2025 (4) TMI 1208 - AT - Income Tax

Bogus purchases - AO concluded that the assessee firm has indulged in inflating the purchases through bogus bills - AO has made the impugned addition by placing reliance entirely on the report given by the investigation wing - HELD THAT - AO merely placed reliance on the report prepared by the Investigation wing. He did not find fault with any of the documents furnished by the assessee to prove the purchases. He also did not bring any material on record to prove that these purchases were bogus in nature. Report of the investigation wing will trigger further probe and it alone cannot be the basis for making addition. Admittedly in the instant case the AO did not carry out any enquiry in this case. As held in Ashok Kumar Rungta 2024 (10) TMI 766 - BOMBAY HIGH COURT merely on suspicion based on information received from another authority the assessing officer ought not to have made the additions without carrying out independent enquiry and without affording due opportunity to the respondent - assessee to controvert the statements made by the sellers before the other authority . Hence, we are of the view that the AO was not justified in disallowing the entire purchases treating them as bogus on the basis of his suspicion and surmises. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the purchases made by the assessee from certain parties belonging to a group under investigation can be disallowed as bogus purchases on the basis of a report from the investigation wing and statements obtained during search and survey operations.
• Whether the Assessing Officer (AO) was justified in disallowing the entire amount of purchases without conducting an independent inquiry or verifying the genuineness of the transactions through examination of relevant documents and suppliers.
• Whether reliance on statements of persons not connected with the suppliers, or on generalized information from other departments such as the Sales Tax Department, is sufficient to treat purchases as bogus.
• Whether the principles of natural justice were violated by not allowing the assessee to cross-examine witnesses whose statements were relied upon by the AO.
• The applicability of precedents regarding disallowance of bogus purchases, particularly the decisions in N K Proteins Ltd and N K Industries Ltd, and whether those precedents apply to the facts of the present case.
• The scope and nature of the AO's duty to investigate and verify allegations of bogus purchases before making additions to income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the purchases were bogus and disallowable based on the investigation wing's report and statements obtained during search and survey

The legal framework requires that disallowance of purchases as bogus must be supported by cogent and convincing evidence. Reliance solely on investigation wing reports or statements obtained during search and survey is insufficient without independent inquiry by the AO.

The AO relied heavily on the investigation wing's report and statements of Shri Rajendra Jain, who was not connected with the suppliers from whom the assessee purchased goods. The AO did not examine the books of accounts, purchase invoices, sales bills, or banking channel payments produced by the assessee. The AO concluded purchases were bogus to inflate expenses and reduce profits, relying on precedents from the Supreme Court and Gujarat High Court.

The Court noted that the investigation wing's report is a generalized report that triggers further inquiry; it cannot be the sole basis for disallowance. The AO failed to conduct any independent verification or inquiry to disprove the genuineness of purchases. The assessee had furnished documents and affidavits from suppliers confirming sales, which the AO did not challenge by independent inquiry.

The Court emphasized that adverse inferences drawn merely on suspicion and surmises without material evidence or inquiry do not satisfy the legal standard for disallowance.

Issue 2: Whether the AO's reliance on statements of persons not connected with the suppliers and generalized information from other departments is justified

The AO's reliance on statements of Shri Rajendra Jain, who was not proprietor or partner of the suppliers, was held to be misplaced. The AO also relied on information from the Sales Tax Department and investigation wing without conducting case-by-case verification or giving the assessee an opportunity to rebut specific allegations.

The Court referred to binding decisions of the Bombay High Court which held that generalized information from other departments cannot be a basis for disallowance without proper inquiry and opportunity to the assessee to respond. The Court noted that the same supplier may have genuine transactions with some parties and bogus ones with others; hence, a wholesale disallowance is impermissible without specific proof.

Issue 3: Whether the principles of natural justice were violated by not allowing cross-examination of witnesses

The assessee contended that not allowing cross-examination of witnesses whose statements were used against it violated natural justice. The Court acknowledged the Supreme Court's decision in Andaman Timber Industries, which held that denial of cross-examination of such witnesses is a serious flaw rendering the order nullity.

Although the Court did not explicitly dwell on this issue in detail, it implicitly supported the principle that the assessee must be given a fair opportunity to challenge adverse evidence.

Issue 4: Applicability of precedents (N K Proteins Ltd and N K Industries Ltd) relied upon by the AO

The AO relied on these precedents to justify disallowance of the entire purchases. However, the Court found that the facts of those cases were materially different. In those cases, the bogus nature of purchases was established through evidence, whereas here the AO's conclusion was based on suspicion without material proof.

The Court held that the precedents are not applicable where the AO has not discharged the burden of proof or conducted any independent inquiry.

Issue 5: The AO's duty to conduct independent inquiry and verify transactions before making additions

The Court extensively referred to recent binding decisions of the Bombay High Court which set out the AO's duties in cases of alleged bogus purchases. The AO must:

• Conduct thorough and case-specific inquiry rather than rely on generalized information.
• Consult other departments such as Sales Tax authorities to verify genuineness.
• Afford opportunity to the assessee to rebut specific allegations.
• Not make additions based on suspicion or superficial inquiry.

The Court found that the AO in the instant case did not undertake any such inquiry and failed to bring any cogent evidence to disprove the genuineness of purchases. The assessee had produced purchase invoices, bank payment proofs, sales reconciliations, stock details, and affidavits from suppliers. The AO did not challenge these documents or conduct any verification with the suppliers.

The Court held that the AO's approach was contrary to settled legal principles and binding judicial precedents, rendering the disallowance unsustainable.

3. SIGNIFICANT HOLDINGS

The Court set aside the orders of the AO, the CIT(A), and the ITAT, allowing the appeal of the assessee on the issue of disallowance of purchases.

Key legal reasoning preserved verbatim includes:

"Merely on suspicion based on information received from another authority, the assessing officer ought not to have made the additions without carrying out independent enquiry and without affording due opportunity to the respondent - assessee to controvert the statements made by the sellers before the other authority."

"A full addition could be made only on the basis of proper proof of bogus purchases being available as the law would recognise before the AO, of a nature which would unequivocally indicate that the transactions were wholly bogus."

"Unless there is a case to case verification, it would be difficult to paint all transactions of such supplier to all the parties as bogus transactions."

"The AO is required to adhere to the lawful norms and well settled principles. After such scrutiny, the transactions are found to be bogus as the law would understand, in that event, they are required to be discarded by making an appropriate permissible addition."

Core principles established or reaffirmed:

• The burden lies on the Revenue to prove that purchases are bogus with cogent and convincing evidence.
• Investigation wing reports or statements obtained during search and survey are triggers for inquiry, not conclusive proof.
• The AO must conduct independent inquiry, verify documents and suppliers, and afford the assessee an opportunity to rebut adverse allegations.
• Generalized information from other departments cannot be the sole basis for disallowance without case-specific verification.
• Disallowance of purchases as bogus cannot be based on suspicion, surmises, or incomplete inquiry.
• Principles of natural justice require that the assessee be allowed to cross-examine witnesses whose statements are relied upon.

Final determinations:

• The entire disallowance of purchases amounting to Rs. 9.56 crores was set aside.
• The AO's order and subsequent appellate orders confirming disallowance were quashed for lack of proper inquiry and evidence.
• The appeal was allowed in favor of the assessee, with no costs.