ITO's ex-parte assessment under Section 144 set aside after assessee submitted required documents to transferring officer

ITAT Mumbai dismissed revenue's appeal against CIT(A)'s order setting aside ex-parte assessment u/s 144. The case was transferred from DCIT to ITO during proceedings. Despite assessee submitting required documents to DCIT, the receiving ITO/AO failed to examine these documents and completed assessment ex-parte. ITAT held the assessment invalid as assessee had complied with hearing notice and submitted necessary details. The transfer of case between officers did not absolve AO from examining previously filed documents. Revenue failed to controvert CIT(A)'s findings regarding sustainable purchases with proper evidence of source, delivery, consumption and end use.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(i) Whether the Learned Commissioner of Income Tax (Ld. CIT(A)) was justified in treating the assessment completed ex-parte under section 144 of the Income Tax Act as valid, despite the fact that the desired details called for were not submitted before the Assessing Officer (AO) who had jurisdiction over the caseRs.

(ii) Whether the Ld. CIT(A) erred in not deciding the appeal on the merits of the additions made by the AO, particularly ignoring the information received from the Sales Tax Department regarding alleged accommodation entries (bogus purchases) claimed by the assesseeRs.

(iii) Whether the Ld. CIT(A) was correct in dismissing the appeal without considering that the genuineness of the details submitted by the assessee during remand proceedings could not be ascertained due to non-availability of the parties involved and absence of questioning by the Ld. CIT(A)Rs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Validity of assessment completed ex-parte under section 144 despite submission of details

Legal Framework and Precedents: Section 144 of the Income Tax Act empowers the AO to complete assessment ex-parte if the assessee fails to comply with the notice issued under section 142(1) or does not produce evidence as required. However, the principle of natural justice and fair play requires that if the assessee has complied with the notice and furnished the required details, the AO ought not to complete the assessment ex-parte.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee had filed voluminous documents and details in response to notices issued by the DCIT, Circle 8(3)(2). These included purchase orders, invoices, delivery challans, lorry receipts, bank statements evidencing payments, and ledger accounts. However, the case was subsequently transferred to ITO Ward 11(3)(3), and the AO who completed the assessment under section 144 claimed that no details were furnished before him. The Ld. CIT(A) noted that either the documents filed before the earlier officer were not forwarded to the AO or were overlooked. The AO's failure to consider the documents was not attributable to the assessee. The AO also accepted the genuineness of the documents in his remand report. Hence, the Tribunal held that the assessment completed ex-parte under section 144 was invalid and bad in law.

Key Evidence and Findings: The AO's remand report explicitly stated that the documents furnished by the assessee were verified and found to be correct. The assessee had complied with notices and submitted all required evidence, including documentary proof of purchase, receipt and consumption of goods, and payment through banking channels.

Application of Law to Facts: Since the assessee complied with the notices and furnished the required details, the AO was not justified in completing the assessment ex-parte under section 144. The Tribunal emphasized that the AO's failure to consider the documents was procedural and not due to any fault of the assessee.

Treatment of Competing Arguments: The revenue contended that the AO was justified as the assessee's authorized representative appeared only once and no details were furnished before the AO. The Tribunal rejected this, noting the transfer of the case and failure to forward documents to the AO.

Conclusion: The assessment order passed under section 144 was held to be invalid and bad in law since the assessee had furnished the required details and evidence.

Issue (ii): Consideration of merits of additions based on information from Sales Tax Department regarding bogus purchases

Legal Framework and Precedents: The Income Tax authorities can reopen assessments under section 147 on the basis of information indicating escapement of income, including information from other departments such as the Sales Tax Department. However, the burden lies on the revenue to establish that the purchases are bogus and not genuine. The genuineness of purchases can be challenged only if the assessee fails to prove the source, delivery, and consumption of goods.

