2023 (11) TMI 338 - AT - Income Tax

Assessee wins Rs. 17.71 crore bogus tobacco purchase case as no expenditure claimed in assessment year

The Deputy Commissioner of Income Tax, Central Circle-1, Andhra Pradesh. Versus M/s. Polisetty Somasundaram Pvt Ltd. And (Vice-Versa)

The Deputy Commissioner of Income Tax, Central Circle-1, Andhra Pradesh. Versus M/s. Polisetty Somasundaram Pvt Ltd. And (Vice-Versa) - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in making an addition of Rs. 17,71,40,617/- as bogus purchases where (a) cash withdrawals from company bank account were admitted to have been used for purchases, but the purchases were shown as stock-in-trade (not expensed) and later written off in a subsequent year, and (b) original purchase invoices/details were not produced during assessment proceedings. 2. Whether statements recorded under section 132(4) (sworn statements during search) admitting purchases/possession of certain documents could, without independent corroboration, justify treating book entries as bogus and sustaining additions. 3. Whether assessment under section 143(3) read with section 153A (assessment in search cases) could validly include additions based on seized/incriminating material when the Assessing Officer has not produced independent corroborative evidence that the purchases were claimed as deductions in any relevant year. 4. Ancillary: Whether the adjudicating authority (CIT(A) / Tribunal) erred in relying on books of account submitted for a later year (post-search) and in treating the claim of stock-in-trade and non-claim of write-off in profit & loss as material to delete the addition. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of addition of Rs. 17,71,40,617/- as bogus purchases Legal framework: Assessing Officer may disallow/ make additions where books or seized material indicate bogus purchases or unaccounted income; in search assessments (s.153A) incriminating material seized can be used, subject to legal requirements of corroboration and relevance to assessment years. Precedent treatment: No specific judicial precedents cited or relied upon in the text; Tribunal and CIT(A) considered evidentiary principles and accounting treatment in arriving at conclusions. Interpretation and reasoning: The Tribunal noted the following factual matrix: (a) assessee admitted cash withdrawals (Rs.14.47 Cr) credited to purchases; (b) purchase value/ opening stock totaling Rs.17.71 Cr was carried as stock-in-trade (not expensed) for AY 2015-16 and subsequent years; (c) the stock was written off in AY 2019-20 on account of damage, and that write-off was not claimed as an expenditure in profit & loss for AY 2019-20; (d) Search team could not find physical stock at time of search; (e) AO did not bring independent corroborative material to establish that purchases were bogus or that the stock was ever claimed as an expense. The Tribunal accepted the CIT(A)'s reasoning that where neither opening stock nor purchases were claimed as an expense in the year under assessment, there was no basis for an addition as bogus purchases for that assessment year. Ratio vs. Obiter: Ratio - Where alleged purchases entered in books are shown as stock-in-trade (revenue neutral for the year) and the write-off is not claimed as expenditure in a later year, the AO cannot make an addition for bogus purchases in the earlier year without independent corroborative material. Obiter - Observations on the purchase source (sale proceeds) and non-dispute of source by AO are explanatory but not necessary to the core holding. Conclusion: Addition of Rs. 17,71,40,617/- as bogus purchases is not sustainable in the absence of evidence that the purchases/stock were claimed as expenditure in the relevant year or independent corroboration linking seized material to an inadmissible tax benefit; deletion by the CIT(A) upheld. Issue 2 - Evidentiary value of statements under section 132(4) Legal framework: Sworn statements recorded under s.132(4) are admissible and relevant, but their evidentiary value depends on corroboration and consistency with other material; a statement alone may not suffice to make additions if uncorroborated. Precedent treatment: No precedents cited; Tribunal applied principles of corroboration and requirement of supporting material. Interpretation and reasoning: The sworn deposition by a company director admitted purchases and referenced seized invoices/handwritten pages. However, the Assessing Officer failed to produce seized material or other independent evidence to corroborate that purchases were claimed as expenses or that stock existed and was used to reduce taxable income. The Tribunal held that the mere admission in sworn statement, without corroborative seized material produced on record, did not justify sustaining the addition. Ratio vs. Obiter: Ratio - A statement under s.132(4) cannot alone support an addition for bogus purchases where the AO does not place corroborative seized material or other independent evidence on record. Obiter - The Tribunal's emphasis on the inability of the Search Team to locate physical stock is supportive but not the sole basis. Conclusion: The CIT(A) rightly questioned the sole reliance on s.132(4) statements; absence of corroborative material undermined the AO's addition. Issue 3 - Use of incriminating/seized material and scope of assessment under s.143(3) r.w.s.153A Legal framework: Assessments under s.153A proceed in respect of incriminating material found during search; however, additions must still be founded on admissible evidence and must pertain to income or claim adjustments in the years under consideration. Precedent treatment: The decision does not reference case law but applies statutory and evidentiary principles in search-related assessments. Interpretation and reasoning: The Tribunal observed that the AO did not bring seized/incriminating material on record to corroborate the allegation of bogus purchases. Additionally, the purchases in books were not expensed in the year under assessment, hence treating them as bogus purchases for that year had no justificatory basis. The CIT(A) concluded, and Tribunal agreed, that additions outside the scope of what was claimed or deducted in the relevant year were not appropriate absent supporting evidence. Ratio vs. Obiter: Ratio - In search assessments, the presence of incriminating material alone does not authorize additions unless that material is produced and connects to taxable claims/deductions in the relevant year; additions must be tied to claimed tax benefits in that year. Obiter - Comments on scope of later-year accounting adjustments are auxiliary. Conclusion: The AO's reliance on alleged incriminating material was insufficient; assessment under s.143(3) r.w.s.153A cannot sustain the specific addition without record material showing that the purchases resulted in a tax benefit in the assessment year. Issue 4 - Reliance on books/accounts prepared after search and non-claim of write-off in subsequent year Legal framework: Documentary evidence, including books of account, must be appraised for temporal relevance; documents prepared after a search may be relevant if they explain transactions, but weight depends on consistency and corroboration. Precedent treatment: No precedent cited; Tribunal accepted factual finding that the write-off was not claimed as an expense in the later year. Interpretation and reasoning: The CIT(A)'s reliance on books/accounts for AY 2019-20 (showing write-off and non-claim of expenditure) was employed to establish that no tax benefit was claimed in respect of the purchases/stock. Tribunal found this reliance permissible for fact-finding: the absence of claimed expenditure negated the rationale for making a bogus-purchase addition in the earlier year. Ratio vs. Obiter: Ratio - Evidence showing no tax claim in relevant years is material; reliance on post-search accounts to establish that no deduction was taken is permissible for assessing whether an addition to taxable income is warranted. Obiter - Observations on the origins of the purchase funds (sale proceeds) are incidental. Conclusion: Use of later-year accounts to show non-claim of write-off was a valid fact-based ground to negate the AO's addition; reliance did not constitute error. Final Disposition The Tribunal upheld the CIT(A)'s deletion of the addition of Rs. 17,71,40,617/-, finding the Assessing Officer failed to place corroborative seized material or other independent evidence on record and that no expenditure had been claimed in the assessment year to justify treating book entries as bogus purchases; Revenue's appeal dismissed and cross-objection rendered infructuous.