2024 (7) TMI 1222 - AT - Income Tax

Disallowance based on reply on third party information - unexplained purchases - Whether information collected from the back of the assessee from a third party, its purchases could be doubted and disallowance of expenditure is to be made? - diversified views among Accountant Member and Judicial Member - Case assigned to the Hon ble third member through reference u/s 255(4) - HELD THAT - Hon ble Judicial Member has taken the correct view that these additions are not sustainable as entire disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO who has not provided the copy of such statements to the appellant, thus denying opportunity of cross examination to the appellant, who has prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques, VAT Registration of the sellers their Income Tax Return. Purchases made by the appellant is found to be acceptable and the consequent disallowance resulting in addition to income made is directed to be deleted - Decided in favour of assessee.

Issues Involved:
1. Quantum addition made by the Assessing Officer (AO) and confirmed by CIT(A).
2. Divergent views of the Tribunal members.
3. Reliance on third-party information without independent verification.
4. Denial of cross-examination of witnesses.
5. Application of principles of natural justice and judicial discipline.

Detailed Analysis:

1. Quantum Addition Made by AO and Confirmed by CIT(A)
The primary issue revolves around the quantum addition made by the AO, which was confirmed by CIT(A)-2, Jalandhar. The AO had information from the DIT(Investigation) that certain entities, including M/s. Daksh Diamonds, M/s. Jewel Diamonds, and M/s. Nazar Impex (P) Ltd., were providing accommodation entries. The assessee had made purchases from these entities amounting to Rs. 36,13,365/-, Rs. 50,62,350/-, and Rs. 82,17,465/- for the assessment years 2007-08 and 2013-14 respectively. The AO doubted these purchases and made the addition.

2. Divergent Views of the Tribunal Members
The Tribunal members had divergent views on this issue. The Judicial Member favored deleting the addition, while the Accountant Member did not. Due to these divergent views, the case was referred to a third member under section 255(4) of the Act. The third member concurred with the Judicial Member, leading to the deletion of the addition.

3. Reliance on Third-Party Information Without Independent Verification
The third member noted that the AO's reliance on third-party information from the DIT(Investigation) without independent verification was not sufficient to disallow the assessee's claim. The Supreme Court's decision in the case of CIT vs. M/s. Odeon Builders Pvt. Ltd. was cited, which emphasized that disallowance based on third-party information without further scrutiny is not justified.

4. Denial of Cross-Examination of Witnesses
The third member also highlighted that the statements from Bhanwar Lal Jain and Sanjay Chaudhary, who managed the affairs of the suppliers, were not subjected to cross-examination. Citing the Supreme Court's decision in Andaman Timber Industries vs. Commissioner of Central Excise, it was emphasized that not allowing cross-examination of witnesses whose statements form the basis of an order is a violation of natural justice, making the order null and void.

5. Application of Principles of Natural Justice and Judicial Discipline
The third member stressed that the cumulative effect of all facts and evidence should be considered. The assessee had provided substantial evidence, including audited accounts, stock registers, and details of payments through banking channels. The purchases were less than 2.86% and 2.76% of the total purchases for the respective years, and payments were made through account payee cheques. The decision also underscored the importance of judicial discipline and consistency with previous Tribunal decisions, particularly those of the Amritsar Bench in similar cases.

Conclusion
Based on the majority view, the impugned orders of the CIT(A) dated 20.03.2017 and 04.07.2017 were set aside, and the additions were deleted. Consequently, the appeals filed by the appellant assessee were allowed. The order was pronounced in the open court on 03.07.2024.

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