Fabrication charges paid by cheque backed by gate-pass records upheld as genuine; mechanical tax addition struck down

Where the assessee claimed fabrication charges, the HC held that the assessee discharged its initial onus to prove genuineness by producing evidence of account-payee cheque payments, banker certificates, and a contemporaneous gate-pass/challan control system; the AO's addition, based merely on non-service of summons and without further enquiry, was treated as a mechanical and unsustainable inference of siphoning. Consequently, the deletion of the addition was upheld. On characterization, the HC held that even if disallowance were warranted, it could not be assessed as "income from other sources" but would fall, if at all, within business profits, impacting export deduction computation; the AO's head-of-income treatment was rejected, and the revenue appeal was dismissed for absence of any substantial question of law.

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Issues Involved:
The judgment involves the issue of burden of proof on the assessee to establish the genuineness of payments made towards fabrication charges and the treatment of such payments as income from other sources by the Assessing Officer.

Summary:

Issue 1: Burden of Proof on Assessee
The assessee, a 100 per cent export unit dealing in garments, claimed expenditure towards fabrication charges. The Assessing Officer issued summons under section 131 of the Income-tax Act, 1961 to parties to whom the payments were made. Despite some parties not being found at the given address, the assessee maintained that payments were made through account-payee cheques with a strict gate pass and challans system. The Assessing Officer added the amount paid to fabricators as income from other sources without further investigation. The Commissioner of Income-tax (Appeals) allowed the appeal, and the Tribunal upheld the decision, noting that the assessee provided evidence of payments through cheques and certificates from bankers. The Tribunal criticized the Assessing Officer's mechanical approach and failure to consider the possibility of parties moving or closing down their businesses over time.

Issue 2: Treatment of Payments as Income from Other Sources
The revenue contended that the burden was on the assessee to prove the genuineness of payments. However, the High Court found that the assessee had met the initial burden by demonstrating payments through cheques and maintaining a gate pass and challan system. The Court held that the Assessing Officer should have added the disallowed amount towards fabrication charges to business profits instead of treating it as income from other sources. By doing so, the assessee could have potentially benefited from section 80HHC of the Act. The Court concluded that there was no basis for the Assessing Officer's assumption that the amount had been siphoned off by the assessee.

In the absence of any error by the Tribunal, the High Court dismissed the appeal, stating that no substantial question of law arose in the case.

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