2024 (12) TMI 1519 - AT - Income Tax

Bogus purchases - rejecting the books of account maintained by the assessee u/s 145(3) - additions made by applying the Gross Profit (GP) - HELD THAT - As decided in own case 2024 (10) TMI 1628 - ITAT DELHI we fail to understand the reasoning of AO as at one hand he stated sale/purchase claimed to have been made by M/s Kamal Trading Company as bogus then he proceeds to make addition on the basis of GP disclosed by the assessee without any justification and explanation. Such order, on merit as well, fails to meet the test of law and deserves to be quashed. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the additions made by the Assessing Officer (AO) treating the sales/purchases as not genuine were justified.
• Whether the rejection of the books of accounts under Section 145(3) of the Income Tax Act was appropriate.
• Whether the assessee was denied a fair opportunity to cross-examine the evidence used against them, thereby violating principles of natural justice.
• Whether the additions made by applying the Gross Profit (GP) rate constituted double taxation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Additions

• Legal Framework and Precedents: The AO made additions based on the assumption that sales/purchases were not genuine, relying on Section 145(3) of the Income Tax Act to reject the books of accounts.
• Court's Interpretation and Reasoning: The Tribunal found that the AO's reasoning lacked justification, as the AO failed to provide specific defects in the books of accounts.
• Key Evidence and Findings: The AO's addition of Rs. 12,86,416/- was based on a GP rate of 0.24% applied to the total turnover, which was already accounted for by the assessee.
• Application of Law to Facts: The Tribunal concluded that the AO's order did not meet the legal standards, as it was based on assumptions without concrete evidence.
• Treatment of Competing Arguments: The assessee argued that the GP was already considered, leading to double taxation. The Tribunal agreed, noting the lack of new evidence or reasoning from the AO.
• Conclusions: The Tribunal quashed the AO's additions, allowing the assessee's appeal.

Issue 2: Rejection of Books of Accounts

• Legal Framework and Precedents: Section 145(3) allows for the rejection of books if they are deemed unreliable.
• Court's Interpretation and Reasoning: The Tribunal determined that the AO's rejection was unjustified, as no specific defects were identified.
• Key Evidence and Findings: The AO's decision was based on the alleged bogus nature of transactions without substantiating evidence.
• Application of Law to Facts: The Tribunal found that the AO did not follow due process in rejecting the books, as required by law.
• Treatment of Competing Arguments: The assessee provided all necessary documentation, which the AO failed to consider adequately.
• Conclusions: The Tribunal set aside the rejection of the books, supporting the assessee's position.

Issue 3: Denial of Cross-Examination

• Legal Framework and Precedents: The right to cross-examine is a fundamental principle of natural justice.
• Court's Interpretation and Reasoning: The Tribunal noted that the AO relied on statements without allowing cross-examination, violating the assessee's rights.
• Key Evidence and Findings: The Tribunal referenced the decision in Andaman Timber Industries, which supports the necessity of cross-examination.
• Application of Law to Facts: The Tribunal found that the lack of opportunity to cross-examine rendered the AO's findings unreliable.
• Treatment of Competing Arguments: The Tribunal sided with the assessee, emphasizing the importance of procedural fairness.
• Conclusions: The Tribunal ruled in favor of the assessee, highlighting the procedural lapses by the AO.

Issue 4: Double Taxation

• Legal Framework and Precedents: Double taxation occurs when the same income is taxed more than once.
• Court's Interpretation and Reasoning: The Tribunal agreed with the assessee that the AO's addition constituted double taxation.
• Key Evidence and Findings: The GP rate applied was already part of the assessee's declared income.
• Application of Law to Facts: The Tribunal found the AO's actions to be unjust and unsupported by law.
• Treatment of Competing Arguments: The Tribunal dismissed the AO's rationale, supporting the assessee's argument against double taxation.
• Conclusions: The Tribunal allowed the appeal, rejecting the AO's double taxation approach.

3. SIGNIFICANT HOLDINGS

• Verbatim Quotes of Crucial Legal Reasoning: "We fail to understand the reasoning of AO as at one hand he stated sale/purchase claimed to have been made by M/s Kamal Trading Company amounting to Rs. 54,14,14,119/- as bogus then he proceeds to make addition on the basis of GP disclosed by the assessee without any justification and explanation."
• Core Principles Established: The Tribunal emphasized the importance of specific evidence when rejecting books of accounts and the necessity of allowing cross-examination to uphold natural justice.
• Final Determinations on Each Issue: The Tribunal set aside the AO's additions, upheld the reliability of the books of accounts, confirmed the right to cross-examination, and rejected the notion of double taxation.