2025 (4) TMI 1486 - AT - Income Tax

Limited scrutiny - Unexplained investments on account of sundry debtors - HELD THAT - As entire business transactions including trading and investments in shares are bogus/non-genuine. Therefore such finding being broad is held falling within the following parameters of limited scrutiny i. Low income in comparison to very high investments. ii. Low income in comparison to high loans/advances/investment in shares iii. Large increase in investment in unlisted equities during the year Therefore the issue raising scope of limited scrutiny is decided against the assessee and in the favour of the Revenue. Unexplained investments on account of sundry debtors being fictitious - AO in the assessment order passed in this case has held that the entire business transactions including trading and investments in shares are bogus/non-genuine. Therefore; in such circumstances the AO should have taken pains to gather various details of real beneficiaries for passing such information to the AOs of beneficiaries for remedial measure. Once the AO has held the assessee s business as non-genuine then the accommodation entry if any given through the Profit Loss account and Balance Sheet should have been taxed in the hands of the beneficiaries as per the law. We find merit in the arguments of the Ld. Counsel as the anomalies/ contradictions/factual inconsistencies pointed out by him prima-facie are convincing. When the AO had not held the sundry debtors existing as on 31.03.2014 as bogus/fictitious in the scrutiny assessment order of the AY 2014-15 even after questioning the same cannot be held as bogus/fictitious in subsequent order of the relevant year. AO has not given specific finding pointing out any bogus transaction in the relevant year with the help of any corroboratory evidence. We find that the AO on one hand has held that the entire business transactions including trading and investments in shares are bogus/nongenuine then no addition on account of purchases and sales treating then real and genuine can be made in the hands of the assessee. We are not able to persuade ourselves that how such contradictions will go together. As far as the addition on account of sundry debtors is concerned we are of the considered view that the same cannot be taxed in the relevant year even if it is fictitious in nature. The current year sale of the shares has not resulted any sundry debtor. The assessment order does not pin-point say any adverse material regarding the sale of shares. Revenue has not brought any material on the record to demonstrate that the trading of shares is non-genuine. Therefore the addition cannot be sustained. Accordingly the addition is deleted.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the Assessing Officer (AO) acted beyond the scope of limited scrutiny without prior approval from the Commissioner/Principal Commissioner of Income Tax, thereby rendering the assessment void ab initio.

(b) Whether the addition of Rs. 67,39,130/- as unexplained investments on account of sundry debtors being fictitious was justified and in accordance with settled principles of law.

(c) Whether the sales reported for AY 2014-15 and AY 2015-16 were genuine, particularly in light of expenses debited in the Profit & Loss Account, and whether the addition on this basis was sustainable.

(d) Whether the AO's reliance on the previous year's assessment order (AY 2014-15) to conclude the non-genuineness of sundry debtors and sales for the current year (AY 2015-16) was legally valid without fresh corroboratory evidence.

(e) Whether the principle of double taxation was violated by taxing sundry debtors and sales in the same assessment year.

(f) Whether the AO's contradictory findings regarding the genuineness of business transactions and investments could be sustained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Scope of Limited Scrutiny and Legality of AO's Actions

The legal framework governing limited scrutiny assessments is primarily derived from CBDT Instructions No. 7/2014 and No. 5/2016, which restrict the AO from expanding the scope of scrutiny beyond specified parameters without prior approval from the Commissioner/Principal Commissioner.

The Tribunal noted the assessee's contention that the AO exceeded the parameters of limited scrutiny by adding unexplained investments and sundry debtors not falling within the four prescribed parameters: low income relative to investments, high loans/advances/investments in shares, large increase in unlisted equities, and mismatch in sales turnover.

The AO, however, justified the additions by holding that the entire business transactions were bogus, which fell within the parameters related to high investments and low income. The Tribunal held that the AO's findings on the non-genuineness of transactions were broad and thus fell within the scope of limited scrutiny parameters. Consequently, the Tribunal rejected the contention that the AO acted beyond the scope of limited scrutiny without approval.

Therefore, the issue of violation of procedural safeguards under section 119 of the Income Tax Act was decided against the assessee.

Issue (b): Addition of Rs. 67,39,130/- as Unexplained Investments on Account of Fictitious Sundry Debtors

The AO's assessment order for AY 2015-16 relied heavily on the assessment order of AY 2014-15, which had concluded that sundry debtors of Rs. 29,65,130/- were fictitious and only book entries. For AY 2015-16, sundry debtors of Rs. 37,74,000/- were also held to be fictitious on similar facts, leading to the addition of Rs. 67,39,130/- as unexplained investments.

The assessee submitted that no fresh evidence was brought on record to establish the non-genuineness of sundry debtors for the current year, and that the AO's reliance on the previous year's order was misplaced. The assessee also contended that the purchases and sales were genuine business transactions, supported by bills and entries in the books of accounts.

