2011 (6) TMI 1022 - AT - Income Tax

Tribunal overturns disallowance of Rs. 1,18,130 for bogus purchases, shifts burden of proof

The Tribunal held that the appellant had provided enough evidence to establish the genuineness of purchases made from M/s. Venus Lubricants, criticizing ... - ISSUES PRESENTED AND CONSIDERED 1. Whether purchases amounting to Rs. 1,18,130/- can be disallowed as 'bogus purchases' solely because notices issued under section 133(6) returned unserved and the supplier did not appear for verification. 2. What is the evidentiary burden and standard for establishing the existence and genuineness of a supplier for the purpose of claiming deduction for purchases (including role of invoices, tax registration numbers and bank payments)? 3. Whether, once the assessee produces documentary evidence (invoices bearing sales tax numbers, bank clearing of account-payee cheques, ledger entries and contact particulars), the onus shifts to the Revenue to undertake independent verification and to disprove the evidentiary material before making an addition. 4. Whether the Assessing Officer was obliged to take further verification steps (e.g., approach Sales Tax authorities or bank verification) before concluding the supplier did not exist and treating purchases as bogus. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of disallowance based solely on unserved notices under section 133(6) Legal framework: Assessing Officer may issue notices under section 133(6) to verify transactions; income-tax law requires taxpayers to substantiate deductions and purchases. Tax authorities have powers of inquiry but must act on proper evidence. Precedent treatment: The parties placed on record authorities addressing burden of proof and reliance on documentary/banking evidence; the Court examined those precedents in context. Interpretation and reasoning: The Court held that a conclusion that purchases are bogus cannot rest solely on the fact that notices returned unserved. The mere non-service of a departmental notice or non-appearance of the supplier does not ipso facto negate the existence of the supplier or the genuineness of transactions where the assessee has produced credible documentary and banking evidence. The Assessing Officer's unilateral conclusion, without attempting corroborative verification of the documentary material, was held to be insufficient. Ratio vs. Obiter: Ratio - Unserved notices under section 133(6) are not by themselves conclusive proof of bogus transactions where the assessee produces credible documentary and banking evidence; such notices cannot substitute for positive disproof by the Revenue. Conclusion: The disallowance based solely on returned notices was not sustainable; the addition is unjustified on that ground. Issue 2 - Sufficiency of documentary and banking evidence to establish existence/genuineness of supplier Legal framework: Claims of purchases are substantiated by invoices, statutory registration numbers (Central/State Sales Tax numbers), ledger entries, and payments through banking channels; such evidence is relevant to prove genuineness of transactions. Precedent treatment: The Court considered authorities cited by the assessee endorsing the principle that banking payments, invoices and tax registration details are material and can discharge the assessee's onus; these were taken into account in the Court's evaluation. Interpretation and reasoning: The Court found that production of bills and invoices bearing sales tax registration numbers, ledger copies, telephone/fax numbers and cross-cheque payments cleared through bank created a prima facie case establishing the supplier's existence and the genuineness of purchases. The presence of statutory identifiers (CST and State VAT numbers) and banking evidence was held to have probative value and to rebut an inference of fabrication, absent positive contradictory evidence from the Revenue. Ratio vs. Obiter: Ratio - Documentary evidence (invoices with tax registration numbers) coupled with bank-cleared account-payee cheques and ledger entries can satisfy the assessee's evidentiary burden to establish purchases and supplier existence in the absence of contrary proof by Revenue. Conclusion: The assessee discharged the onus of proof; documentary and banking evidence were sufficient to rebut the presumption of bogus purchases. Issue 3 - Shift of onus to Revenue once assessee produces credible evidence Legal framework: Initial onus to substantiate claimed expenses rests on the assessee; once credible supporting material is produced, the onus shifts to the Revenue to impeach or contradict that material. Precedent treatment: The Court noted and applied the settled evidentiary principle reflected in cited decisions that where the assessee produces credible documentary and banking evidence, Revenue must undertake steps to disprove that evidence rather than relying on presumptive inference. Interpretation and reasoning: Having accepted the assessee's evidence as prima facie sufficient, the Court held that the onus shifted to the Revenue to show that the material produced was incorrect or fabricated. The Assessing Officer failed to make any attempt to contradict the material (for example, by verifying with Sales Tax authorities or confirming bank particulars), and therefore could not sustain the addition on mere absence of supplier's response to departmental notice. Ratio vs. Obiter: Ratio - Once the assessee furnishes credible documentary and banking evidence of purchases, the Revenue must produce positive contrary evidence or undertake reasonable verification to displace that evidence before making an addition. Conclusion: The Revenue did not discharge the shifted onus; the addition therefore could not be sustained. Issue 4 - Duty of the Assessing Officer to undertake further verification (Sales Tax authorities / bank) before treating purchases as bogus Legal framework: Assessing Officers are required to make enquiries and take reasonable steps to verify material facts; reliance on returned notices without further enquiry may be inadequate where other corroborative evidence exists. Precedent treatment: The Court, after reviewing the record and authorities, applied the principle that departmental verification should be made where documentary evidence exists but departmental notices prove unserved. Interpretation and reasoning: The Court criticized the Assessing Officer for not contacting Sales Tax authorities or verifying with the bank to test the veracity of the supplier's existence and the payments. The Court found that basic cross-verification steps would have been appropriate and that the failure to undertake such enquiries rendered the AO's conclusion arbitrary. The Court emphasized that non-service of notice is only one circumstance and not conclusive when contradicted by other material. Ratio vs. Obiter: Ratio - Where the assessee furnishes documentary and banking proof of purchases and the departmental notice remains unserved, the Assessing Officer is expected to undertake reasonable verification (e.g., with Sales Tax authorities or bank) before declaring transactions bogus. Conclusion: The Assessing Officer's failure to undertake further verification rendered the disallowance untenable; the addition must be deleted. Overall Conclusion The Court allowed the appeal in respect of the disallowance of purchases of Rs. 1,18,130/-. The assessee's documentary and banking evidence was held sufficient to discharge the initial burden; the onus shifted to the Revenue, which did not undertake independent verification or adduce contradictory material. Therefore, the addition based solely on returned departmental notices was set aside. The Court confirmed dismissal of ancillary grounds not pressed by the assessee.