2023 (8) TMI 1660 - AT - Income Tax

Four percent addition on identified bogus purchases sustained; levy under section 115BBE quashed as purchases explained

ITAT MUMBAI - AT upheld a 4% addition on identified bogus purchases, following an identical finding in a prior year, thereby partly allowing the ... Unexplained expenditure u/s 69C - contention of the assessee before us, that disallowance in respect of bogus purchases should be restricted to the 4% of the quantum of bogus purchases - HELD THAT:- We find that in the assessment year 2008-09 [2023 (7) TMI 1600 - ITAT MUMBAI] also the addition made in the case of the assessee for obtaining accommodation entries from M/s Sparsh Export Pvt. Ltd. i.e. a group concern of Shri Rajendra Jain. The issue in dispute involved in the year under consideration is identical and therefore, following the finding of the Tribunal (supra), the addition to the extent of 4% of the bogus purchases is sustained. The grounds of appeal of the assessee are accordingly partly allowed. Addition u/s 69C and levy of tax as per the provisions of section 115BBE - AO has referred only difference in valuation of stock. It is not the case of the AO that any of the purchases were not found to be recorded in the books of accounts. The difference in the valuation as on the date of the survey as compared to the valuation at the time of purchase comprises in the profit and loss account at the time of recording sales. Therefore, the assessee was not required to offer the said profit during the year under consideration. Despite the assessee has enhanced value of the closing stock as on the date of the survey and included the same for the purpose of declaring profit. In such scenario, the said disclosure would be at maximum in the nature of business profit and it cannot be treated as unexplained expenditure to be taxed u/s 115BBE of the Act. The invoking of the said section by the Assessing Officer is without substantiating that any purchase of the assessee was in the nature of the unexplained purchases. The sources of the purchases by the assessee are duly explained and only assessee has offered the difference in valuation of the stock and said valuation was recorded by the assessee in the note found during the course of survey. In the facts and circumstances discussed above, we set aside the order of the CIT(A) on the issue in dispute and direct the AO to cancel the action of the taxing the undisclosed profit declared by the assessee u/s 115BBE. Grounds of appeal of the assessee are accordingly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the reassessment notice issued under section 148/147 was validly issued (adequacy/origin of reasons recorded and borrowed satisfaction) - (grounds not pressed by assessee). 2. Whether purchases from entities controlled by a known accommodation-entry operator can be treated as bogus and fully disallowed as unexplained expenditure under section 69C when sales and stock are not disputed. 3. If purchases are held to be bogus under section 69C, whether the entire purchase value is liable to be added or only the embedded profit (and, if so, the proper basis/percentage of such addition) - including application of precedent treatment in a closely related assessment year. 4. Whether reliance on statements of third parties (including statements recorded during search/survey or by investigation wing) without permitting cross-examination of those third parties violates principles of natural justice and vitiates additions based on those statements. 5. Whether an amount offered by the assessee as difference in valuation of closing stock (disclosed during survey and included in return) can be treated as unexplained investment/expenditure chargeable under section 69C and taxed under section 115BBE, or whether it is business income/profit not attractable to section 115BBE. --- ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reassessment notice (section 148/147) Legal framework: Reopening requires recording of reasons forming AO's satisfaction that income has escaped assessment; reasons must be the AO's own satisfaction and not a borrowed satisfaction. Precedent Treatment: Various authorities require that reasons be cogent and not merely borrowed; however, the assessee did not press these grounds before the Tribunal. Interpretation and reasoning: The Court notes these grounds were not pursued by the assessee and accordingly dismissed them as not pressed. No adjudication on merits of validity or borrowed satisfaction was undertaken by the Tribunal. Ratio vs. Obiter: Procedural - obiter in this judgment because no substantive determination was made on the adequacy/origin of reasons. Conclusions: Grounds challenging validity of reassessment under section 148/147 are dismissed as not pressed; no decision on the merits of recording of reasons or borrowed satisfaction rendered. --- Issue 2 - Treating purchases from entities controlled by an accommodation-entry operator as bogus purchases (section 69C) Legal framework: Section 69C treats investments/expenditure as unexplained where source not explained; tax authorities may disallow unexplained purchases when transactions are with paper companies/accommodation-entry providers and creditworthiness/genuineness is not proved. Precedent Treatment: Tribunal and Courts have held that mere banking channel payments or documentary formalities do not establish genuineness (cited: Kachwala Gems; Prashant (P); other authorities). The Tribunal and CIT(A) relied on the Supreme Court decision in NK Proteins Ltd. to uphold additions where transactions are shown to be accommodation entries. Interpretation and reasoning: The Tribunal examined search/post-search material, statements of the accommodation-entry operator admitting operation of paper concerns, failure of the assessee to prove creditworthiness/genuineness of the suppliers, absence of stock/operations at supplier premises and corroborative findings of the DDIT/AO. The Tribunal accepted the view that these surrounding circumstances and admissions rendered the supplier entities as paper concerns; therefore ledger confirmations and banking evidence lacked evidentiary value. Ratio vs. Obiter: Ratio - when