2020 (2) TMI 1745 - AT - Income Tax

Additions for Bogus Purchases Limited to 5% Without Rejecting Books; Interest Under Sections 234A-D Upheld

M/s. Shashvat Jewels Pvt. Ltd. Versus Deputy Commissioner of Income-Tax, Circle-2 (1) (2) Surat

M/s. Shashvat Jewels Pvt. Ltd. Versus Deputy Commissioner of Income-Tax, Circle-2 (1) (2) Surat - TMI 1. ISSUES:1. Whether purchases reported in books can be treated as 'unexplained cash credit under section 68' where suppliers do not appear for verification and investigative material alleges provision of 'bogus accommodation entries'.2. Whether a statement recorded under section 132(4) may be treated as evidence and the extent to which failure to afford cross-examination of such declarants affects admissibility/weight.3. Whether service attempts (summons under section 131, notice under section 133(6), ITI/inspector reports of locked premises) and non-production/non-traceability of suppliers justify drawing adverse inference as to existence/identity of suppliers and genuineness of transactions.4. Whether the assessing authority may disallow the entire amount of purchases treated as bogus when corresponding sales and stock records are not questioned, or whether a limited estimation of bogus purchases is appropriate.5. Whether charging of interest under sections 234A, 234B, 234C and 234D is mandatory.6. Whether an appellate challenge to mere initiation of penalty proceedings under section 271(1)(c) is maintainable at the assessment/appeal stage (i.e., whether such a ground is premature).2. RULINGS / HOLDINGS:1. The 'unexplained cash credit under section 68' characterization of purchases was sustained to the extent that the assessee failed to prove existence/identity of the suppliers and investigative material indicated 'bogus accommodation entries', but the AO was not justified in disallowing 100% of purchases where corresponding sales/stock were not doubted.2. The tribunal held that the 'statement recorded under section 132 (4) was an evidence by itself' and a subsequent retraction without proof of coercion or threat is an afterthought; further, it is 'not imperative in each case to provide for cross-examination'.3. Non-traceability of suppliers, service attempts (including summons and inspector reports) and non-compliance by the suppliers warranted an adverse inference that the suppliers were 'paper concern[s]' and that the transactions lacked demonstrable genuineness.4. In view of undisputed sales/stock records and industry practice, the addition was restricted by estimation rather than treating the entire purchases as bogus; addition corresponding to 5% of the disputed purchases was sustained - resulting in an addition of Rs. 1,87,645 (5% of Rs. 37,52,890) and deletion of Rs. 35,65,245.5. Charging of interest under sections 234A, 234B, 234C and 234D was held to be mandatory; the assessee is entitled to consequential relief, if any, arising on giving effect to the order.6. A ground challenging mere initiation of penalty proceedings under section 271(1)(c) is premature and not maintainable at this stage.3. RATIONALE:1. Statutory and evidentiary framework applied: assessment power under section 68 (treatment of unexplained credits), procedural summons powers under sections 131 and 133(6), and admissibility of statements recorded under section 132(4). Investigative findings indicating a modus operandi of providing 'bogus accommodation entries' and admissions in search-recorded statements were given evidentiary weight.2. On admissibility and weight of statements: the tribunal treated section 132(4) statements as material evidence; absence of a demonstrated inducement, coercion or threat in retraction reduced the retraction's probative value, and the tribunal endorsed that it is 'not imperative in each case to provide for cross-examination'.3. On evidential sufficiency of service/inspection: repeated opportunities to produce suppliers, reliance on confirmatory documents notwithstanding, and inspector/ITI reports of locked premises supported an adverse inference that suppliers were non-existent or 'paper concern[s]' engaged in a 'make-believe arrangement'.4. On proportionality of disallowance: where sales and stock records were not questioned, the tribunal adopted an estimation approach rather than a blanket disallowance; it followed the jurisdictional principle recognizing an average/industry gross profit benchmark (applied here at 5%) to quantify the reasonable extent of bogus purchases rather than disallowing the entire purchase amount-reflecting the premise that 'There cannot be any sales without making purchases.'5. On interest and penalty: the tribunal applied the mandatory character of statutory interest provisions, granting consequential relief as appropriate, and held that appeals against mere initiation of penalty proceedings are premature until penalty is levied.