2024 (10) TMI 766 - HC - Income Tax

Estimation of income - bogus purchases - onus to prove - CIT-A disallowing 10% of the total purchases as confirmed by ITAT - HELD THAT - In the instant case, we find that the Revenue in fact viewed the position as warranting a 100% disallowance of the expenses. In the context of the Impugned Order, that is understandable since one could question if there is no cogent and convincing evidence at all. A Division Bench of this Court did not consider that appeal to be worthy of consideration. In Nikunj, the ITAT reversed the entire disallowance on the part of the Assessing Officer and the CIT-A. But purporting to adopt Nikunj 2013 (1) TMI 88 - BOMBAY HIGH COURT , in the instant case, the ITAT fell short of analysing if the disallowance of 10% was reasonable and justifiable. Not only has the Assessing Officer not conducted the exercise as expected of him, the CIT-A has effected a summary measure of disallowing 10% of the expenses and the ITAT has been happy to endorse the same as an equitable middle ground. Such an approach cannot be endorsed as a process known to law to disallow expenses on the premise of their being bogus. ITAT has returned a firm finding that there is no cogent or convincing evidence in the AO Order. Against such backdrop, the ITAT believed that the factual pattern of the matter at hand is similar to the factual context of Nikunj. That being the case, the outcome too ought to have been similar to Nikunj, where the disallowance was entirely rejected by the ITAT. In the instant case, the ITAT appears to have found it convenient that the CIT-A had chosen to disallow 10% of the expenses and it appears to be an acceptable consolation to strike a balance. We have to note that once there is a quasi-judicial finding that there is no cogent and convincing evidence at all on the part of the Revenue in levelling an allegation, it would be wrong to expect that the Assessee would still have to prove its innocence. The ITAT ought to have gone into this facet of the matter and dealt with why the 10% disallowance was plausible, reasonable and necessary in the context of the facts of the case. Such an analysis is totally absent in the Impugned Order. In our opinion, in adopting such an approach, the ITAT has given credence to the proposition that the law can call for proof of the negative. The ad hoc rejection of 10% of the expenses, found in the order of the CIT-A, appears to have been a convenient via media that has been endorsed by the ITAT. It is repugnant for the ITAT to uphold such an addition of 10% of the allegedly bogus purchases to the income of the Appellant-Assessee, despite returning a firm finding that the AO Order was untenable not being backed by cogent and convincing evidence. Therefore, in our opinion, the substratum of the adverse findings returned in the AO Order having been undermined, we are unable to agree, in the facts and circumstances of the case, with the conclusion of the ITAT. Decided in favour of the Appellant-Assessee and against the Respondent-Revenue.

Summary

Issues Involved:

1. Whether the Income Tax Appellate Tribunal (ITAT) was right in upholding the findings of the Commissioner of Income Tax-Appeal (CIT-A) by disallowing 10% of the total purchases alleged to have been bogus and adding such sum to the income of the Appellant-Assessee for the relevant Assessment Years.

Detailed Analysis:

Issue 1: Legitimacy of Purchases and Disallowance by ITAT

The primary issue in this case revolves around the legitimacy of certain purchases made by the Appellant-Assessee, which were deemed bogus by the Assessing Officer (AO). The AO initially disallowed all expenses related to these purchases, adding them to the income of the Appellant-Assessee. However, the CIT-A, upon appeal, restricted the disallowance to 10% of the total purchases, a decision subsequently upheld by the ITAT.

The ITAT's decision was influenced by the precedent set in the case of CIT vs. Nikunj Eximp Enterprises, where it was held that merely because suppliers did not appear before the AO or CIT-A, it could not be concluded that purchases were not made. The ITAT noted that the AO's findings lacked cogent and convincing evidence, as the sales were accepted and supported by compliance with indirect tax requirements like sales tax returns and VAT audit reports. Despite this, the ITAT upheld the 10% disallowance, suggesting that purchases were made from the gray market to evade taxes.

Issue 2: Adequacy of Evidence and Burden of Proof

The ITAT found that the AO's order was not supported by cogent and convincing evidence, undermining the foundation of the proceedings. The ITAT observed that the Appellant-Assessee failed to produce parties from whom purchases were made and documents proving the movement of goods. However, the ITAT did not provide a detailed analysis of why a 10% disallowance was plausible, reasonable, and necessary, thus failing to justify the partial disallowance.

The court emphasized that once there is a quasi-judicial finding of no cogent evidence, it is unreasonable to expect the Assessee to prove its innocence. The ITAT's approach was criticized for endorsing a proposition where the law calls for proof of the negative, which is not a process known to law for disallowing expenses.

Issue 3: Comparison with Precedent Cases

The judgment referenced similar cases, such as Principal Commissioner of Income-tax-1 Vs. SVD Resins & Plastics (P.) Ltd., where a similar approach of disallowing a percentage of expenses based on alleged bogus purchases was not endorsed. The court noted that unless there is specific evidence of bogus transactions, a full addition could not be justified. The ITAT's decision was seen as a convenient middle ground without proper legal basis.

Conclusion:

The court concluded that the ITAT's decision to uphold the 10% disallowance lacked a proper legal foundation, as the AO's adverse findings were not based on cogent evidence. The court set aside the Impugned Order, ruling in favor of the Appellant-Assessee and against the Respondent-Revenue. Consequently, all three appeals were allowed, emphasizing that the burden of proving the purchases as bogus was not adequately discharged by the Revenue.