2010 (8) TMI 32 - HC - Income Tax

Inflated purchase - Onus to prove proof of purchase - Revenue submitted that the respondent-assessee had over-invoiced its purchases with an intent to inflate its purchases and reduce its profits. Held that - It is settled law that in revenue matters, the onus of proof is not a static one. Though the initial burden of proof lies on the assessee yet when it files purchase bills and affidavits, the onus shifts to the Revenue. One must not forget that it is Revenue which has powers regarding discovery, inspection, production and calling for evidence as well as survey, search, seizure and requisition of books of accounts. - The difference in purchase rate has been arrived at by the learned CIT(A) is merely 1.5%. This in our opinion is not significant enough to warrant any addition based on surmises. The learned CIT(A) has himself observed that provision of section 40A(2) are not attracted in this case. It is also an admitted fact that assessee has made the profit on those purchase. It is also not the case that there is decline in the gross profit rate as compared the previous year. No case has also been made out that the profit earned on these purchase was not up the mark. Under the circumstances, in our opinion the addition on account of substitution of purchase price by the revenue is not justified.

Summary

Issues:
Challenging ITAT order on over-invoicing purchases and failure to produce supplier. Burden of proof in revenue matters. Significance of purchase price difference and inability to produce supplier. Application of section 40A(2) and commercial expediency test in determining expenditure.

Analysis:
The appeals were filed challenging the ITAT order regarding over-invoicing purchases and failure to produce the supplier for the Assessment Year 2005-2006. The Revenue contended that the respondent-assessee inflated purchases to reduce profits and failed to substantiate purchases from Mr. Sanjay Kumar Garg. The counsel argued that the onus shifted to the Revenue when the assessee provided purchase bills and affidavits. However, the respondent-assessee's failure to produce Mr. Garg was highlighted as a failure to discharge the onus.

In revenue matters, the onus of proof is dynamic, shifting from the assessee to the Revenue when evidence is presented. The Revenue possesses powers for evidence discovery, inspection, and production. The ITAT noted that the excess in purchase price from Mr. Garg was only 1.5%, and the inability to produce the supplier did not automatically render the purchases bogus. Citing a Supreme Court decision, it was emphasized that the absence of suppliers does not imply fraudulent transactions. The ITAT found the purchase rate difference insignificant for additional surmises and noted the absence of profit decline or inadequacy in profit earned on those purchases.

Referring to the decision in CIT, Bombay Vs. Walchand and Co. Private Ltd., the ITAT emphasized judging expenditures based on commercial expediency from a businessman's perspective. Ultimately, based on the factual findings by the ITAT, which is the final fact-finding authority, it was concluded that no substantial question of law arose in the appeals, leading to their dismissal.

This judgment underscores the importance of meeting the burden of proof in revenue matters, the significance of purchase price differences, and the application of legal principles such as section 40A(2) and the commercial expediency test in determining business expenditures.