2015 (10) TMI 2872 - AT - Income Tax

Section 69C deletion: sales-tax default of seller alone cannot substitute for proof of non-genuine purchases

Income tax Officer-14 (1) (1), Mumbai Versus Shri Nikhil A. Jhaveri

ITAT MUMBAI - AT held the AO wrongly invoked s.69C of the IT Act solely because the seller was declared a defaulter under the MVAT Act. The tribunal ... Addition u/s 69C - Sales tax department had declared SE a defaulter under MVAT Act - that the assessee had claimed that he had sold gold jewellery to PSJ that was purchased from SE, that the AO had made addition u/s.69C - HELD THAT:- AO was not justified in invoking the provisions of section 69C of the Act just because SE was declared defaulter by the Sales tax department. We hold that default by a person under MVAT Act cannot be a base for making addition under Income tax Act in case of another person until and unless documentary evidence is not brought on record in the income tax proceedings proving the transaction was non-geninue. SE did not deposit tax in the treasury of State Government and later on the assessee had paid the required sum, as he had taken credit under MVAT Act. Section 69C of the Act is an independent section and can be invoked if certain conditions are fulfilled. AO had ignored the documentary and corroborative evidences produced by the assessee in form of bank statements, declaration made under MVAT Act, TIN No., stock registering containing quantative details. Except referring to the information received from the sales tax department the AO had not carried out any independent inquiry. If the evidences produced by the assessee are weighed against the information of the Sales tax department, it becomes clear that piece of the information was too light. Maxium it was a starting point for further investigation. But, the AO stopped at the beginning and made an addition though the assessee had produced reliable evidence in his favour. Secondly, in our opinion the FAA had rightly opined that without purchases there cannot be any sale. Thus, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his order, we decide the effective ground of appeal against the AO. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in invoking the provisions of section 69C of the Income-tax Act to make additions in the hands of the assessee solely because the supplier was declared a defaulter under the MVAT Act. 2. Whether documentary and corroborative evidence produced by the assessee (tax invoices under MVAT, bank statements showing account-payee cheques, TIN, stock registers with quantitative details, declarations) sufficiently rebut the AO's claim of non-genuine purchases and preclude addition under section 69C. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legitimacy of invoking section 69C on basis of supplier's MVAT default Legal framework: Section 69C is an independent provision allowing income tax additions where undisclosed money/assets/credits are found and specified conditions are satisfied. An addition under section 69C requires positive satisfaction of its statutory conditions on the facts of the income-tax proceedings. Precedent Treatment: No specific judicial precedent was invoked or relied upon in the decision; the Tribunal examined statutory scope and factual matrix. Interpretation and reasoning: The Tribunal found that a supplier's default under the MVAT Act (i.e., being declared a defaulter by the Sales Tax department) is not, by itself, a legally sufficient or automatic basis for making additions under section 69C against a purchaser. The information from the Sales Tax department was characterized as a starting point for further inquiry, not as conclusive proof of the non-genuineness of transactions in income-tax proceedings. The AO did not undertake independent inquiries to verify or disprove the assessee's transactions beyond relying on the sales-tax information. Ratio vs. Obiter: Ratio - A supplier's tax default under MVAT cannot, without additional documentary or investigative proof in the income-tax record, justify additions under section 69C against a purchaser. The Tribunal's statement that sales-tax information is only a starting point for investigation is part of the operative reasoning. Conclusions: The invocation of section 69C by the AO solely on the basis of the supplier's MVAT default was unwarranted. The AO's action in stopping inquiry at the initial information stage and making additions was legally incorrect. Issue 2 - Sufficiency of assessee's documentary and corroborative evidence to rebut allegation of non-genuine purchases Legal framework: When an assessing authority alleges undisclosed income or unexplained credits, the assessee is entitled to place on record documents and corroborative material; the AO must examine such evidence and, if necessary, conduct independent inquiries before making additions under section 69C. Precedent Treatment: No prior cases were expressly followed, distinguished, or overruled in the text; the Tribunal assessed the evidence on established principles of proof and investigation required before making additions. Interpretation and reasoning: The Tribunal examined the materials produced: MVAT tax invoices containing required particulars and signatures, bank statements showing payments by account-payee cheques, TIN details, stock registers with quantitative details reconciling purchases and sales, and declarations under MVAT. The FAA (First Appellate Authority) had directed a remand report; the AO's remand report did not counter the documentary evidence or point to defects in quantity reconciliation; no books of account were rejected and no independent inquiry was conducted to establish non-genuineness. Given these factors, the Tribunal concluded the documentary evidence was reliable and entitled the assessee to benefit. Ratio vs. Obiter: Ratio - Properly authenticated MVAT invoices, bank evidence of payments, and stock/sales reconciliation, when uncontroverted and unexplained by independent inquiry, negate the basis for additions under section 69C. Obiter - Characterization of sales-tax information as 'too light' to outweigh documentary evidence serves as commentary supporting the ratio. Conclusions: The assessee's documentary and corroborative evidence sufficiently rebutted the AO's allegation of non-genuine purchases. In absence of independent enquiries or pointed defects, the AO could not legitimately make additions under section 69C. Cross-references and combined conclusion The two issues are interrelated: (a) the supplier's MVAT default cannot substitute for a full factual basis under the Income-tax Act for additions under section 69C; and (b) where the assessee produces contemporaneous MVAT invoices, bank payment evidence and stock/sales reconciliation that remain unrefuted by independent inquiry, the AO cannot make additions. The Tribunal therefore upheld the appellate authority's decision allowing the assessee's claim and dismissed the AO's appeal.