Court overturns ITAT decision, restores Commissioner's order, deems ITAT ruling unsustainable

The court allowed the appeal, ruling in favor of the appellant and against the revenue. The Income Tax Appellate Tribunal's order disallowing 25% of the purchases as bogus was quashed and set aside. The court restored the order passed by the Commissioner (Appeals), emphasizing that the ITAT's decision was unsustainable due to various infirmities and failure to follow previous directions.

---

---

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was right in holding that purchases of Rs. 73,29,278/- out of the total purchases of Rs. 1,01,83,331/- of grey cloth were bogus.
2. Whether 25% of the said purchases should be disallowed and added as income of the appellant.

Issue-wise Detailed Analysis:

1. Bogus Purchases:
The appellant, engaged in the business of purchase and sale of grey cloth, filed a return of income for the assessment year 2003-04. The Assessing Officer (AO) disallowed 25% of the purchases amounting to Rs. 73,29,278/- as bogus and added Rs. 18,32,319/- to the appellant's income. The AO's decision was based on the inability of the appellant to produce the seller and the fact that the cheques were encashed by someone else. The Commissioner (Appeals) confirmed this disallowance. However, the Income Tax Appellate Tribunal (ITAT) restored the issue to the AO for further examination, emphasizing the need to ascertain who encashed the cheques and the actual receipt of goods.

Upon re-examination, the AO concluded that the purchases were not genuine and disallowed 25% of the said purchases. The Commissioner (Appeals) disagreed with the AO, highlighting that the mandatory requirement for payment by account payee cheque was not applicable for the assessment year 2003-04 and that no defects were found in the books of accounts or stock register, indicating that purchases and sales were genuine. The ITAT, however, set aside the Commissioner (Appeals)'s decision and restored the AO's order.

2. Disallowance and Addition to Income:
The appellant argued that the findings of the Commissioner (Appeals) were in line with the ITAT's previous directions, and the ITAT failed to appreciate the evidence properly. The appellant emphasized that at the relevant time, there was no mandatory requirement for payment by account payee cheque, which was introduced only from 13.7.2006, while the case pertains to the assessment year 2003-04.

The respondent argued that the appellant failed to produce the seller and that the cheques were encashed by someone else, raising doubts about the genuineness of the purchases. The respondent supported the ITAT's decision to confirm the AO's findings.

Court's Observations:
The court noted that the AO did not reject the books of accounts and accepted the same. The AO's findings were based on the issuance of cross/bearer cheques and the endorsement of cheques to other parties, which did not conclusively prove that the purchases were bogus. The Commissioner (Appeals) found no defects in the books of accounts or stock register and noted that the mandatory requirement for payment by account payee cheque was not applicable for the relevant assessment year. The ITAT's findings were contrary to the record, as the AO did not claim that the appellant produced purchase bills from one concern and procured goods from another.

The court observed that the ITAT failed to follow its previous directions, which required the AO to verify from the party in whose favour the cheque was endorsed. The Tribunal's findings were not in consonance with the record and were deemed perverse.

Judgment:
The court allowed the appeal, answering the question in favor of the appellant and against the revenue. The impugned order of the ITAT dated 17.7.2015 was quashed and set aside, and the order passed by the Commissioner (Appeals) was restored. The court concluded that the ITAT's decision was not sustainable due to various infirmities and the failure to adhere to its previous directions.

---