The Tribunal examined the AO's reasoning and found contradictions and anomalies, including:

• The AO had not found the sundry debtors of Rs. 29,35,130/- as bogus in the AY 2014-15 assessment order despite scrutiny.
• The current year's sales did not result in sundry debtors as per the Profit & Loss Account and Balance Sheet notes.
• Taxing both purchases and sales to the extent of sundry debtors would amount to double taxation.
• The AO failed to produce corroboratory evidence to substantiate the claim of bogus transactions for the current year.

The Tribunal concluded that the addition of Rs. 29,35,130/- relating to AY 2014-15 sundry debtors could not be taxed in the current year and that the addition of Rs. 37,74,000/- relating to current year sales and sundry debtors was not sustainable due to lack of adverse findings or corroboratory evidence.

Hence, the addition of Rs. 37,74,000/- was deleted, while the addition relating to the previous year's sundry debtors was not upheld for the current year.

Issue (c): Genuineness of Sales for AY 2014-15 and AY 2015-16

The AO's conclusion that sales were not genuine was based on the absence of commensurate expenses such as transportation costs and rent/maintenance despite claimed sales and stock of cotton knitted fabrics.

The assessee argued that the expenses debited in the Profit & Loss Account contradicted the AO's findings and that the sales were genuine business transactions supported by documentary evidence.

The Tribunal observed that the AO's findings were broad and not supported by specific adverse material or corroboratory evidence for the current year. The Tribunal also noted the contradiction in the AO's approach of holding the entire business as bogus but simultaneously taxing purchases and sales.

Accordingly, the Tribunal held that the addition based on non-genuine sales for AY 2015-16 could not be sustained and deleted the addition of Rs. 37,74,000/- related to sales.

Issue (d): Reliance on Previous Year's Assessment Order Without Fresh Evidence

The AO's order for AY 2015-16 heavily relied on the findings of the AY 2014-15 assessment order regarding the non-genuineness of sundry debtors and transactions.

The assessee contended that such reliance was improper without fresh corroboratory evidence and that the previous year's order had accepted the returned income without adverse findings on sundry debtors.

The Tribunal agreed with the assessee's contention, noting that the AO had not given any specific adverse finding or brought new evidence for the current year. The Tribunal emphasized that the assessment for the current year should be based on facts and evidence relevant to that year and not merely on presumptions or conclusions drawn in prior years.

Thus, the Tribunal held that the AO's reliance on the previous year's order without fresh evidence was not justified.

Issue (e): Principle of Double Taxation

The assessee argued that taxing sundry debtors of the preceding year and sales in the current year would amount to double taxation, violating fundamental accounting and taxation principles.

The Tribunal found merit in this argument, observing that the AO had taxed the same amounts twice-once as sundry debtors of the previous year and again as sales in the current year. This was held to be contrary to the principle of accounting and taxation.

The Tribunal accordingly disallowed the addition on this ground.

Issue (f): Contradictory Findings by the AO Regarding Genuineness of Business Transactions

The AO's order contained contradictions: on one hand, holding the entire business and transactions as bogus/non-genuine; on the other hand, taxing purchases and sales as real and genuine transactions.

The Tribunal found these contradictions to demonstrate non-application of mind and lack of coherence in the AO's reasoning. It emphasized that such contradictory findings could not be sustained in law.

The Tribunal also noted that if the entire business was non-genuine, then the accommodation entries should have been taxed in the hands of the real beneficiaries, which the AO failed to do.

Thus, the Tribunal rejected the AO's contradictory approach and held that the additions based on such reasoning were unsustainable.

3. SIGNIFICANT HOLDINGS

The Tribunal crystallized the following core principles and final determinations:

"The assessment order passed in this case has clearly held that the entire business transactions including trading and investments in shares are bogus/non-genuine. Therefore, such finding, being broad, is held falling within the following parameters of limited scrutiny: (i) Low income in comparison to very high investments; (ii) Low income in comparison to high loans/advances/investment in shares; (iii) Large increase in investment in unlisted equities during the year."

"When the AO had not held the sundry debtors of Rs. 29,35,130/- existing as on 31.03.2014 as bogus/fictitious in the scrutiny assessment order of the AY 2014-15 even after questioning the same cannot be held as bogus/fictitious in subsequent order of the relevant year."

"The AO has not given specific finding pointing out any bogus transaction in the relevant year with the help of any corroboratory evidence."

"The current year sale of the shares i.e. Rs. 37,74,000/- has not resulted any sundry debtor. The assessment order does not pin-point say any adverse material regarding the sale of shares. Further, the Revenue has not brought any material on the record to demonstrate that the trading of shares is non-genuine. Therefore, the addition of Rs. 37,74,000/- cannot be sustained."

"Taxing sundry debtors of preceding year in the current year would be contrary to the principle of accounting and taxation."

"The AO, on one hand, has held that the entire business transactions including trading and investments in shares are bogus/non-genuine, then no addition on account of purchases and sales treating them real and genuine can be made in the hands of the assessee."

Accordingly, the Tribunal partly allowed the appeal by deleting the addition of Rs. 37,74,000/- relating to the current year's sundry debtors and sales, while upholding the action of the AO and CIT(A) in other respects.