2020 (4) TMI 787 - AT - Income Tax

Estimation of income - Rejection of books of accounts - Bogus purchases - not allowing the assessee to cross examine the witnesses - AO made the addition of 25% of these alleged bogus purchases - CIT (A) while sustaining the addition has applied 18% as Net Profit on such purchases - HELD THAT - Disallowance made by the AO based on the 3rd party information gathered by the Investigation Wing of the Department which was not subjected to independent verification by the AO was deleted by the ld. CIT (A), confirmed by the Tribunal as well as by the Hon ble High Court which was further upheld by the Hon ble Supreme Court while dismissing the appeals filed by the revenue. Even otherwise, the assessment order solely based on the statements of the 3rd party is not sustainable in law when the opportunity of cross examination was not given to the assessee. As decided in M/S ANDAMAN TIMBER INDUSTRIES LTD. 2005 (3) TMI 763 - SC ORDER not allowing the assessee to cross examine the witnesses by the adjudicating authority with the statements of those witnesses were made the basis of impugned order is a serious flaw which makes the order nullity as well as it amounts to violation of principles of natural justice. In the case in hand, when the assessee has demanded the cross examination, the AO instead of giving the opportunity to the assessee to cross examine the witnesses has rather asked the assessee to produce those witnesses. Purchases made by the assessee in the said case from M/s. Avi Exports were treated by the AO as bogus, however, the Tribunal after considering the voluminous documents filed by the assessee before the lower authorities has set aside the orders of the lower authorities and deleted the addition made on account of alleged bogus purchases. It is pertinent to note that the addition made by the AO in the said case of M/s. Haryana Jewellers Pvt. Ltd. vs. ITO (supra) was also on the basis of statement of Shri Rajendra Jain. Where the assessee has produced all the relevant documentary evidences which prove the genuineness of the purchases as well as following the decisions as relied upon by the assessee, we delete the addition sustained by the ld. CIT (A) on account of bogus purchases. - Appeal of the assessee is allowed

Summary

Issues Involved:
1. Reassessment validity.
2. Bogus purchases of diamonds.
3. Rejection of books of accounts under section 145(3).
4. Application of gross profit rate.
5. Cross-examination rights and natural justice.

Issue-wise Detailed Analysis:

1. Reassessment Validity:
The assessee challenged the reassessment on multiple grounds, including lack of appropriate sanction under section 151 of the Income Tax Act, reliance on statements made under section 132(4) without corroborative evidence, and denial of cross-examination rights. The Tribunal noted that the reassessment was initiated based on third-party information from the Investigation Wing, Mumbai, regarding alleged bogus purchases from concerns linked to Rajendra Jain Group. The Tribunal emphasized that the AO did not provide the assessee an opportunity to cross-examine the third-party witnesses, which is a serious flaw and a violation of natural justice principles.

2. Bogus Purchases of Diamonds:
The AO disallowed 25% of the purchases amounting to ?3,66,51,505, treating them as bogus based on statements from Rajendra Jain and others. The CIT (A) modified this to an 18% gross profit rate, resulting in an addition of ?75,33,550. The Tribunal held that the AO's reliance solely on third-party statements without independent verification or allowing cross-examination was insufficient to prove the purchases were bogus. The assessee presented substantial documentary evidence, including purchase bills, export invoices, and bank statements, which the Tribunal found credible.

3. Rejection of Books of Accounts under Section 145(3):
The AO rejected the assessee's books of accounts under section 145(3) and made additions based on alleged bogus purchases. The Tribunal noted that once books are rejected, the income should be estimated based on a reasonable and proper gross profit or net profit rate, considering the past history of the assessee. The Tribunal criticized the AO and CIT (A) for not following this well-settled principle and instead making arbitrary additions.

4. Application of Gross Profit Rate:
The CIT (A) applied an 18% gross profit rate on the alleged bogus purchases, which the Tribunal found excessive and unreasonable. The Tribunal highlighted that the assessee's past gross profit rates in the diamond segment were significantly lower, around 3.98% for AY 2008-09 and an average of 4.43% over three years. The Tribunal emphasized that the AO should have considered these historical rates rather than applying an arbitrary rate.

5. Cross-examination Rights and Natural Justice:
The Tribunal underscored the importance of cross-examination rights, referencing the Supreme Court's decision in Andaman Timber Industries vs. CCE, which held that denying cross-examination violates natural justice principles. The Tribunal found that the AO's failure to allow the assessee to cross-examine the third-party witnesses whose statements formed the basis of the reassessment rendered the order null and void.

Conclusion:
The Tribunal concluded that the AO's addition based on third-party statements without independent verification and denial of cross-examination was not sustainable. The Tribunal deleted the addition sustained by the CIT (A) and allowed the assessee's appeal, emphasizing the need for a fair and just assessment process that adheres to legal principles and natural justice. The Tribunal's decision aligns with precedents set by higher courts, reinforcing the importance of due process in tax assessments.