Court's Interpretation and Reasoning: The AO made additions under section 69C treating purchases from Riya Enterprises and Divine Packaging as accommodation entries based on information from the Sales Tax Department that these parties were involved in providing bogus accommodation bills. However, the assessee furnished detailed evidence to establish the genuineness of the purchases, including purchase orders, invoices, delivery challans, lorry receipts, bank payment proofs, and stock registers. The AO, upon remand, accepted the genuineness of these documents. The Tribunal noted that no adverse evidence was brought against the assessee's submissions.

Key Evidence and Findings: The assessee demonstrated that goods were actually received and consumed in the business operations, specifically in providing fire fighting systems to a reputed client. Payments were made through banking channels, and the transactions were reflected in the books of account. The AO's remand report corroborated the genuineness of the evidence.

Application of Law to Facts: The Tribunal found that the mere information from the Sales Tax Department labeling the parties as hawala or accommodation entry providers was insufficient to disallow the purchases when the assessee produced credible and verified evidence of genuineness. The Tribunal distinguished the facts from precedent cases where the assessee failed to prove genuineness.

Treatment of Competing Arguments: The revenue relied on the Sales Tax Department's investigation and a recent High Court decision where the assessee failed to prove genuineness. The Tribunal distinguished the facts, holding that the present assessee had successfully proved genuineness and source of purchases, which were accepted by the AO himself.

Conclusion: The additions made by the AO on account of alleged bogus purchases were not sustainable and were rightly deleted by the Ld. CIT(A).

Issue (iii): Treatment of non-availability of parties for verification and Ld. CIT(A)'s dismissal of appeal without questioning genuineness

Legal Framework and Precedents: Under section 133(6), the AO may issue notices to third parties for verification of transactions. Non-availability or failure of third parties to respond can be a factor in assessing genuineness but is not conclusive. The assessee's own evidence and books of account are relevant.

Court's Interpretation and Reasoning: The AO issued notices under section 133(6) to Riya Enterprises and Divine Packaging, which were returned undelivered with the remark "left." The assessee did not provide current addresses. However, the AO accepted the assessee's evidence as genuine in the remand report. The Ld. CIT(A) relied on the AO's acceptance and the assessee's documentary proof to hold that the genuineness was established. The Tribunal found no fault in this approach.

Key Evidence and Findings: The assessee's detailed documentary evidence was accepted by the AO. The non-availability of parties for verification was due to circumstances beyond the assessee's control and did not negate the evidence produced.

Application of Law to Facts: The Tribunal held that the absence of verification from third parties did not justify adverse inference against the assessee when the AO himself accepted the evidence. The Ld. CIT(A)'s dismissal of the appeal without further questioning was justified given the AO's acceptance of evidence.

Treatment of Competing Arguments: The revenue argued that failure to produce parties for verification should lead to adverse inference. The Tribunal rejected this, emphasizing the AO's acceptance of evidence and the assessee's compliance.

Conclusion: The Ld. CIT(A)'s approach in dismissing the appeal without further questioning was appropriate and consistent with the facts and law.

3. SIGNIFICANT HOLDINGS

"The AO was not justified in completing the assessment ex-parte under section 144 as the assessee duly complied with the hearing notice and submitted the required details asked for. It is not the assessee's fault that such documents were filed before one officer but assessment was completed by another officer without examining such documents. Therefore, the assessment order passed under section 144 is invalid and bad in law."

"The AO accepted the evidences furnished by the assessee as genuine and found to be correct after verification during remand proceedings. No adverse evidence was brought against the genuineness of purchases. The mere information from the Sales Tax Department about accommodation entries is insufficient to disallow the purchases when the assessee has proved the source, delivery, and consumption of goods."

"Non-availability of parties for verification under section 133(6) notices does not automatically lead to adverse inference against the assessee when the AO himself accepts the evidence produced by the assessee."

Core principles established include the requirement that assessment under section 144 cannot be completed ex-parte if the assessee has complied with notices and furnished documents, the burden on revenue to prove bogus purchases beyond mere information from other departments, and the acceptance of evidence by the AO is binding unless rebutted by adverse material.

Final determinations:

- The assessment order under section 144 is quashed as invalid.

- Additions made on account of alleged bogus purchases are deleted.

- The appeal of the revenue is dismissed.

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