2017 (10) TMI 54 - AT - Income Tax

ITAT upholds CIT(A) decision on bogus purchases, emphasizes evidence and due process

ACIT 4 (3) (1) Mumbai Versus M/s. Panache Exports Pvt. Ltd. And Vice-Versa

The ITAT upheld the CIT(A)'s decision to delete the addition of Rs. 33,76,271/- made by the AO due to alleged bogus purchases. The AO's failure to provide ... Addition on account of bogus purchases - Reopening of assessment - CIT(A) deleted the addition observing that assessee has not given copy of statement and other documents by relying on which AO has made addition, thus, the opportunity to cross examination was not given by the AO - Held that:- CIT(A) relied on the decision of the Bombay High Court in case of HR Mehta [2016 (7) TMI 273 - BOMBAY HIGH COURT] and held that not giving opportunity to cross examine the deponents of the statement relied by the AO would render addition made by AO null and void. Even on merits, CIT(A) dealt with the issue threadbare and after taking into account average value addition made by the assessee in respect of each and every item of raw materials so purchased from the alleged suppliers reached to the conclusion that there is no evidence of over invoicing of purchases alleged by the AO. Detailed finding so recorded by CIT(A) are as per material on record and has not been controverted by learned DR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings recorded by CIT(A) resulting into deletion of addition . In the result, appeal filed by revenue is dismissed. Issues Involved:1. Deletion of addition made by AO on account of bogus purchases.2. Reopening of assessment.Issue-wise Detailed Analysis:1. Deletion of Addition Made by AO on Account of Bogus Purchases:During the reassessment proceedings, the Assessing Officer (AO) found that the assessee had purchased goods from parties declared as bogus by the Sales Tax Department, leading to an addition of Rs. 33,76,271/- to the assessee's income. The AO estimated a profit of 6% on these purchases, amounting to Rs. 5,62,71,184/-. The assessee was asked to provide documentary evidence to justify the genuineness of the purchases, but the AO did not furnish the materials and evidence on which the addition was based.The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, observing that the AO did not provide the assessee with the investigation report or third-party evidence, denying the assessee the opportunity to rebut the evidence by cross-examining the witnesses. This was deemed a violation of the principles of natural justice. The CIT(A) referenced the case of H.R. Mehta, where the Bombay High Court ruled that the revenue was not justified in making additions without giving the assessee an opportunity to cross-examine the deponents.The CIT(A) further cited the Supreme Court's decision in Andaman Timber Industries, which held that not allowing the assessee to cross-examine witnesses whose statements were the basis of a demand is a serious flaw, making the order a nullity due to the violation of natural justice principles. Similar principles were upheld in the case of Kishinchand Chellaram vs. CIT, where the Supreme Court ruled that evidence not shown to the assessee and without an opportunity to controvert it is inadmissible.The CIT(A) also noted that the AO did not provide any proof to substantiate the contention that the appellant inflated its purchases. The value addition was higher in the case of sales made from purchases from the alleged bogus parties, contradicting the AO's claim of over-invoicing. The CIT(A) concluded that the AO's addition was based on mere suspicion without legitimate material, and the initial burden of finding such material was on the AO.The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, noting that the AO did not give the assessee the opportunity to cross-examine the deponents or provide the statements and documents relied upon. The ITAT found no reason to interfere with the CIT(A)'s findings, resulting in the deletion of the addition of Rs. 33,76,271/-.2. Reopening of Assessment:The assessee filed a Cross Objection against the CIT(A)'s order upholding the reopening of the assessment. However, the ITAT did not address this issue in detail, as the primary issue on merits had already been decided in favor of the assessee. Consequently, the legal ground raised by the assessee became infructuous.Conclusion:The ITAT dismissed the appeal filed by the revenue and the Cross Objection filed by the assessee. The order pronounced on 25/09/2017 upheld the deletion of the addition made by the AO on account of bogus purchases, emphasizing the importance of adhering to the principles of natural justice and providing the assessee with the opportunity to rebut evidence used against them.