2023 (1) TMI 967 - AT - Income Tax

Bogus purchase of jewellery - Valuation of stock - statement recorded on oath u/s. 132(4) - HELD THAT - We are of the considered view that where the assessee has discharged the initial onus cast upon it and has submitted the necessary documentation in support of the purchases so made and such purchases are duly recorded in the books of accounts and forming part of the inventory and such books of accounts and closing inventory being duly accepted and no adverse finding recorded by the AO, mere reliance on statement of Mr. Rajender Jain without allowing an opportunity of cross - examination to the assessee, the purchases so made cannot be held as bogus. We are intrigued by the fact that where the said purchases are equally forming part of inventory and closing stock as not disputed by the AO and in absence of any finding that the purchases are made at an inflated value vis- -vis comparable third party and/or the closing inventory has been shown at a lower value, how the same will lead to understatement of profit as so held by the AO which is not clear from the reassessment order. Addition so made by the AO and upheld by the ld. CIT(A) is hereby directed to be deleted. Ground of appeal no. 4 of assessee's appeal is thus allowed

Issues Involved:
1. Validity of reopening the assessment under section 148.
2. Legitimacy of reassessment based on borrowed information and lack of cross-examination.
3. Addition on account of alleged bogus purchases.
4. Procedural fairness and adherence to principles of natural justice.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 148:
The assessee contested the reopening of the assessment, arguing that there was no escapement of income and that the original assessment was completed under section 153B(1)(b) read with section 143(3). The assessee asserted that there was no failure to disclose material facts and that the reassessment was based on suspicion and change of opinion, which is not permissible.

2. Legitimacy of Reassessment Based on Borrowed Information and Lack of Cross-Examination:
The assessee argued that the reassessment was based on borrowed information from the Investigation Wing, Mumbai, without providing an opportunity to cross-examine the persons alleged to have provided bogus bills. The assessee cited the Supreme Court decision in Andaman Timber Industries Vs CCE, which mandates that assessments based on third-party statements without cross-examination are liable to be quashed.

3. Addition on Account of Alleged Bogus Purchases:
The assessee provided detailed evidence including bills, bank statements, purchase registers, and stock registers to substantiate the purchases from M/s. Kriya Impex Pvt. Ltd. Despite this, the Assessing Officer (AO) concluded that the purchases were bogus based on the statement of Shri Rajender Jain, who was alleged to provide accommodation entries. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

The Tribunal found that the assessee had duly explained and substantiated the nature and source of the purchases, which were recorded in the books of accounts and formed part of the closing stock. The AO's reliance on Shri Rajender Jain's statement without allowing cross-examination was deemed insufficient to hold the purchases as bogus. The Tribunal referred to the Supreme Court's decision in Andaman Timber Industries and a similar case in Bhatia Diamonds Pvt. Ltd. Vs ITO, where additions based on unverified third-party statements were deleted.

4. Procedural Fairness and Adherence to Principles of Natural Justice:
The Tribunal emphasized the importance of procedural fairness, noting that the AO and CIT(A) failed to provide the assessee with an opportunity for cross-examination, which is a violation of natural justice principles. The Tribunal concluded that the assessee had discharged the initial onus of proving the genuineness of the purchases and that the AO's reliance on third-party statements without cross-examination was not legally sustainable.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, directing the deletion of the additions made by the AO and upheld by the CIT(A). The Tribunal underscored the necessity of adhering to principles of natural justice and providing opportunities for cross-examination when third-party statements are used as the basis for reassessment. The appeals were allowed, and the reassessment proceedings were deemed invalid due to procedural lapses and lack of substantive evidence against the assessee.

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