2025 (4) TMI 1441 - AT - Income Tax

Addition made on account of bogus purchase and profit estimation on sales - AO made addition @8% on these 3 sales treating that actual sales had been made in the grey market and accordingly would have earned grey market premium on sales - HELD THAT - Merely because there was some cash deposit in its bank account prior to the issuance of cheques to the assessee towards payment of purchase consideration it cannot be concluded that the source of said cash deposit represent the unaccounted income of the assessee. Similarly with regard to sales made by the assessee to M/s. Bhagya Laxmi Gems and Jewellers Pvt. Ltd the said company is a Pvt ltd company registered under Companies Act at Secunderabad Telengana and assessed to income tax. The said party had filed its confirmation that it had made purchase from the assessee and had directly responded to the notice issued u/s 133(6) of the Act before the AO which fact is also mentioned by the AO in the assessment order. For all the sales made to these 3 parties i.e. Bombay Gold Lab Dharneesh Gold Pvt. Ltd and Bhagya Laxmi Gems and Jewellers Pvt. Ltd the assessee had already declared the same in its profit and loss account and in the income tax returns. There is absolutely no evidence brought on record that assessee had made cash sales in grey market at a huge premium. Hence there is absolutely no question of bringing to tax any amount on account of profit of premium at grey market. Hence the addition made again @8% by the ld AO which was reduced to 2% by the CIT(A) does not deserve to survive at all. Accordingly the grounds raised by the assessee in this regard are allowed and grounds raised by the revenue in this regard are dismissed. Addition made on account of purchase made from Bombay Gold Lab - The said party Bombay Gold Lab had duly responded to the notice issued u/s 133(6) of the Act by furnishing the requisite details directly before the ld AO. The assessee had even given the PAN details and GST details of the said party before the lower authorities. Hence purchase transaction made from the said party cannot be treated as bogus. Once corresponding sales made out of disputed purchase stands accepted the purchase cannot be doubted. The books of account of the assessee have not been rejected by the ld AO or by the ld CIT(A). With regard to the Inspector report that Bombay Gold Lab does not exist at the address given the assessee had already pleaded that said Inspector s Report was never furnished to the assessee for its rebuttal over the purchase made by the assessee which includes the disputed purchase the closing stock sales which are reflected in the books of account already cannot be doubted as they are not rejected by the ld AO. CIT(A) duly appreciated all these facts and erroneously proceeded to make an ad hoc addition @1% of the value of purchase treating it as an accommodation entry on account of claim of expenditure. Once the transaction from Bombay Gold Lab is held to be genuine there is no question of treating the same as accommodation entry. Accordingly the addition made on account of commission expenditure stands deleted as it was not incurred at all and it was not required to be incurred by the assessee.

Summary

The core legal questions considered by the Tribunal revolve around the genuineness of certain transactions and the consequent tax additions. Specifically, the issues are:

1. Whether the purchase of bullion worth Rs. 2,79,52,732/- from M/s. Bombay Gold Lab was a bogus transaction warranting disallowance under section 37 of the Income-tax Act, 1961.

2. Whether the sales made to Bombay Gold Lab, Dharneesh Gold Pvt. Ltd, and Bhagya Laxmi Gems and Jewellers Pvt. Ltd were genuine or merely cover-ups for unaccounted grey market sales, thereby justifying additions on account of estimated grey market premium.

3. The correctness of the profit estimation on sales by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]-specifically, the addition of 8% and 2% respectively as grey market premium.

4. The applicability of adverse inference against the assessee due to non-appearance of the third party (Bombay Gold Lab) in response to summons under section 131 of the Act.

Issue-wise Detailed Analysis

1. Genuineness of Purchase from Bombay Gold Lab

The legal framework involves provisions under section 37 of the Income-tax Act, which allows disallowance of expenditure if it is not incurred wholly and exclusively for business purposes. The AO disallowed the purchase on the ground that Bombay Gold Lab was a bogus entity, supported by the failure of the proprietor to respond to summons under section 131 and the Inspector's report stating non-existence of the entity at the declared address.

The assessee countered by submitting copies of purchase and sales bills, bank statements, ledger copies, income tax returns, audited financial statements of Bombay Gold Lab, and PAN and GST details. Bombay Gold Lab also directly responded to notices under section 133(6) of the Act, furnishing requisite documents to the AO.

