assessee provided purchase bills, bank statements, and confirmations. The tribunal noted that merely unserved notices do not justify treating purchases as bogus when other evidence supports the transactions. However, to resolve the dispute, the tribunal directed the AO to estimate a 12.5% profit on the alleged bogus purchases.

7. Set-off of Loss Against Additions/Disallowances:
The AO did not grant the set-off of loss incurred during the year against the additions/disallowances amounting to ?18,13,250/-. The tribunal did not specifically address this issue separately, but the overall findings imply that the set-off should be allowed in light of the deletions and adjustments directed.

Conclusion:
The tribunal allowed the appeals in favor of the assessee, directing the deletion of additions made towards unsecured loans, interest disallowance, and commission estimation. It also directed the AO to estimate a 12.5% profit on the alleged bogus purchases instead of treating the entire amount as bogus. The tribunal emphasized the importance of providing a fair opportunity to the assessee and the need for corroborative evidence when relying on third-party statements.

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