2018 (3) TMI 2046 - AT - Income Tax

Bogus purchases - purchase of paintings by the assessee is unproved - HELD THAT - The case made out is that the stated suppliers/sellers of paintings of the assessee received cheques and after clearance withdrew the cash and after deducting their commission, balance of cash was handed over to the person who came with the cheques. The suppliers also stated that they were in the business of bill discounting and adjustment transactions. As stated suppliers/sellers are not in the business of paintings and therefore, the transaction of purchase as canvassed by the assessee is not proved. In this context, we find that there not enough material with the Revenue to establish that the purchase of paintings is per-se bogus, as our subsequent discussion would show. Pertinently, existence of the transaction between assessee and the stated suppliers/sellers cannot be doubted, inasmuch as, the consideration has flown from the assessee to such parties by account payee cheques, which stand cleared to the credit of the bank account of such suppliers. While we agree with the reasoning of the Ld. Departmental Representative that payment by account payee cheques by itself does not prove genuineness of the transaction but in the instant case more is required to prove that the transaction was bogus. We say so for the reason that in the present case, the existence of paintings in the possession of the assessee, of-course, except one which has been sold, is not in dispute. The statement of the stated suppliers/sellers does not prove that the consideration going out of the assessee s bank account has come back to the assessee in the form of cash. Quite clearly, even the statement given by the stated suppliers/sellers only say that cash was returned by them to the person who gave them the cheques; there is uniformity in the statements on the aforesaid aspect. At this point, we may like to emphasize that it was for the Revenue to establish the link, if any, between the person who is stated to have received back the cash from the stated suppliers/sellers and the assessee. The only prudent inference that can be drawn is that the paintings in question have indeed been purchased, because they exist in the possession of the assessee; and, at best the purchases had been effected from some other parties and not the stated suppliers/sellers. In fact, as per the given state of verification, it can also be a probability that stated suppliers/sellers have acted for and on behalf of the actual sellers of paintings to the assessee and if that be so then no fault can be found with the transaction carried out by the assessee. Therefore, for all these reasons, we say that there is not enough material with the Revenue to treat the purchase transaction as bogus or not proved. Be that as it may, in our considered opinion, we find no justifiable reason to depart from the conclusion drawn in the cases ACG Capsules Pvt. Ltd 2015 (2) TMI 1412 - ITAT MUMBAI wherein also similar stand of the Revenue, qua purchase of paintings found in the search, has been found to be unsustainable. In fact, with regard to one of the transaction, wherein one painting has been sold and profit thereof has been credited in the P L Account, there is no doubt about the sale made. Assessee is quite justified in invoking the ratio laid down in the case of Nikunj Eximp Enterprises (P) Ltd 2013 (1) TMI 88 - BOMBAY HIGH COURT in such a situation, to canvass that where sale of purchased goods is not doubted, the corresponding purchases could not be construed as bogus. - Decided in favour of assessee.

Summary

Issues Involved:

1. Addition on account of unproved purchases of paintings.
2. Reliance on statements of suppliers denying transactions.
3. Genuineness of transactions reflected in account books.
4. Treatment of sales and closing stock in financial statements.
5. Right to cross-examine suppliers.

Detailed Analysis:

1. Addition on Account of Unproved Purchases of Paintings:

The primary issue in the appeals was the addition of Rs. 1,74,37,500/- made by the Assessing Officer (AO) concerning unproved purchases of paintings. The AO contended that the purchases were bogus, based on statements from suppliers denying the sale of paintings to the assessee. The assessee argued that the purchases were genuine, supported by account payee cheques, ledger entries, and other documentation. However, the AO relied on the suppliers' statements that they received payments through cheques but returned the cash, minus commission, to a broker.

2. Reliance on Statements of Suppliers Denying Transactions:

The AO's decision was heavily influenced by the statements of the suppliers, who denied supplying paintings to the assessee. The suppliers admitted to receiving cheques from the assessee, which they deposited and later withdrew as cash, returning it to a broker. The CIT(A) upheld the AO's decision, emphasizing that the suppliers were not in the business of paintings and were involved in cheque discounting. The CIT(A) concluded that the cash returned to the broker implied the transactions were not genuine.

3. Genuineness of Transactions Reflected in Account Books:

The assessee maintained that the purchases were duly recorded in the account books, with payments made via account payee cheques, including VAT payments. The assessee also highlighted that the paintings were either sold or remained in stock, indicating their genuine acquisition. The Tribunal noted that the existence of paintings was not disputed, as they were found during the search, except for one sold painting. The Tribunal found no merit in the addition when the source of funds and physical possession of paintings were not in question.

4. Treatment of Sales and Closing Stock in Financial Statements:

The Tribunal observed that the assessee had declared and offered to tax the profit from the sale of one painting, which was not doubted. The Tribunal emphasized that the closing stock value of the remaining paintings was reflected in the financial statements, negating any net debit impact on the Profit and Loss account. The Tribunal relied on precedents where similar additions were deleted, noting that the right to cross-examine the suppliers was not granted, which could have clarified the situation.

5. Right to Cross-Examine Suppliers:

The Tribunal highlighted the lack of opportunity for the assessee to cross-examine the suppliers, which could have provided a clearer picture of the transactions. The Tribunal emphasized that the Revenue failed to establish a link between the broker and the assessee, and the suppliers' statements alone were insufficient to prove the transactions were bogus. The Tribunal concluded that the purchases were genuine, as the paintings existed and were accounted for, and directed the deletion of the addition.

Conclusion:

The Tribunal allowed the appeals, setting aside the CIT(A)'s order and directing the AO to delete the addition. The decision was applied mutatis mutandis to the subsequent assessment year, resulting in the allowance of both appeals. The Tribunal emphasized the need for concrete evidence beyond supplier statements to substantiate claims of bogus transactions, especially when the physical possession and financial recording of assets are undisputed.