2017 (2) TMI 906 - AT - Income Tax

Tribunal Overturns AO's Decision on Disallowing Purchases

The Tribunal concluded that the Assessing Officer was not justified in disallowing purchases made from suspicious dealers as bogus. The Tribunal directed ... Bogus purchases - onus on assessee to prove expenditure - reliance on statements/affidavits of third parties - duty of Assessing Officer to make independent inquiries - right to cross examine third party witnesses for adverse reliance - addition under section 69C-requirement of evidence beyond suspicion - profit element addition as alternate measureBogus purchases - onus on assessee to prove expenditure - Validity of disallowance of purchases from dealers classed as 'suspicious dealers' as bogus purchases - HELD THAT: - The Tribunal examined the material placed on record and the conduct of the Assessing Officer. Although the AO relied on information from the Sales Tax Department and statements attributed to certain dealers, the assessee had produced external documentary evidence - invoices, delivery challans (where available), bank payment entries and ledger/details of running accounts - and the contracts were subject to stringent verification by government contractees. The statements of the project engineer and the assessee referred only to internal records and did not deny receipt or consumption of materials. The AO did not carry out independent enquiries to demonstrate that the invoices were not genuine or that payments had been routed back to the assessee. Mere categorisation of suppliers as 'suspicious' by the VAT authority, without further corroborative inquiry or evidence specifically impugning the transactions with the assessee, is insufficient to treat purchases as bogus. Having considered the facts and relevant precedents, the Tribunal held that the AO was not justified in treating the entire purchases as bogus. [Paras 11, 12, 13, 16, 17]Disallowance of purchases as bogus is not justified; additions treating the purchases as wholly bogus are to be deleted.Reliance on statements/affidavits of third parties - right to cross examine third party witnesses for adverse reliance - duty of Assessing Officer to make independent inquiries - Permissibility of AO's reliance on statements/affidavits given before Sales Tax authorities and effect of non production/non cross examination of those dealers - HELD THAT: - The Tribunal held that the AO could not simply rely on generalized statements/affidavits or a list of 'suspicious dealers' provided by the Sales Tax Department without conducting further enquiries specific to the assessee's transactions. Where adverse reliance is placed on third party statements, principles of natural justice require that the assessee be afforded an opportunity to test those statements by cross examination; absence of such opportunity and lack of further investigative steps (for example, bank cash trails or direct verification of suppliers' admissions in relation to the assessee) rendered the AO's reliance impermissible. Coordinate bench and High Court precedents were followed to the effect that suspicion alone cannot substitute for evidence. [Paras 14, 15, 17]AO's reliance on Sales Tax statements and third party affidavits without independent inquiry or opportunity for cross examination is improper; such material alone cannot sustain additions.Profit element addition as alternate measure - addition under section 69C-requirement of evidence beyond suspicion - Sustainability of the CIT(A)'s restriction of addition to 12.5% of alleged unverifiable purchases (profit element addition) - HELD THAT: - Although the CIT(A) declined to uphold the AO's total disallowance and framed an alternate approach by estimating and sustaining 12.5% as profit element on alleged unverifiable purchases, the Tribunal found that even this limited addition was based on surmise rather than any material evidence. No material was produced to show that purchases were at non arm's length rates or that the assessee had realized any profit from accommodation entries; the survey produced no incriminating material and the AO had not demonstrated aberration in purchase prices. Given the absence of evidential foundation for estimating a profit element, the Tribunal concluded that the partial addition was also unsustainable and ought not to stand. [Paras 17, 18]CIT(A)'s sustainment of 12.5% addition is set aside; no alternate profit element addition is to be sustained.Final Conclusion: The Tribunal dismissed the revenue appeals and allowed the assessee's appeals and cross objection for A.Y. 2009-10 to 2011-12, directing deletion of the additions relating to alleged bogus purchases in all three years on the grounds that the AO's reliance on 'suspicious dealers' and third party statements without independent inquiry or opportunity for cross examination was unsustainable and that the CIT(A)'s approximate 12.5% profit addition was based on surmise and therefore set aside. Issues Involved:1. Disallowance of purchases treating them as bogus.2. Reliance on statements from suspicious dealers.3. Evidence provided by the assessee to prove the genuineness of purchases.4. Opportunity for cross-examination.5. Profit element on alleged unverifiable purchases.Detailed Analysis:1. Disallowance of Purchases Treating Them as Bogus:The Assessing Officer (AO) disallowed a portion of purchases made by the assessee, treating them as bogus based on information from the Maharashtra Sales Tax Department that certain dealers issued bogus bills without actual delivery of goods. The AO found that the assessee purchased goods from these suspicious dealers and reopened the assessment for A.Y. 2009-10 and 2010-11, and took up scrutiny for A.Y. 2011-12. The AO disallowed the purchases, totaling Rs. 2.35 crores for A.Y. 2009-10, Rs. 7.99 crores for A.Y. 2010-11, and Rs. 3.34 crores for A.Y. 2011-12.2. Reliance on Statements from Suspicious Dealers:The AO relied on statements from the suspicious dealers to the Sales Tax Department, which indicated that they issued accommodation bills without supplying any material. The AO also referred to statements from the assessee and his project engineer, who admitted that certain purchases lacked supporting documents. However, the assessee argued that these statements were not specific to his transactions and were made by the dealers to serve their own purposes.3. Evidence Provided by the Assessee to Prove the Genuineness of Purchases:The assessee provided copies of bills, payment details, and delivery challans to prove the genuineness of the purchases. The assessee also argued that the materials were delivered directly to the work sites and that the payments were made through banking channels. The learned CIT(A) noted that the assessee had furnished necessary documents, including VAT registration of suppliers, letter of confirmation, payment details, invoices, and stock reconciliation.4. Opportunity for Cross-Examination:The assessee contended that the AO did not allow him to cross-examine the suspicious dealers, which violated the principles of natural justice. The Tribunal agreed, noting that the AO did not make any independent enquiry with the dealers or show that they specifically admitted the transactions with the assessee were bogus. The Tribunal cited the Bombay High Court's decision in CIT Vs. M/s Ashish International, which held that the addition towards alleged bogus purchases was not justified when the AO did not allow the assessee to cross-examine the suspicious dealer.5. Profit Element on Alleged Unverifiable Purchases:The learned CIT(A) restricted the addition to 12.5% of the alleged bogus purchases, reasoning that only the profit element on the unverifiable purchases should be added. However, the Tribunal found that the CIT(A) sustained the addition on surmises and conjectures without bringing any material on record. The Tribunal noted that the gross profit rate and net profit rate declared by the assessee had increased substantially during the three years under consideration, indicating that the purchases were genuine.Conclusion:The Tribunal concluded that the AO was not justified in disallowing the purchases made from the suspicious dealers as bogus. The Tribunal directed the AO to delete the additions relating to purchases made in all three years under consideration. The appeals filed by the revenue were dismissed, and the appeals and cross-objections filed by the assessee were allowed.