Third-party statements cannot sustain bogus purchase additions, and service-linked bonus to director-employees is not dividend substitution.

Purchase additions based solely on an untested third-party statement could not be sustained where the assessee produced purchase bills, transport documents and bank records, and no independent enquiry was made or cross-examination provided; the alleged bogus purchase addition was therefore deleted. Bonus paid to director-employees was also not disallowable under section 36(1)(ii) because it was authorised by board resolution, linked to services rendered, separately taxed and not shown to be a disguised dividend. The commentary states that contractual remuneration for services is distinct from dividend or profit distribution, and that the Revenue failed to establish any tax-avoidance device.

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Issues: (i) Whether the additions towards alleged bogus purchases from a supplier could be sustained merely on the basis of a third-party statement without independent enquiry and without furnishing cross-examination to the assessee; (ii) Whether performance bonus paid to director-employees was disallowable under section 36(1)(ii) of the Income-tax Act, 1961 as being in lieu of dividend.

Issue (i): Whether the additions towards alleged bogus purchases from a supplier could be sustained merely on the basis of a third-party statement without independent enquiry and without furnishing cross-examination to the assessee.

Analysis: The assessee produced purchase bills, transport documents and bank records to show that the payments were made through banking channels. The adverse material relied upon by the Assessing Officer consisted mainly of a third-party statement alleging accommodation entries. No independent enquiry was made to discredit the documentary evidence, and the statement was not confronted to the assessee or tested by cross-examination. On the facts, the purchase transactions were supported by contemporaneous records and the alleged irregularities in some transport documents were not enough to displace the primary evidence.

Conclusion: The addition on account of alleged bogus purchases was not sustainable and was rightly deleted; the finding is in favour of the assessee.

Issue (ii): Whether performance bonus paid to director-employees was disallowable under section 36(1)(ii) of the Income-tax Act, 1961 as being in lieu of dividend.

Analysis: The bonus payment was authorised by a board resolution and was linked to services rendered and increased responsibilities, not to shareholding. The directors were separately remunerated, tax was deducted at source, and the recipients had offered the amounts to tax at the maximum marginal rate. Dividend and bonus operate on different legal bases, and dividend is distributable to shareholders in accordance with shareholding, whereas the impugned payment was contractual remuneration for services. The Revenue did not establish that the payment was a disguised distribution of profits or a tax-avoidance device.

Conclusion: The disallowance under section 36(1)(ii) was not justified and was rightly deleted; the finding is in favour of the assessee.

Final Conclusion: The common reasoning adopted by the appellate authority was upheld, and all the Revenue appeals failed.

Ratio Decidendi: A purchase addition based only on an untested third-party statement cannot stand when the assessee has produced primary documentary evidence and no independent verification is undertaken; likewise, bonus paid to director-employees under a contractual and service-related arrangement is not disallowable under section 36(1)(ii) merely because the recipients are shareholders, unless it is shown to be a substitute for dividend or profit distribution.

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