2025 (1) TMI 258 - AT - Income Tax

Estimation of income - Bogus purchases - result declared by the assessee in their return of income relied upon - AO Determined the commission from the alleged bogus parties relating to purchases and sales and made the addition - HELD THAT - AO should have either rejected the books of account and determined the actual profit earned by the assessee. He chose to proceed with the result declared by the assessee in their return of income and also proceeded to make the presumed commission income which assessee must have paid and received. We are not able to understand that the AO has retained the returned income as per the ROI and also made the commission income on top of the retuned income. Strictly speaking he has to determine the actual income earned by the assessee not on the basis of presumption. In that case, he has to rework the actual income earned by the assessee. As discussed above, the AO may have to reduce the bogus purchases and sales to the extent it is booked in the financial statements and must have added the commission income which is the payment presumed to have been made. The net result would have been lesser than the retuned income AO has already proved that the purchases and sales as bogus based on the material found during the search and has already chose to treat them as bogus and cannot play hot and cold. As discussed above, he has to determine the actual income earned by the assessee and can charge to tax only the actual returned income. It is allowed to make penalties as per the law and cannot presume or make additional income as the income of the assessee without their being actually earned by the assessee. It is different if the AO has not come to conclusion that the transactions are not genuine. Therefore, after considering the factual matrix on this case, we are of the view that the gross taxable income cannot be less than the returned income filed by the assessee u/s 139(1) of the Act. In our view, the addition made by the Assessing Officer of commission and the elimination of bogus purchases and sales will reduce the taxable income. Therefore, we are inclined to delete the additions made by the Assessing Officer - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in the judgment include:

• Whether the assessment orders under Section 153A/143(3) of the Income Tax Act were validly passed, considering the alleged invalid approval under Section 153D.
• The admissibility and reliance on electronic evidence, considering the alleged non-compliance with Section 65B of the Indian Evidence Act and the CBDT Digital Evidence Manual.
• Whether the assessment orders were arbitrary and lacked the application of mind, resulting in a violation of natural justice principles.
• The validity of additions made under Sections 28 and 69C of the Income Tax Act, considering the alleged lack of independent inquiry and corroboration of material used.
• The applicability of the doctrine of "approbate and reprobate" in the context of the assessment orders.
• The treatment of alleged bogus purchases and sales, and the determination of the actual income earned by the assessee.
• The entitlement to benefits of netting and telescoping in the context of alleged unaccounted income and expenses.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Assessment Orders under Section 153A/143(3)

• Legal Framework and Precedents: The assessment orders were challenged on the grounds of invalid approval under Section 153D.
• Court's Interpretation and Reasoning: The court noted the procedural aspects and the timing of approvals but did not quash the orders solely on this basis.
• Conclusions: The court refrained from adjudicating jurisdictional issues, keeping them open for further consideration.

Issue 2: Admissibility of Electronic Evidence

• Legal Framework and Precedents: Section 65B of the Indian Evidence Act and the CBDT Digital Evidence Manual govern the admissibility of electronic evidence.
• Court's Interpretation and Reasoning: The court acknowledged the lack of a certificate under Section 65B but focused on the substantive findings rather than procedural lapses.
• Conclusions: The court did not invalidate the assessment solely based on electronic evidence admissibility issues.

Issue 3: Alleged Arbitrariness and Lack of Application of Mind

• Legal Framework and Precedents: The principles of natural justice and fairness in tax assessments were considered.
• Court's Interpretation and Reasoning: The court noted contradictions in the assessment approach, particularly the acceptance of returned income alongside allegations of bogus transactions.
• Conclusions: The court found the assessment approach contradictory and lacking in consistency, impacting the validity of the additions made.

Issue 4: Validity of Additions under Sections 28 and 69C

• Legal Framework and Precedents: Sections 28 and 69C pertain to income from business and unexplained expenditure, respectively.
• Court's Interpretation and Reasoning: The court criticized the lack of independent inquiry and corroboration, questioning the basis for additions.
• Conclusions: The court deleted the additions made by the Assessing Officer, emphasizing the need for actual evidence rather than presumptions.

Issue 5: Doctrine of "Approbate and Reprobate"

• Legal Framework and Precedents: The doctrine prevents parties from accepting and rejecting the same transaction for different advantages.
• Court's Interpretation and Reasoning: The court applied this doctrine, noting that the Revenue could not retain returned income while alleging bogus transactions.
• Conclusions: The court held that the Revenue's contradictory stance invalidated the additions made.

Issue 6: Treatment of Alleged Bogus Purchases and Sales

• Legal Framework and Precedents: The court examined the treatment of alleged bogus transactions in determining actual income.
• Court's Interpretation and Reasoning: The court emphasized the need to adjust financial results to reflect genuine transactions.
• Conclusions: The court directed that the actual income be determined without the alleged bogus transactions.

Issue 7: Entitlement to Netting and Telescoping Benefits

• Legal Framework and Precedents: The principles of netting and telescoping allow for adjustments between related income and expenses.
• Court's Interpretation and Reasoning: The court recognized the lack of such adjustments in the assessment.
• Conclusions: The court implied that such benefits should be considered in determining the actual taxable income.

3. SIGNIFICANT HOLDINGS

• The court emphasized that the Revenue cannot "approbate and reprobate," highlighting the need for consistency in accepting or rejecting financial records.
• The court criticized the reliance on presumptions without adequate evidence, particularly concerning alleged bogus transactions and commission income.
• Final determinations included the deletion of additions made by the Assessing Officer and a directive to determine actual income based on genuine transactions.
• The court refrained from addressing jurisdictional issues, leaving them open for further consideration.

The judgment underscores the importance of consistency, evidence-based assessments, and adherence to procedural requirements in tax assessments.