2020 (12) TMI 501 - AT - Income Tax

Bogus purchases - assessee could not produce primary evidences like Octroi Receipts, Delivery challan etc. evidence to prove the genuineness of the purchases before the AO and before CIT(A) - HELD THAT - In the instant case, the assessee failed to file before the AO/CIT(A) confirmed copy of the ledger account, present mailing address of the said parties. In such a situation, in absence of current mailing address, it was not possible for the Revenue to summon those parties for examination/verification/cross-examination. Therefore, the reliance placed by the Ld. counsel on the decision in Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT is misplaced. In the instant case, the issue is genuineness of purchases, which arose because of the investigation done by the Sales Tax Department, Government of Maharashtra which resulted in the affidavits filed by the entry providers that they had merely provided entries and no goods were supplied. In the overall facts and circumstances of the case, the contentious issue would be resolved through cross-examination of the parties. A proper hearing must always include a fair opportunity to those who are parties in the controversy for correcting or contradicting anything prejudicial to their view. Cross-examination is allowed by procedural rules and evidently also by the rules of natural justice. Any witness who has been sworn on behalf of any party is liable to be cross-examined on behalf of the other party to the proceedings. The Hon'ble Supreme Court in State of Kerala vs. K.T. Shaduli Grocery Dealer 1977 (3) TMI 160 - SUPREME COURT recognised the importance of oral evidence by holding that the opportunity to prove the correctness or completeness of the return necessarily carry with it the right to examine witnesses and that includes equally the right to cross-examine witnesses. Thus considering the above factual scenario and position of law, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make a de novo order, after allowing the opportunity of cross-examination to the assessee. We direct the assessee to file the relevant accounts/documents/evidence before the AO. Needless to say, the AO would give reasonable opportunity of being heard to the assessee before passing the order. Appeals are allowed for statistical purpose

Summary

Issues Involved:
1. Addition of bogus purchases.
2. Violation of principles of natural justice.
3. Estimation of Gross Profit (GP) rate.

Detailed Analysis:

1. Addition of Bogus Purchases:
The assessee filed its return of income for the AY 2011-12, which was scrutinized by the AO. During the assessment, the AO received information from the Sales Tax Department, Government of Maharashtra, indicating that the assessee had obtained bogus purchase bills from eight entry providers. The AO noted that the proprietors/partners of these entry providers had filed affidavits stating that they issued only sale bills without any real transactions. Despite the assessee providing purchase bills, ledger accounts, and delivery challans, they failed to file confirmations from the above parties or produce them for verification. Consequently, the AO added ?1,02,07,160/- as bogus purchases. The CIT(A) partially sustained the addition but reduced it to ?34,93,111/-, estimating the GP rate at 6.26% based on the assessee’s GP rate in the subsequent year (AY 2013-14).

2. Violation of Principles of Natural Justice:
The assessee contended that the AO violated the principles of natural justice by not allowing them to cross-examine the witnesses whose statements were used against them. The assessee argued that the onus was on the Revenue to disprove the documents provided by the assessee, which included original purchase bills, ledger accounts, and bank statements reflecting payments made to the parties in question. The assessee cited the Hon’ble Supreme Court’s decision in Andaman Timber Industries v. Commissioner of Central Excise, emphasizing that not allowing cross-examination of witnesses whose statements were the basis of the order is a serious flaw that renders the order null and void.

3. Estimation of Gross Profit (GP) Rate:
The CIT(A) observed that the assessee failed to justify the genuineness of the purchases from the entry providers by not providing confirmations, current mailing addresses, or credible documents. The CIT(A) noted that the assessee’s GP rate had decreased from 6.26% in AY 2013-14 to 4.44% in AY 2011-12, indicating suppressed profits due to bogus purchases. The CIT(A) estimated the suppressed GP at ?34,93,111/- and sustained the disallowance to this extent, rejecting the assessee’s books of accounts and estimating the GP rate at 6.26%. The CIT(A) relied on the Hon’ble Supreme Court’s decisions in H M Esufali H M Abdulla and M/s. Kanchwala Gems Pvt. Ltd., which upheld the estimation of income based on rational and reasonable grounds.

Conclusion:
The appellate tribunal considered the assessee’s arguments and the CIT(A)’s findings. The tribunal noted that the assessee failed to provide qualitative/quantitative details and other necessary documents to substantiate the genuineness of the purchases. The tribunal also acknowledged the importance of cross-examination for ensuring a fair hearing. Consequently, the tribunal set aside the CIT(A)’s order and restored the matter to the AO for a de novo order, directing the AO to allow the assessee the opportunity to cross-examine the witnesses and submit relevant documents. The AO was instructed to provide a reasonable opportunity of being heard to the assessee before passing the order. The appeals were allowed for statistical purposes.