2019 (9) TMI 496 - AT - Income Tax

Addition of Bogus Purchases u/s 69C - peak credit theory applicability - HELD THAT - AO had placed heavy reliance on the seized document of Shri Bhanwarlal Jain relating to the period 1.1.2008 to 31.12.2008 for making addition in the hands of the assessee. But we find from Annexure C to the assessment order which contains the workings of peak credit for purchases, those are transactions of purchases made by the assessee and payments made by the assessee to the disputed parties. Those transactions are not at all reflected in the seized document of Shri Bhanwarlal Jain. Hence the entire allegations of the ld AO vanishes on this count itself as no addition has been made by the AO using the contents of the said seized document for the period 1.1.2008 to 31.12.2008. AO had made addition by considering the peak credit of purchases. The theory of peak credit could be used only when the transactions are carried out outside the books. Entire purchase transactions are duly reflected in the regular books of accounts of the assessee and payments for the same were made by account payee cheques from disclosed sources. Hence the peak credit theory cannot be made applicable and the addition deserves to be deleted on this count. Addition has been made by the AO u/s 69C - The basic principle of section 69C of the Act is that the incurrence of an expenditure is not in dispute whereas the source for such expenditure is in dispute. In the instant case, since the addition is made u/s 69C of the Act, it could be safely concluded that the purchases has been accepted as genuine by the ld AO and only the source is disputed. We find that the source for such purchases have been explained from the regular books of accounts by making payment by account payee cheques. Hence there cannot be any addition u/s 69C of the Act. Hence the addition deserves to be deleted on that count also. Addition made in the hands of assessee for the Asst Year 2009-10 deserves to be deleted for more than one reason as could be evident from above and has been rightly deleted by the CIT-A. Deletion of addition made on account of alleged disputed purchases, correspondingly, the addition made towards commission at 0.1% also requires to be deleted which was rightly deleted by the ld CITA. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the addition made towards bogus purchases.
2. Validity of the reopening of assessment.
3. Applicability of Section 69C of the Income Tax Act, 1961.
4. Addition of commission expenditure for obtaining bogus bills.

Issue-wise Detailed Analysis:

1. Validity of the Addition Made Towards Bogus Purchases:
The primary issue in the revenue's appeal for the assessment year 2007-08 was whether the Commissioner of Income Tax (Appeals) (CIT(A)) was justified in deleting the addition made towards bogus purchases. The assessee, involved in the business of trading diamonds, was alleged to have obtained accommodation purchase bills from certain parties. The Assessing Officer (AO) concluded that the purchases were not genuine based on statements from a search operation indicating the provision of accommodation entries. However, the assessee provided substantial evidence, including purchase bills, ledger accounts, bank statements, stock registers, and affidavits from the suppliers, confirming the transactions. The CIT(A) observed that the AO relied heavily on statements that were later retracted and did not provide concrete evidence linking the assessee to bogus transactions. Consequently, the CIT(A) deleted the addition, which was upheld by the tribunal, noting that the purchases were genuine and supported by documentary evidence.

2. Validity of the Reopening of Assessment:
The assessee challenged the reopening of the assessment on the grounds that the AO was inconsistent in the reasons recorded for the reassessment. The AO initially treated the transactions as unsecured loans but later considered them as bogus purchases. The tribunal noted that the AO was uncertain about the nature of the transactions and that the reopening was based on vague and inconsistent reasons. The tribunal upheld the CIT(A)'s decision to delete the additions, emphasizing that the AO did not provide a clear basis for the reassessment.

3. Applicability of Section 69C of the Income Tax Act, 1961:
The AO made additions under Section 69C, which deals with unexplained expenditure. The tribunal highlighted that Section 69C applies when the incurrence of expenditure is not in dispute, but the source is. In this case, the assessee had explained the source of the expenditure through regular books of accounts and payments made by account payee cheques. The tribunal concluded that since the purchases were accepted as genuine, the addition under Section 69C was unwarranted and deserved to be deleted.

4. Addition of Commission Expenditure for Obtaining Bogus Bills:
The AO also added commission expenditure under Section 69C for obtaining bogus bills, calculated at 0.1% of the total value of the alleged bogus purchases. The CIT(A) deleted this addition, and the tribunal upheld the deletion, noting that the primary addition towards bogus purchases was deleted, rendering the commission expenditure addition baseless.

Conclusion:
The tribunal dismissed the revenue's appeals and upheld the CIT(A)'s decision to delete the additions towards bogus purchases and commission expenditure. The tribunal emphasized that the assessee had provided adequate evidence to substantiate the genuineness of the purchases and that the AO's reliance on retracted statements and inconsistent reasons for reassessment was insufficient to justify the additions. The cross objections by the assessee questioning the validity of the reopening of assessment were dismissed as not pressed.