2025 (5) TMI 741 - AT - Income Tax

CIT(A) must give AO opportunity to comment on additional evidence before granting relief under Rule 46A

Income Tax Officer, 19 (3) (1) Versus Mahendra Hemraj Jain, Mumbai

ITAT Mumbai set aside CIT(A)'s order that admitted additional evidence and granted relief to assessee regarding bogus purchases from hawala traders. The ... Bogus purchases from Hawala Traders/Parties - CIT(A) admitted the additional evidence and allowed the relief to the assessee - HELD THAT:- AO should also be provided a fair opportunity for commenting on the additional evidence filed by the assessee in terms of rule 46A of the income Tax rules, 1962. Accordingly, we set aside the order of the Ld. CIT(A) on the issue and dispute and restore the matter back to him for deciding in accordance with law after providing fair and reasonable opportunities of being heard to both the parties. The grounds of the appeal of the Revenue are accordingly allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:Whether the Commissioner of Income-tax (Appeals) erred in deleting the addition of Rs. 48,43,166/- made on account of alleged bogus purchases from three parties identified as hawala traders, despite credible information from the Sales Tax Department and DGIT (Inv.) Mumbai indicating these parties were involved in providing accommodation entries through bogus bills.Whether the deletion of the addition ignored the fact that notices under section 133(6) of the Income Tax Act sent to these parties were returned unserved due to non-existent addresses, thereby undermining the genuineness of the alleged purchases.Whether the deletion disregarded the assessee's failure to produce delivery challans, transport bills, invoices, or any substantive evidence to establish the authenticity of the purchases from the three parties.Whether the CIT(A) failed to consider binding judicial precedents, including the Supreme Court decision in N.K. Proteins Ltd. v. Dy. CIT, which holds that purchases from bogus suppliers/hawala traders are liable to be disallowed in entirety.Whether the CIT(A) overlooked other relevant judicial decisions such as the ITAT Ahmedabad ruling in Swetambar Steels Ltd., which upheld disallowance of bogus purchases from similar parties, and the precedent in Shri Ganesh Rice Mills v. CIT, where entire bogus purchases were disallowed under section 145(3) of the Act.Whether the appeal by the Revenue is maintainable despite the tax effect being below the prescribed monetary limit, given the CBDT circular exception relating to accommodation entries and bogus purchases.2. ISSUE-WISE DETAILED ANALYSISIssue 1 & 2: Legitimacy of Deletion of Addition on Account of Bogus Purchases from Hawala TradersRelevant legal framework and precedents: The Income Tax Act empowers the Assessing Officer (AO) to disallow expenditures or purchases if they are found to be bogus or accommodation entries, as per judicial precedents including the Supreme Court's ruling in N.K. Proteins Ltd. v. Dy. CIT, which firmly establishes that purchases from bogus suppliers are not allowable for deduction.Court's interpretation and reasoning: The Tribunal noted that the AO had made the addition based on credible information from the Maharashtra Sales Tax Department and DGIT (Inv.) Mumbai, which declared the three parties as hawala traders not conducting genuine business. The AO's action was thus grounded in verified intelligence. However, the CIT(A) deleted the addition after admitting additional evidence filed by the assessee, despite the AO not submitting a remand report in response to the CIT(A)'s call.Key evidence and findings: The AO's reliance on official information from tax authorities and the failure of the parties to respond to notices under section 133(6) were significant factors indicating the non-genuineness of the parties. The assessee's failure to produce delivery challans or transport documents further weakened the claim of genuine purchases.Application of law to facts: The Tribunal found that the CIT(A) erred in deleting the addition without adequately considering the credible information and the absence of evidence from the assessee to prove genuineness. The deletion was premature in the absence of a remand report from the AO, who had not been given a proper opportunity to comment on the additional evidence.Treatment of competing arguments: The Revenue argued that the CIT(A) ignored the credible information and binding precedents, while the assessee relied on additional evidence and the non-submission of remand report as justification for deletion. The Tribunal balanced these by emphasizing the need for fair opportunity to the AO before deletion of addition.Conclusions: The Tribunal held that the matter required reconsideration by the CIT(A) after providing the AO a fair chance to respond, thus setting aside the deletion and restoring the matter.Issue 3 & 4: Non-Compliance with Notices and Lack of Documentary EvidenceRelevant legal framework and precedents: Section 133(6) empowers the AO to summon persons for information or documents. Failure to respond or non-existence of addresses is a strong indicator of non-genuineness. Judicial precedents emphasize the necessity of documentary proof such as delivery challans and transport bills to establish genuineness of purchases.Court's interpretation and reasoning: The Tribunal observed that notices to the three parties were returned unserved, indicating that the addresses were fictitious and the parties were not genuine. The assessee could not produce any supporting documents for the