2024 (5) TMI 1476 - AT - Income Tax

Disallowance of bogus purchases - information collected from the back of the assessee from a third party relied upon - both the Hon ble Members have given dissenting judgments and even they did not agree on the questions of difference - Reference of matter to third member - HELD THAT - Disallowance based on third party information gathered by the Investigation Wing of the Department without independent verification of the ld. Assessing Officer cannot be made. Information transmitted by the DIT (Investigation) was a material to ignite assessment machinery in motion but it cannot be treated as gospel truth for disallowing the claim of the assessee without independent cross verification of those information by the ld. Assessing Officer. Information of the DIT, Investigation Wing is based upon the statements of two persons who are managing the affairs of assessee s suppliers - Both these witnesses were not subject to cross examination. Hon ble Supreme Court in the case of Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT has considered this issue as held that if the statement was recorded from the back of the assessee and assessee was not allowed to cross examine the witness by the authorities, then such statement is to be excluded from the evidence. When an explanation or defence of an assessee based on number of facts supported by evidence and circumstances required consideration, whether it is sound or not must be determined not by considering the evidence attached to each single facts in isolation, but by assessing the cumulative effects of all the facts in their setting as a whole. If we weigh both the sets of evidences discussed then, certainly scale will tilt in favour of the assessee, because when assessee made the purchases at that point of time, all the three concerns were having PAN with the Department/TIN/VAT/CST nos. It has made payments through account payee cheques. It has accounted the materials in the stocks and made sales out of that. It has produced the stock register. The purchase shown from these concerns is less than 2.86%/2.76% of the total purchase made by the assessee in respective years. How it can be anticipated that such purchases would be treated as a bogus only on admission of a third party, who might have many reasons for making such statements and such witnesses were not subject to cross examination. Therefore, we are of view that Brother Judicial Member has rightly deleted the disallowance and concur with his order. Right to cross-examine third-party witnesses - If third party statement recorded from the back of an assessee is being used as an evidence, then, the witness is to be subjected to cross examination and failure on that point would lead to exclusion of that statement from consideration. There is no dispute qua this proposition because it is a proposition laid down by the Hon ble Apex Court in Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT the dispute is how to apply the proposition on the given facts. Thus Hon ble Judicial Member has taken the correct view that these additions are not sustainable in both the years.

Summary

Issues Involved:

1. Legitimacy of the reopening of assessment under section 148.
2. Justification for the addition of alleged bogus purchases.
3. Right to cross-examine third-party witnesses.
4. Consistency with decisions of coordinate benches.

Issue-wise Detailed Analysis:

1. Legitimacy of the Reopening of Assessment:
- The assessee initially challenged the reopening of the assessment under section 148 but later withdrew these grounds. The reopening was based on information from the Investigation Wing regarding alleged bogus purchases from entities managed by Bhanwar Lal Jain Group, which were engaged in providing accommodation entries.

2. Justification for the Addition of Alleged Bogus Purchases:
- In ITA No. 226/ASR/2017, the addition of Rs. 86,76,315/- was made on account of alleged bogus purchases from M/s. Daksh Diamonds and M/s. Jewel Diamonds. The assessee argued that the CIT(A) failed to appreciate that no trading additions could be made without pointing out defects in the audited books of accounts.
- In ITA No. 586/ASR/2017, a similar addition of Rs. 82,17,465/- was made for purchases from M/s. Nazar Impex (P) Ltd. The assessee contended that the addition was based on the statement of Mr. Sanjay Choudhary, who was not produced for cross-examination, thereby violating principles of natural justice.
- The Tribunal found that the purchases were supported by invoices, payments made through banking channels, and entries in the stock register. The information from the Investigation Wing was deemed insufficient without independent verification by the Assessing Officer.

3. Right to Cross-Examine Third-Party Witnesses:
- The assessee requested the cross-examination of third-party witnesses, namely Bhanwar Lal Jain and Sanjay Chaudhary, whose statements were used against them. The Tribunal emphasized the necessity of cross-examination, citing the Supreme Court's decision in Andaman Timber Industries, which mandates that statements recorded from the back of the assessee must be subject to cross-examination to be admissible as evidence.

4. Consistency with Decisions of Coordinate Benches:
- The Judicial Member highlighted the importance of maintaining judicial discipline by following the decisions of coordinate benches on similar issues. The Tribunal referred to its earlier decision in the case of DCIT vs. Sunil Kumar, where similar additions were deleted due to lack of cross-examination and proper verification of third-party information.
- The Tribunal also referenced the Supreme Court decision in CIT vs. M/s. Odeon Builders Pvt. Ltd., which underscored that disallowances based solely on third-party information without further scrutiny are not sustainable.

Conclusion:
The Tribunal concluded that the additions for alleged bogus purchases were not justified as they were based on unverified third-party information. The failure to provide the assessee the opportunity to cross-examine the witnesses further invalidated the additions. The Tribunal upheld the Judicial Member's view that the additions should be deleted, emphasizing the need for independent verification and adherence to principles of natural justice.