2025 (1) TMI 761 - AT - Income Tax

Bogus purchases - additions of gross profit over and above the gross profit declared by the assessee without detecting even a single defect in the books of accounts - HELD THAT - AO without pointing out any specific defect therein rejected the books of account u/s 145(3) and made the impugned addition by applying the GP rate of 0.24% on the total turnover accounted by the assessee in its books of accounts. We fail to understand the reasoning of AO as at one hand he stated sale/purchase claimed to have been made as bogus then he proceeds to make addition on the basis of GP disclosed by the assessee without any justification and explanation. Such order, on merit as well, fails to meet the test of law and deserves to be quashed. The grounds raised by the assessee are allowed. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses several core issues:

• Whether the order passed by the CIT(A) confirming the additions made by the AO under section 153A is valid, given the alleged unlawful search.
• Whether the proceedings initiated and assessments framed under section 153A are in violation of statutory conditions and procedures, thus rendering them invalid.
• Whether the additions made under section 153A r.w.s. 143(3) without any incriminating material found during the search are justified.
• Whether the proceedings under section 153A violated mandatory provisions of Section 153D.
• Whether the addition of gross profit by the AO, treating sales/purchases as not genuine, is justified without pointing out defects in the books of accounts.
• Whether the rejection of the assessee's contention regarding double taxation of income is valid.
• Whether the reliance on third-party statements without allowing cross-examination violates the assessee's rights.
• Whether the assessment order was based on conjectures without adverse material on record.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of CIT(A) Order and Unlawful Search

• Legal Framework: The assessment under section 153A is contingent upon a lawful search under the Income Tax Act.
• Court's Interpretation: The tribunal considered whether the search was lawful and if the subsequent proceedings were valid.
• Evidence and Findings: The appellant argued that the search was unlawful, but the tribunal focused on the procedural adherence in the assessment process.
• Application of Law: The tribunal examined the procedural correctness of the assessments rather than the legality of the search.
• Competing Arguments: The appellant claimed the search was invalid, while the respondent maintained the procedural correctness of the assessments.
• Conclusion: The tribunal did not find sufficient grounds to invalidate the CIT(A) order based on the alleged unlawful search.

Issue 2: Violation of Statutory Conditions under Section 153A

• Legal Framework: Section 153A outlines conditions for assessments following a search.
• Court's Interpretation: The tribunal assessed compliance with statutory conditions.
• Evidence and Findings: The appellant argued procedural violations, but the tribunal focused on adherence to statutory requirements.
• Application of Law: The tribunal examined the statutory compliance in the assessment process.
• Competing Arguments: The appellant highlighted procedural lapses, while the respondent defended the assessments' validity.
• Conclusion: The tribunal upheld the assessments, finding no significant procedural violations.

Issue 3: Additions Without Incriminating Material

• Legal Framework: Additions under section 153A require incriminating material found during the search.
• Court's Interpretation: The tribunal scrutinized the basis for additions.
• Evidence and Findings: The tribunal noted the lack of incriminating material justifying the additions.
• Application of Law: The tribunal applied precedents requiring incriminating evidence for additions.
• Competing Arguments: The appellant contested the additions, and the respondent relied on procedural grounds.
• Conclusion: The tribunal found the additions unjustified due to the absence of incriminating material.

Issue 4: Violation of Section 153D

• Legal Framework: Section 153D mandates supervisory approval for assessments under section 153A.
• Court's Interpretation: The tribunal evaluated compliance with supervisory approval requirements.
• Evidence and Findings: The tribunal reviewed the procedural adherence to Section 153D.
• Application of Law: The tribunal focused on the procedural aspect of supervisory approval.
• Competing Arguments: The appellant cited lack of approval, while the respondent defended procedural compliance.
• Conclusion: The tribunal did not find significant procedural lapses under Section 153D.

Issue 5: Justification of Gross Profit Additions

• Legal Framework: Additions require defects in books of accounts or evidence of non-genuine transactions.
• Court's Interpretation: The tribunal examined the rationale for gross profit additions.
• Evidence and Findings: The tribunal noted the lack of defects in the books of accounts.
• Application of Law: The tribunal applied principles requiring substantive evidence for such additions.
• Competing Arguments: The appellant contested the additions, and the respondent cited procedural grounds.
• Conclusion: The tribunal found the gross profit additions unjustified due to lack of evidence.

Issue 6: Double Taxation of Income

• Legal Framework: Double taxation occurs when the same income is taxed twice.
• Court's Interpretation: The tribunal assessed the potential for double taxation.
• Evidence and Findings: The tribunal considered the appellant's claim of declared profits.
• Application of Law: The tribunal evaluated the tax treatment of declared profits.
• Competing Arguments: The appellant argued for double taxation, while the respondent focused on procedural grounds.
• Conclusion: The tribunal acknowledged the potential for double taxation and found the additions unjustified.

Issue 7: Reliance on Third-Party Statements

• Legal Framework: Reliance on third-party statements requires an opportunity for cross-examination.
• Court's Interpretation: The tribunal evaluated the procedural fairness of relying on third-party statements.
• Evidence and Findings: The tribunal noted the lack of cross-examination opportunity.
• Application of Law: The tribunal applied principles of procedural fairness.
• Competing Arguments: The appellant contested the procedural fairness, and the respondent relied on procedural grounds.
• Conclusion: The tribunal found the reliance on third-party statements unjustified due to lack of cross-examination.

Issue 8: Assessment Based on Conjectures

• Legal Framework: Assessments require substantive evidence, not conjectures.
• Court's Interpretation: The tribunal scrutinized the basis for the assessment.
• Evidence and Findings: The tribunal noted the lack of adverse material supporting the assessment.
• Application of Law: The tribunal applied principles requiring substantive evidence for assessments.
• Competing Arguments: The appellant contested the assessment's basis, and the respondent relied on procedural grounds.
• Conclusion: The tribunal found the assessment unjustified due to lack of substantive evidence.

3. SIGNIFICANT HOLDINGS

• Verbatim Quotes: "The AO has made addition of Gross Profit which has already been considered by the assessee for computing its tax liability."
• Core Principles Established: Additions under section 153A require incriminating material; procedural fairness mandates cross-examination of third-party statements.
• Final Determinations: The tribunal set aside the additions made by the AO, finding them unjustified due to procedural lapses and lack of substantive evidence.