2020 (12) TMI 1064 - AT - Income Tax

Unexplained cash credit u/s 68 r/w section 115BBE - Bogus purchase and sale - HELD THAT - Authorities below have not cited any statement of the parties from whom the purchases and sales were made wherein they had denied these transactions and if there are any statements of these parties wherein they had denied these transactions, such statements were not made available to the assessee for cross examination. The assessee in para 3 of the above reply had specifically requested to confront all information and documents etc. but no such opportunity was granted to assessee. The argument of Learned D. R. that since the Hon'ble Allahabad High Court had held the parties to be bogus therefore, there was nothing to be confronted to assessees is not helpful to the Revenue as opportunity of cross examination of third parties on whose statements the Revenue is relying is a legal right available to the assessee and which has been held by various Hon'ble courts including Supreme Court in the case of Andman Timber Industries 2015 (10) TMI 442 - SUPREME COURT . Moreover, we find that the Assessing Officer had made the additions on the basis of a report from the Assessing Officer of Rich Group of companies and has not carried out any independent investigations for holding the transactions of cloth trading as bogus. The assessee has recorded the entries of sales and purchase in its books of account and has duly disclosed the items of sales and purchase in the profit loss account and has duly disclosed the profit earned on the trading in the profit loss account and has offered the same as business income. The assessee has furnished as much information as possible to justify its claim about the transactions of cloth being genuine. Under these circumstances, Hon'ble Supreme Court in the case of CIT vs. Odeon Builders Pvt. Ltd. 2019 (8) TMI 1072 - SUPREME COURT has decided the issue in favour of assessee. Additions deleted.

Issues Involved:
1. Sustaining treatment of profit in wholesale trading in cloth as unexplained cash credit under section 68 r/w section 115BBE of the Income Tax Act, 1961.
2. Validity of the assessment under section 153A without incriminating material found during the search.
3. Denial of cross-examination of third parties whose statements were relied upon by the Assessing Officer.
4. Legitimacy of treating business transactions as bogus without any corroborating material.
5. Arbitrary addition of alleged commission paid as unexplained expenditure under section 69C of the Income Tax Act, 1961.

Detailed Analysis:

1. Sustaining Treatment of Profit as Unexplained Cash Credit:
The Tribunal noted that the Assessing Officer (AO) treated the profit from wholesale trading in cloth as unexplained cash credit under section 68 of the Income Tax Act, 1961. The AO's decision was based on documents found during a search on a different group of companies, which suggested that the group was engaged in providing accommodation entries. However, the Tribunal observed that the names of the assessees did not appear in the impounded documents. The addition was made by treating the sale and purchase of cloth as bogus, despite the fact that no incriminating documents were found during the search on the assessees.

2. Validity of Assessment Under Section 153A Without Incriminating Material:
The Tribunal emphasized that for completed assessments, additions under section 153A can only be made based on incriminating material found during the search. In this case, the Tribunal found that no incriminating material was found during the search on the assessees. The AO relied on documents found during a search on a different group, which did not mention the assessees. Citing various case laws, including Pr. CIT vs. Meeta Gutgutia, the Tribunal concluded that the additions could not be sustained in the absence of incriminating material.

3. Denial of Cross-Examination:
The Tribunal highlighted that the AO did not provide the assessees with an opportunity to cross-examine third parties whose statements were relied upon for making the additions. The Tribunal cited the Supreme Court's decision in Andman Timber Industries vs. CIT, which held that the denial of cross-examination violates the principles of natural justice. The Tribunal found that the AO made the additions based on a report from the AO of the Rich Group of companies without conducting independent investigations.

4. Treating Business Transactions as Bogus:
The Tribunal noted that the assessees had been declaring business from cloth trading since assessment year 2011-12 and had reported the turnover to VAT authorities. The transactions were supported by invoices and payments were made through banking channels. The Tribunal found that the AO's conclusion that the transactions were bogus was based on assumptions and not on any concrete evidence. The Tribunal held that the AO's reliance on the findings of the Hon'ble Allahabad High Court in the case of Rich Group of companies was misplaced as the court's findings were related to money laundering activities and not to cloth trading.

5. Arbitrary Addition of Alleged Commission Paid:
The Tribunal found that the AO made an arbitrary addition of 2% of the total profit in trading in cloth as unexplained expenditure under section 69C of the Income Tax Act, 1961. The Tribunal observed that the AO did not provide any material evidence to justify this addition. The Tribunal held that the addition was based on conjectures and surmises and was not sustainable in law.

Conclusion:
The Tribunal allowed the appeals filed by the assessees, holding that the additions made by the AO under sections 68 and 69C were not sustainable in the absence of incriminating material and due to the denial of the right to cross-examine third parties. The Tribunal directed that the income from cloth trading be treated as business income and not as unexplained cash credit.

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