2023 (9) TMI 149 - AT - Income Tax

Tribunal limits income addition, cites lack of cross-examination opportunity, and follows High Court precedent.

NYK Enterprises P. Ltd., Versus ITO, Ward 18 (4), New Delhi

The Tribunal partially allowed the appeal, restricting the addition of income on account of alleged bogus purchases and commission expenses to 8% of the ... Estimation of income - Bogus purchases - assessee before the CIT(A) submitted copies of confirmations from all three entities and copies of relevant bills and ITR and also filed stock statement, purchase and sale registers and bank statement for FY 2015-16 showing that all transactions of purchases have been included in the purchases shown in the P&L account and payments have been made through banking channels - HELD THAT:- In absence of any positive and adverse material against the assessee showing and establishing above facts, no addition can be made in the hands of assessee on account of allege bogus purchases u/s. 68 of the Act or any other charging section of the Act and on account of commission payment. However, to cover up all possible leakage of revenue, we find it appropriate to follow the preposition rendered in the case of PCIT vs. Mohd. Hazi Adam [2019 (2) TMI 1632 - BOMBAY HIGH COURT] and restrict the addition to the element of profit embedded therein. GP rate declared by the assessee as per audited accounts may be a relevant fact but the same is not suffice to meet the requirement of tax proceedings. Therefore find it appropriate to restrict the addition to the tune of 8% of total impugned sales which is sufficient to cover all possible leakage of revenue.Additions upheld by the ld. CIT(A) are substituted by the 8% of total alleged purchases. Appeal of assessee is partly allowed. Issues Involved:1. Legality of the order passed under Section 143(3) of the Income Tax Act.2. Validity of the addition of income on account of bogus purchases and commission expenses.3. Consideration of evidence and adherence to the principles of natural justice.4. Applicability of the Supreme Court's decision in PCIT v. Tejua Rohitkumar Kapadia.5. Charging of interest under Sections 234A, 234B, and 234C of the Income Tax Act.Summary:1. Legality of the order passed under Section 143(3) of the Income Tax Act:The assessee challenged the order passed under Section 143(3) by the AO, which was upheld by the CIT(A), as being 'bad both in the eye of law and on facts.' The AO had assessed the income at Rs. 19,53,840 against the declared income of Rs. 14,160.2. Validity of the addition of income on account of bogus purchases and commission expenses:The AO made additions based on alleged bogus purchases from three entities and commission expenses, totaling Rs. 18,65,080 and Rs. 74,603 respectively. The assessee contended that these additions were made 'only on the basis of presumption and assumptions' without direct evidence. The CIT(A) upheld these additions, which the assessee contested.3. Consideration of evidence and adherence to the principles of natural justice:The assessee argued that the authorities did not consider the evidence provided, including confirmations from the concerned parties, bank statements, and financial statements. The assessee also claimed that the additions were made based on material collected without giving an opportunity to rebut or cross-examine, thus violating the principle of natural justice.4. Applicability of the Supreme Court's decision in PCIT v. Tejua Rohitkumar Kapadia:The assessee cited the Supreme Court's decision in PCIT v. Tejua Rohitkumar Kapadia, which held that purchases cannot be treated as bogus if they are supported by bills, payments made by account payee cheque, and confirmed by the seller. The Tribunal noted that the AO did not provide an opportunity for cross-examination and relied on statements without confronting the assessee, which was against the principles laid out by the Supreme Court.5. Charging of interest under Sections 234A, 234B, and 234C of the Income Tax Act:The assessee also contested the charging of interest under Sections 234A, 234B, and 234C, but this issue was not elaborated upon in the judgment.Judgment:The Tribunal found merit in the assessee's contentions regarding the lack of direct evidence and violation of natural justice principles. It noted that the AO relied on statements without providing an opportunity for cross-examination. The Tribunal decided to restrict the addition to the element of profit embedded in the alleged bogus purchases, following the precedent set by the Hon'ble High Court of Bombay in PCIT v. Mohd. Hazi Adam. The addition was thus restricted to 8% of the total impugned sales to cover possible revenue leakage. Consequently, the appeal was partly allowed, substituting the upheld additions with 8% of the alleged purchases.Order pronounced in the open court on 23.06.2023.