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2017 (9) TMI 1404 - AT - Income TaxBogus purchases - proof of genuineness of purchases - Held that - Basic precondition for invoking the section 69C is that the expenditure incurred by the assessee should be out of books of accounts. Here, the payments to the suppliers, as stated earlier, have been made by cheques. So, it cannot be held that expenses were incurred by the assessee outside the books of accounts. Section 69C was introduced in to the statute with a specific purpose. A bare reading of the section makes it clear that if the assessee incurred any expenditure, but offered no explanation about the source of such expenditure or part thereof, or the explanation so offered is not satisfactory, such expenditure may be deemed to be the income of the assessee. We hold that the FAA was not justified in confirming the order of the AO partly and retaining the addition to the extent of 25% of the sales. The orders of the AO and FAA are not valid because of violation of principles of natural justice. Besides, the addition made u/s. 69C is also not maintainable. So, reversing the order of the FAA, we decide the effective ground of appeal in favour of the assessee.
Issues Involved:
1. Disallowance of 25% of total purchases. 2. Addition of unexplained expenditure under Section 69C of the Income Tax Act. 3. Violation of principles of natural justice by not allowing cross-examination of suppliers. 4. Validity of reopening assessment under Section 147 of the Income Tax Act. 5. Non-furnishing of material received from the Sales Tax Department (STD) to the assessee. Detailed Analysis: 1. Disallowance of 25% of Total Purchases: The primary issue in the appeal was the disallowance of 25% of total purchases, resulting in an addition of ?1.37 crores to the assessee's income. The Assessing Officer (AO) received information from the Sales Tax Department (STD) and the Directorate General of Income Tax (Investigation) that the assessee had received accommodation entries from suspicious parties. The AO initiated proceedings under Section 147 of the Income Tax Act and treated purchases totaling ?3.9 crores as unexplained expenditure under Section 69C. The First Appellate Authority (FAA) restricted the disallowance to 25% of the purchase price involved, justifying the addition of ?1.37 crores while giving relief of ?4.12 crores to the assessee. 2. Addition of Unexplained Expenditure under Section 69C: The AO invoked Section 69C to make an additional ?1.57 crores to the assessee's income for purchases from two more entities listed as defaulters by the STD. The FAA upheld the AO's decision partially but reduced the addition. The Tribunal found that the AO and the FAA did not provide sufficient evidence to justify the addition under Section 69C, as the assessee had made payments through banking channels and provided necessary documents like purchase bills, delivery challans, and bank statements. 3. Violation of Principles of Natural Justice: The Tribunal highlighted a significant violation of natural justice principles. The AO did not allow the assessee to cross-examine the suppliers considered hawala dealers by the STD. The AO relied on inquiries and statements from the STD without sharing this material with the assessee. The Tribunal emphasized that the assessee should have been given a fair chance to defend itself, including access to the material used against it and the opportunity to cross-examine the suppliers. 4. Validity of Reopening Assessment under Section 147: The Tribunal acknowledged that the reopening of the assessment was based on valid reasons, with the AO having prima facie material justifying the issuance of notice under Section 148. However, the Tribunal criticized the AO for not sharing the material received from the STD with the assessee and for not allowing cross-examination of the suppliers. 5. Non-Furnishing of Material Received from STD to the Assessee: The Tribunal noted that the AO did not provide the assessee with the material received from the STD, which was used to make the addition. This non-disclosure was a significant flaw, as it deprived the assessee of the opportunity to challenge the evidence against it. The Tribunal stated that the FAA should have addressed this issue and ensured that the assessee had access to the material. Conclusion: The Tribunal found that the AO and the FAA had not followed the principles of natural justice and had made additions based on insufficient evidence. The Tribunal reversed the FAA's order, deciding the effective ground of appeal in favor of the assessee. The Tribunal emphasized that its decision was limited to the facts of the present case and should not be treated as a precedent. Consequently, the appeals filed by the assessee for both assessment years were allowed.
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