2025 (3) TMI 1369 - AT - Income Tax

Additions for bogus purchases invalid without proper inquiry and cross-examination opportunity for assessee

ITAT Hyderabad ruled in favor of the assessee on two issues. First, regarding bogus purchases, the tribunal held that additions cannot be made solely ... Bogus purchases - Shri Shailabh Khandelwal/third party in his statement recorded u/s 131 has admitted that the above company provide accommodation entries on commission basis - HELD THAT:- In the present case, the AO made additions towards purchases, merely, on the basis of statement of third party i.e. Shri Shailabh Khandelwal, without providing his statement to the assessee for its rebuttal and also cross examination contrary to the settled principle of law. Therefore, in our considered view, unless the statement is given to the assessee, no additions can be made on the basis of third party statement. Purchases made by the assessee from M/s Jagannatha Agro Ltd. - As based on few instances of irregularity in transport bills, genuineness of purchases cannot be doubted, when the assessee has furnished every bill for purchases and payment made through proper banking channel. Therefore, we are of the considered view, that the AO erred in making additions towards purchases from M/s Jagannath Agro Ltd. as bogus in nature, without conducting further enquiry and also without bringing further material on record to establish that the payment made against purchases was received back in cash by the assessee. This principle is supported by the decision of Vaman International (P.) Ltd. [2020 (2) TMI 464 - BOMBAY HIGH COURT] wherein, on similar facts, the Hon’ble High Court held that, the AO solely relying on the statement of a third party made addition on account of bogus purchases, without any inquiry made by him to bring on record any evidence to prove his allegation of bogus purchases. As genuineness of purchases cannot be doubted only on the basis of third party statements, unless independent enquiry is conducted to ascertain true nature of transactions, in light of various evidences filed by the assessee. In the present case, since the assessee has filed various evidences to prove the genuineness of the purchases, in our considered view, the AO is erred in making addition only on the basis of statement of third party. Decided in favour of assessee. Treatment to payment as bonus - assessee company had made bonus payment to the Directors and claimed deduction u/s 36(1)(ii) - although the assessee contends that payment of bonus to the Directors is for the services rendered, but the fact remains that the payment is distribution of dividend, which falls under the provisions of 36(1)(ii), therefore, disallowed the bonus payment - HELD THAT:- If we go by the rate of tax payable by the appellant company on this income and the rate of taxes paid by the directors on their total income, there is no difference in taxes paid by the Directors on the performance bonus paid by the appellant company. Had the company has not paid bonus to the employees and paid taxes on its own as its profits, the assessee would have paid 30% tax on such bonus payment. Since the Directors have paid maximum marginal rate of tax on their income, which includes performance bonus received by the appellant company, in our considered view, when there is no loss of taxes, it can at best be said that it is tax neutral and there is no loss of revenue to the Government. Therefore, once the assessee has proved the payment of bonus to the directors as part of remuneration in terms of contractual obligation between the parties and further, there is no loss of revenue, in our considered view, the AO cannot bring the said payment within the provisions of section 36(1)(ii). In our considered view, the provisions of section 36(1)(ii) will come into play, where assessee makes payment to any employee, as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission. Since the assessee has paid performance bonus for the services rendered to the Directors, in our considered view, the provisions of section 36(1)(ii) cannot be pressed into service. CIT(A), after considering the relevant facts has rightly directed the AO to delete the additions made towards performance bonus. Thus, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the Revenue. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal were:1. Whether the purchases made by the assessee from M/s Jagannath Agro Ltd. for the assessment years 2014-15 and 2015-16 were genuine or bogus.2. Whether the payment of Rs. 25,00,00,000/- as a bonus to the directors for the assessment year 2018-19 was allowable under Section 36(1)(ii) of the Income Tax Act, 1961, or if it was a distribution of profit disguised as a bonus to avoid taxes.ISSUE-WISE DETAILED ANALYSIS1. Genuineness of Purchases from M/s Jagannath Agro Ltd.Relevant legal framework and precedents: The legal framework involved the provisions of the Income Tax Act, particularly the assessment and reassessment procedures under Sections 147 and 148, and the principles of natural justice requiring the assessee to be given an opportunity to cross-examine any third-party statements relied upon by the Assessing Officer (AO). Precedents from various High Courts, including the Bombay High Court and the Delhi High Court, were considered, which emphasized the need for independent inquiry by the AO beyond mere reliance on third-party statements.Court's interpretation and reasoning: The Tribunal found that the AO's reliance on the statement of Shri Shailabh Khandelwal, without providing the assessee an opportunity for cross-examination, was insufficient to deem the purchases as bogus. The Tribunal noted that the assessee had provided substantial documentary evidence to support the genuineness of the purchases.Key evidence and findings: The assessee submitted purchase bills, transport receipts, and bank statements evidencing payments through banking channels. The Tribunal observed that the AO did not conduct further inquiries to substantiate the claim of bogus purchases.Application of law to facts: The Tribunal applied the principles of natural justice and the precedents requiring independent verification by the AO. It concluded that the AO's addition based solely on third-party statements, without further inquiry or evidence, was not justified.Treatment of competing arguments: The Tribunal considered the Revenue's argument about the adverse statement from Shri Khandelwal but emphasized the lack of direct evidence linking the assessee to bogus transactions.Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO, finding the purchases genuine based on the evidence provided by the assessee.2. Allowability of Bonus Payment to DirectorsRelevant legal framework and precedents: The issue revolved around Section 36(1)(ii) of the Income Tax Act, which disallows deductions for payments made as bonuses or commissions if such payments would have been payable as dividends. The Tribunal referred to judicial precedents, including decisions from the Delhi High Court and the ITAT Delhi, which clarified the distinction between bonuses and dividends.Court's interpretation and reasoning: The Tribunal agreed with the CIT(A) that the bonus payments were part of the directors' remuneration for services rendered and not a distribution of profits. It noted that the payments were authorized by a Board Resolution and were not linked to the directors' shareholding.Key evidence and findings: The assessee provided a Board Resolution authorizing the bonus, evidence of TDS deductions, and proof that the directors paid taxes at the maximum marginal rate. The Tribunal found no evidence of tax evasion or that the payments were in lieu of dividends.Application of law to facts: The Tribunal applied the principles from relevant precedents, emphasizing the contractual nature of the bonus payments and the lack of evidence suggesting they were disguised dividends.Treatment of competing arguments: The Tribunal addressed the Revenue's contention that the payments were a device for tax evasion by highlighting the tax neutrality of the transactions and the lack of evidence supporting the Revenue's claim.Conclusions: The Tribunal upheld the CIT(A)'s decision to allow the deduction of the bonus payments, finding them to be legitimate business expenses.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: The Tribunal emphasized, 'The AO cannot make additions merely on the basis of third-party statements without further inquiry or providing the assessee an opportunity for cross-examination.'Core principles established: The Tribunal reaffirmed the necessity for independent verification by the AO when relying on third-party statements and the importance of distinguishing between bonus payments and dividend distributions under Section 36(1)(ii).Final determinations on each issue: The Tribunal dismissed the Revenue's appeals for both the genuineness of purchases and the allowability of bonus payments, upholding the CIT(A)'s orders in favor of the assessee.