suppliers are shown to be paper entities controlled by an accommodation-entry operator and the assessee fails to prove creditworthiness/genuineness, additions under section 69C are sustainable. Conclusions: Addition under section 69C in respect of purchases from supplier entities controlled and operated by an accommodation-entry operator is sustainable where the assessee fails to discharge onus of proving genuineness and creditworthiness and where there is supporting material from search/post-search and investigation. --- Issue 3 - Quantum of addition where purchases are held bogus: entire purchase value versus embedded profit (application of earlier Tribunal finding) Legal framework: Where purchases are treated as bogus but sales and stock are accepted, authorities have recognized that adding entire purchase value may be inappropriate; addition of suppressed profit embedded in purchases (estimated) may be the correct approach. Precedent Treatment: Tribunal in a closely related assessment year for the same assessee restricted addition to estimated suppressed profit at 4% (following reasoning in relevant High Court authority cited by the Tribunal). The CIT(A) in the present assessment upheld 100% addition relying on admissions and search material and NK Proteins; the Tribunal in this order invoked earlier Tribunal decision on an identical issue in a related year. Interpretation and reasoning: The Tribunal compared facts of the present year with those in the earlier Tribunal decision concerning the same accommodation-entry group and the same assessee. Because the issue and factual matrix were identical, the Tribunal followed its prior finding that only suppressed profit (estimated at 4%) should be added when sales and inventories are not disputed and the possibility of procuring goods from grey market exists. Ratio vs. Obiter: Ratio - where purchases are held bogus but sales and inventories as declared are accepted and no discrepancy in inventory exists, addition may be limited to the suppressed profit portion; prior identical finding of the Tribunal (4%) was followed. Conclusions: The Tribunal reduced the addition in the assessment year under appeal from 100% of purchases to 4% of the bogus purchases, following the Tribunal's earlier decision in the related assessment year on identical facts. --- Issue 4 - Reliance on third-party statements and right to cross-examination Legal framework: Principles of natural justice require hearing; however, right to cross-examination of third parties whose statements are recorded during search/survey/investigation is not absolute and depends on statutory regime and facts. Precedent Treatment: Authorities (cited: Nath International; State of I&K v. Bakshi Gulam Mohammad; Metal Products of India; Khujji @ Surendra Tiwari; Rameshwarlal Mali) establish that cross-examination is not an absolute right in tax proceedings and that AO may utilize information gathered by investigation wings even if not conclusive evidence under Evidence Act, provided material exists to base assessment. Interpretation and reasoning: The Tribunal accepted that the DDIT/AO had independent materials (search/post-search findings, failure of suppliers to establish business, absence of stock) in addition to statements; therefore absence of opportunity to cross-examine third parties did not vitiate the additions. The Tribunal held that right to cross-examination depends on circumstances and statute, and cited precedents to justify reliance on third-party statements and other corroborative material. Ratio vs. Obiter: Ratio - where independent corroborative material exists and the statutory regime does not mandate cross-examination, reliance on third-party statements without cross-examination does not automatically invalidate the assessment. Conclusions: Reliance on statements of third parties recorded during search/survey did not infringe natural justice given corroborative material; the absence of cross-examination did not warrant deletion of additions on those grounds. --- Issue 5 - Treatment of disclosed difference in valuation of closing stock found during survey: business income versus unexplained expenditure (section 69C and section 115BBE) Legal framework: Section 69C targets unexplained investments/expenditure where source not explained; section 115BBE prescribes specific tax consequences for income deemed to be unexplained and attracts a special tax treatment. Business profits disclosed and reflected in books generally taxed under normal heads unless source is unexplained and attributable to concealed income. Precedent Treatment: Authorities recognize that disclosure of additional profits/valuation adjustment by assessees during survey, if properly explained and reflected in accounts, may be business income and not necessarily unexplained investment. The AO's characterization must be consistent with whether purchases/sources are unexplained. Interpretation and reasoning: The Tribunal found no discrepancy in stock quantity - only valuation difference. The assessee had included the offered valuation difference in business profit in the return. AO recharacterized it as unexplained expenditure and invoked section 115BBE without establishing that any purchases themselves were unexplained or that sources were not explained. The Tribunal held that the difference in valuation, recorded by the assessee and included in profit computation, at most constituted business profit and could not be taxed under section 115BBE as unexplained expenditure absent evidence that the purchase sources were unexplained. Ratio vs. Obiter: Ratio - where stock quantity is not in dispute and the assessee discloses valuation difference in business income, such amount is in the nature of business profit and cannot be recast as unexplained expenditure under section 69C/115BBE unless sources of purchases are shown to be unexplained. Conclusions: The Tribunal set aside the CIT(A)'s confirmation of section 69C addition and application of section 115BBE in respect of the valuation difference of Rs.4,02,01,020/-, directing the AO to cancel taxation under section 115BBE and treating the amount consistent with business income as declared by the assessee.