Disallowance of purchases based solely on unverified third-party statements without cross-examination ruled improper

The ITAT Amritsar ruled in favor of the assessee regarding disallowance of alleged bogus purchases. The tribunal held that disallowance based solely on third-party information from the Investigation Wing without independent verification by the Assessing Officer was improper. Following SC precedent in Andaman Timber Industries, statements recorded without allowing cross-examination must be excluded from evidence. The assessee had valid documentation including PAN, payments through account payee cheques, stock registers, and the disputed purchases constituted less than 3% of total purchases. The tribunal deleted the disallowance, emphasizing that cumulative evidence favored the assessee over unverified third-party statements.

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Issues Involved:

1. Legitimacy of the reopening of assessment under section 148.
2. Justification for the addition of alleged bogus purchases.
3. Right to cross-examine third-party witnesses.
4. Consistency with decisions of coordinate benches.

Issue-wise Detailed Analysis:

1. Legitimacy of the Reopening of Assessment:
- The assessee initially challenged the reopening of the assessment under section 148 but later withdrew these grounds. The reopening was based on information from the Investigation Wing regarding alleged bogus purchases from entities managed by Bhanwar Lal Jain Group, which were engaged in providing accommodation entries.

2. Justification for the Addition of Alleged Bogus Purchases:
- In ITA No. 226/ASR/2017, the addition of Rs. 86,76,315/- was made on account of alleged bogus purchases from M/s. Daksh Diamonds and M/s. Jewel Diamonds. The assessee argued that the CIT(A) failed to appreciate that no trading additions could be made without pointing out defects in the audited books of accounts.
- In ITA No. 586/ASR/2017, a similar addition of Rs. 82,17,465/- was made for purchases from M/s. Nazar Impex (P) Ltd. The assessee contended that the addition was based on the statement of Mr. Sanjay Choudhary, who was not produced for cross-examination, thereby violating principles of natural justice.
- The Tribunal found that the purchases were supported by invoices, payments made through banking channels, and entries in the stock register. The information from the Investigation Wing was deemed insufficient without independent verification by the Assessing Officer.

3. Right to Cross-Examine Third-Party Witnesses:
- The assessee requested the cross-examination of third-party witnesses, namely Bhanwar Lal Jain and Sanjay Chaudhary, whose statements were used against them. The Tribunal emphasized the necessity of cross-examination, citing the Supreme Court's decision in Andaman Timber Industries, which mandates that statements recorded from the back of the assessee must be subject to cross-examination to be admissible as evidence.

4. Consistency with Decisions of Coordinate Benches:
- The Judicial Member highlighted the importance of maintaining judicial discipline by following the decisions of coordinate benches on similar issues. The Tribunal referred to its earlier decision in the case of DCIT vs. Sunil Kumar, where similar additions were deleted due to lack of cross-examination and proper verification of third-party information.
- The Tribunal also referenced the Supreme Court decision in CIT vs. M/s. Odeon Builders Pvt. Ltd., which underscored that disallowances based solely on third-party information without further scrutiny are not sustainable.

Conclusion:
The Tribunal concluded that the additions for alleged bogus purchases were not justified as they were based on unverified third-party information. The failure to provide the assessee the opportunity to cross-examine the witnesses further invalidated the additions. The Tribunal upheld the Judicial Member's view that the additions should be deleted, emphasizing the need for independent verification and adherence to principles of natural justice.

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