The AO's reliance on the non-compliance with summons under section 131 was challenged. The Tribunal referred to the Supreme Court decision in Orissa Corporation (159 ITR 78), which held that failure of a third party to comply with summons does not warrant adverse inference against the assessee, especially when the assessee has placed sufficient evidence on record.

The Tribunal distinguished the reliance placed by the Department on the Bombay High Court decision in PCIT vs. Kanak Impex India Ltd, noting that in that case the party was a hawala operator, no documents were produced, and the source of payments was not established. In contrast, the assessee in the instant case had established the source of payments through regular banking channels, and the transactions were reflected in audited books.

Regarding the Inspector's report about the non-existence of Bombay Gold Lab at the given address, the Tribunal noted that the assessee was not furnished this report for rebuttal, and the party had provided an alternative address. Even at the alternative address, the Inspector reported non-existence, but the Tribunal emphasized that the party had responded to notices under section 133(6) and had furnished all relevant documents.

Applying the law to facts, the Tribunal held that the purchase transactions were genuine, reflected in audited accounts, supported by corresponding sales, and the source of payments was established. Therefore, the disallowance under section 37 was unwarranted.

The CIT(A) had allowed only 1% profit element embedded in the purchase value as an addition, treating the transaction as an accommodation entry. The Tribunal rejected this approach, holding that once the transaction is genuine, no accommodation entry or commission expenditure can be presumed.

2. Genuineness of Sales to Bombay Gold Lab, Dharneesh Gold Pvt. Ltd, and Bhagya Laxmi Gems and Jewellers Pvt. Ltd and Estimation of Grey Market Premium

The AO estimated an 8% addition on sales to these parties, treating these sales as cover-ups for actual grey market cash sales at higher premiums. The CIT(A) reduced this addition to 2%. Both parties appealed.

The Tribunal examined the evidence submitted by the assessee, including audited financial statements, income tax returns, PAN and GST registrations, confirmations from the parties, bank statements, and responses to notices under section 133(6). It was noted that these parties were duly assessed to income tax and GST authorities, and confirmations of purchases from the assessee were furnished.

The Tribunal found no evidence on record to support the AO's and CIT(A)'s conclusion that these sales were fictitious or that the assessee had made unaccounted cash sales in the grey market. The mere presence of cash deposits in the bank accounts of these parties prior to issuance of cheques was not sufficient to conclude that these represented unaccounted income of the assessee.

Applying the law to the facts, the Tribunal held that since the sales were disclosed in audited accounts and income tax returns, and the parties had responded with confirmations and documents, the addition on account of grey market premium was unjustified.

Consequently, the Tribunal allowed the grounds raised by the assessee and dismissed the revenue's grounds on this issue.

3. Adverse Inference for Non-Compliance with Summons under Section 131

The AO drew adverse inference against the assessee due to non-compliance by Bombay Gold Lab with summons under section 131. The Tribunal analyzed this in light of the Supreme Court's ruling in Orissa Corporation, which clarified that failure of a third party to appear does not automatically lead to adverse inference against the assessee if the assessee has produced credible evidence.

The Tribunal observed that the assessee had produced extensive documentary evidence and the third party had responded to notices under section 133(6). Therefore, the adverse inference was not justified.

Significant Holdings

"Failure of a 3rd party in not responding to the summons would not lead to draw an adverse inference against the assessee."

"Once corresponding sales made out of disputed purchase stands accepted, the purchase cannot be doubted."

"The books of account of the assessee have not been rejected by the ld AO or by the ld CIT(A)."

"There is absolutely no evidence brought on record that assessee had made cash sales in grey market at a huge premium."

"Merely because there was some cash deposit in its bank account prior to the issuance of cheques to the assessee towards payment of purchase consideration, it cannot be concluded that the source of said cash deposit represent the unaccounted income of the assessee."

The Tribunal established the principle that the genuineness of transactions must be judged on the basis of credible documentary evidence and not merely on non-compliance by third parties with summons. It emphasized that addition on estimation of unaccounted income must be supported by substantial evidence.

Final determinations were:

- The purchase of Rs. 2,79,52,732/- from Bombay Gold Lab was genuine; disallowance under section 37 was deleted.

- The addition of 8% and 2% respectively by AO and CIT(A) on sales to the three parties on account of grey market premium was not justified and was deleted.

- The adverse inference drawn on non-compliance of summons by Bombay Gold Lab was not sustainable.

Accordingly, the appeal of the assessee was allowed, and the appeal of the revenue was dismissed.