purchases, which is critical to substantiate the claim.Key evidence and findings: The returned notices and absence of delivery or transport documents were significant evidentiary gaps.Application of law to facts: The Tribunal found that these factors supported the AO's addition and that the CIT(A) erred in ignoring these facts.Treatment of competing arguments: The assessee's additional evidence was admitted by the CIT(A), but without AO's input, the Tribunal found this insufficient to negate the credible evidence against the genuineness.Conclusions: The Tribunal directed reconsideration after giving AO a chance to comment, implying these issues remain unresolved.Issue 5 & 6: Applicability of Binding Judicial PrecedentsRelevant legal framework and precedents: The Supreme Court ruling in N.K. Proteins Ltd. v. Dy. CIT unequivocally holds that purchases from bogus suppliers/hawala traders are liable to be disallowed. Similarly, ITAT Ahmedabad's decision in Swetambar Steels Ltd. confirmed disallowance of such bogus purchases, with subsequent appeals dismissed by higher courts.Court's interpretation and reasoning: The Tribunal noted that the CIT(A) failed to consider these authoritative decisions, which constitute binding precedents on the issue.Key evidence and findings: The Revenue's reliance on these decisions was supported by the facts of the case, which mirrored the judicially scrutinized scenarios.Application of law to facts: The Tribunal emphasized that the CIT(A) ought to have applied these precedents in denying relief to the assessee.Treatment of competing arguments: The assessee did not dispute the precedents but relied on additional evidence to establish genuineness, which the Tribunal found insufficient without AO's input.Conclusions: The Tribunal held that the CIT(A)'s failure to consider binding precedents was an error requiring reconsideration.Issue 7 & 8: Application of Section 145(3) and Related PrecedentsRelevant legal framework and precedents: Section 145(3) allows the AO to adopt a particular method of accounting if the method regularly employed is not in accordance with the law or the income cannot be computed accurately. Judicial decisions such as Shri Ganesh Rice Mills v. CIT have upheld disallowance of entire bogus purchases under this provision.Court's interpretation and reasoning: The Tribunal acknowledged that once purchases are found bogus, the AO has the mandate to disallow the entire amount under section 145(3).Key evidence and findings: The information from tax authorities and lack of evidence from the assessee justified invocation of this provision.Application of law to facts: The Tribunal found that the CIT(A) did not consider this legal position adequately.Treatment of competing arguments: The assessee's reliance on additional evidence without AO's comment was insufficient to override the statutory mandate.Conclusions: The Tribunal directed reconsideration with proper application of section 145(3) principles.Issue 9: Maintainability of Revenue's Appeal Despite Tax Effect Below Monetary LimitRelevant legal framework: CBDT Circular No. 05 of 2024 dated 15.03.2024 prescribes monetary limits for filing appeals, but includes exceptions for cases involving accommodation entries and bogus purchases where merit-based decisions are required irrespective of tax effect.Court's interpretation and reasoning: The Tribunal accepted that the appeal is maintainable under the exception clause 3.1(c) of the CBDT circular.Conclusions: The appeal was rightly admitted for adjudication.Overall Procedural Issue: Non-Submission of Remand Report by AO and Fair OpportunityThe CIT(A) admitted additional evidence filed by the assessee but did not receive a remand report from the AO despite reminders. The Tribunal emphasized the principle of natural justice and fair opportunity, holding that the AO must be given a reasonable chance to comment on additional evidence before a final order is passed. Accordingly, the Tribunal set aside the CIT(A) order on the issue and restored the matter for fresh consideration after hearing both parties.3. SIGNIFICANT HOLDINGS'In our opinion, the Ld. assessing officer should also be provided a fair opportunity for commenting on the additional evidence filed by the assessee in terms of rule 46A of the Income Tax rules, 1962. Accordingly, we set aside the order of the Ld. CIT(A) on the issue and dispute and restore the matter back to him for deciding in accordance with law after providing fair and reasonable opportunities of being heard to both the parties.'Core principles established include:The necessity of credible information from tax authorities and non-compliance with statutory notices as strong indicators of bogus purchases.The binding nature of judicial precedents disallowing purchases from bogus/hawala traders.The importance of documentary evidence such as delivery challans and transport bills to establish genuineness of purchases.The applicability of section 145(3) for disallowance of bogus purchases when the regular method of accounting is not reliable.The requirement of providing fair opportunity to the AO to comment on additional evidence before appellate orders.The maintainability of appeals by Revenue in cases involving accommodation entries irrespective of tax effect limits under CBDT circulars.Final determinations on each issue were that the CIT(A)'s deletion of addition was premature and erroneous without AO's input and proper application of law and precedents. The matter was remanded for fresh adjudication in accordance with law after hearing both parties.