2023 (10) TMI 252 - AT - Income Tax

Bogus purchases - AO has considered the whole business activity and fund flow of the assessee to be sham and intended to circulate the money outside of India and bring it back - HELD THAT - Bench is of considered opinion that when the Ld. AO was not believing the confirmation submitted by the assessee from M/s. Thakur Associates then it was necessary to give an opportunity to rebut the same to the assessee. AO was drawing inferences from the statement of Rahul, and Ld. CIT(A) has rightly observed that no reason have been given in the assessment order in not allowing cross examination of Rahul which is a violation of principle of natural justice. CIT(A) has taken into consideration the assessment record and observed that assessee was never asked by Ld. AO to produce Sanjeev Thakur for verification. Revenue in this appeal does not dispute that this was an incorrect factual aspect of the assessment proceedings as recorded by Ld. CIT(A) on the basis of records before it. What transpires is that the payments were made through banking transactions and without any factual evidences, AO concluded that the amount deposited in the account of Thakur Associates was withdrawn as cash by the assessee. The findings of Ld. CIT(A) require no interference. Decided against the Revenue. Bogus sales - What transpires from record and rightly held by Ld. CIT(A) is that apart from his own belief, Ld. AO did not make any inquiry with regard to sales from M/s. Golden Harvest. The fact that the amounts were received from M/s. Golden Harvest from banking channel was taken into consideration by Ld. CIT(A). CIT(A) also concluded that without inquiry from M/s. Golden Harvest and without confronting specifically to the assessee why the sale should not be treated as bogus the same could not have been discarded and treated as undisclosed income from undisclosed source. Thus, the findings of Ld. CIT(A) in deleting the additions on account of alleged bogus purchases and sales do not require interference. Ground is decided against the Revenue. Inguine fabrication charges - The bench is of considered opinion that the Ld. AO without making any inquiry and contradicting the claim of assessee has made disallowance of fabrication expenses. Assessee had claimed that there is general practice to make cash payments to small time workers and it is difficult to keep records of cash payments but the same was not considered without any reasonable observations. Ld. CIT(A) has rightly deleted the addition and need no interference. Addition made on account of peak export by the A.O. - There is no denial to fact that these all statutory documents were prepared and submitted for relevant custom clearance by the custom authorities. There is no matter on record to show that if any inquiry was made with the custom department questioning genuineness of these documents. The export proceeds were received through banking channel and duty draw back, DEPB received on account of export were duly accounted by the assessee. The finding of Ld. AO that assessee has exported some other types of good instead of those mentioned in the export documents cannot be accepted as it is not supported with any direct or circumstantial evidence and to the contrary the custom clearance documents being records of a statutory authority have to be presumed to be correct. Thus, Ld. CIT(A) taking into account all the aforesaid aspects and pointing deficiencies in the order of ld. AO, including the contrary stand of rejecting the exports and allowing shipping and forwarding and travelling expenses incurred on these export, had set aside the peak addition which need no interference. Unexplained credits - Revenue cannot dispute the fact that the opening balances in the book of accounts has been added as an unexplained credits. While the settled proposition of law is that Section 68 of the Act cannot be invoked in case of outstanding balances of creditors as recorded at the beginning of FY. Reliance in this regard can be placed on the judgment of Usha Stud Agricultural Farms Ltd. 2008 (3) TMI 91 - DELHI HIGH COURT , CIT vs. Om Prakash Mahajan Sons 1984 (2) TMI 41 - DELHI HIGH COURT and Nipun Builders Developers Ltd. 2011 (7) TMI 1285 - ITAT DELHI Ld. CIT(A) has rightly deleted the addition and the same requires no interference. Failure of Ld. AO to take into consideration the undoubted expenses was certainly required to be allowed from the total income, however, the manner in which Ld. AO had proceeded to summarily re-compute the total taxable income, it appears these expenses were impliedly disallowed by him as he had disbelieved the sales purchase and cash credits. Deduction u/s 80HHC of the is a natural consequence of the nature of income derived and as the additions made by Ld. AO have been substantially deleted a re-computation of the total taxable income is required to be done and therefore these issues are also restored to the files of Ld. AO to take into consideration the relevant evidences of assessee and allow the expenses and give benefit of exempt income in accordance with law.

Issues Involved:

1. Addition on account of peak export.
2. Addition on account of bogus sales to M/s. Golden Harvest.
3. Addition on account of bogus purchase from M/s. Thakur Associates.
4. Addition on account of unexplained cash credit.
5. Disallowance of fabrication expenses.
6. Deduction under section 80HHC.

Summary:

1. Addition on Account of Peak Export:

The Ld. AO considered the export sales to an entity in the Netherlands as doubtful based on an investigation report. However, the Ld. CIT(A) noted that the assessee provided 11 documents substantiating the exports, including statutory documents for customs clearance. The Tribunal found no evidence to dispute the genuineness of these documents and noted that the export proceeds were received through banking channels. Consequently, the addition of Rs. 1,18,41,518/- was deleted by the Ld. CIT(A) and upheld by the Tribunal.

2. Addition on Account of Bogus Sales to M/s. Golden Harvest:

The Ld. AO considered the sales to M/s. Golden Harvest as bogus without any inquiry or confronting the assessee. The Ld. CIT(A) observed that the payments were received through banking channels and no adverse evidence was available. The Tribunal upheld the deletion of the addition of Rs. 74,96,688/- by the Ld. CIT(A).

3. Addition on Account of Bogus Purchase from M/s. Thakur Associates:

The Ld. AO branded the purchases from M/s. Thakur Associates as bogus based on the statement of Rahul, nephew of the proprietor, without allowing cross-examination. The Ld. CIT(A) found this to be a violation of natural justice and noted that the payments were made through banking channels. The Tribunal upheld the deletion of the addition of Rs. 76,88,380/- by the Ld. CIT(A).

4. Addition on Account of Unexplained Cash Credit:

The Ld. AO added the opening balance of Rs. 16,09,094/- as unexplained cash credit, which the Ld. CIT(A) deleted. The Tribunal upheld this deletion, noting that Section 68 of the Act cannot be invoked for outstanding balances at the beginning of the financial year.

5. Disallowance of Fabrication Expenses:

The Ld. AO disallowed Rs. 5,65,490/- of fabrication expenses, considering the purchases and sales as non-genuine. The Ld. CIT(A) deleted this addition, and the Tribunal upheld this decision, noting that the assessee had provided all necessary details and the Ld. AO had not made any inquiries to contradict the claim.

6. Deduction under Section 80HHC:

The Tribunal noted that the deduction under section 80HHC of the Act should be allowed as a natural consequence of the nature of income derived. The issue was restored to the files of the Ld. AO for re-computation in accordance with the law.

Conclusion:

The Tribunal dismissed the appeal of the Revenue and allowed the cross-objections of the assessee for statistical purposes, directing the Ld. AO to give consequential effects as per the directions.

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