2025 (8) TMI 1332 - AT - Income Tax

Revenue appeal allowed; addition under Section 69C set aside; matter returned for GST-ITC reconciliation and supplier inquiry

Income Tax Officer, Ward – 1 (3) (1), Ahmedabad Versus Ramlal Manekchand HUF

ITAT AHMEDABAD allowed the revenue's appeal for statistical purposes and set aside the addition under s. 69C relating to unexplained purchases from five ... Addition u/s 69C - unexplained purchases - creditworthiness and genuineness of the two suppliers was not established - status of input text credit (ITC) claimed under the GST regime in respect of purchases made from these five parties HELD THAT:- Disallowance was made by the AO considering the non-availability of the parties, serious concern regarding the identity of the supplier, credibility of the supporting documents and in the absence of evidence establishing the actual delivery of the goods and also the commercial substance of the transactions. In the course of hearing, we enquired from the AR about the status of input text credit (ITC) claimed under the GST regime in respect of purchases made from these five parties. AR was unable to elucidate about the input credit in respect of these transactions under the GST regime. Neither the status of GST return of these five suppliers was clarified, so as to treat the transactions made with them as genuine. On the purchases from these five parties, GST component @ 3% was involved. It remains unexamined whether this GST credit was claimed and, if so, whether it was accepted or rejected by the GST Authorities. This is a material aspect which has a direct bearing on the genuineness of the underlying transactions. This aspect was neither examined by the Assessing Officer nor by the Ld. CIT(A). From the stand point of commercial rationality, it was required to be examined as to how the assessee had reconciled or sustained the economic burden of ITC loss, if the transaction to the extent of Rs. 25,17,23,938/- was fictitious. We deem it fit and proper to restore the matter to the file of Assessing Officer with a direction to reconcile the ITC claimed under the GST law in respect of bogus purchase from the five parties which were held as non-genuine in the course of original assessment. For this purpose, the AO may obtain the information from the GST authorities about their GST returns and the status of ITC claims, if so required. Appeal of the Revenue is allowed for statistical purpose ISSUES PRESENTED AND CONSIDERED 1. Whether the appellate authority was justified in deleting additions made under Section 69C of the Income Tax Act for alleged unexplained purchases where the creditworthiness, identity and genuineness of suppliers were not established. 2. Whether the appellate authority was justified in deleting additions treated as income arising from purchases from parties found untraceable or non-genuine where evidential defects existed. 3. Whether reconciliation of Input Tax Credit (ITC) under the GST regime and related GST returns of the suppliers is a material aspect that must be examined to determine the genuineness of purchases and whether the matter should be restored to the Assessing Officer for such examination and further enquiry (including suppliers' bank accounts and correlating proceedings against suppliers). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deletion of addition under Section 69C for purchases from suppliers whose business activity/turnover was not commensurate with purchases Legal framework: Section 69C permits treating certain unexplained credits/expenditure as income where the assessee fails to explain the source; Assessing Officer may make additions where identity, creditworthiness or genuineness of transactions are not established. Administrative/verificatory steps (e.g., notices under Section 133(6), physical verification by Designated Verification Units) are relevant evidentiary sources. Precedent treatment: No judicial precedents were cited in the judgment; therefore, precedent treatment is not applied in the Court's reasoning. Interpretation and reasoning: The Tribunal found that the Assessing Officer relied on adverse findings from DVU physical enquiries - suppliers engaged in unrelated low-scale occupations and having turnovers not commensurate with amounts shown by the assessee - to make large additions under Section 69C. The appellate authority (CIT(A)) confined its review to bills, invoices, ledger confirmations and bank statements and did not address the adverse evidences collected by DVU regarding identity/creditworthiness. The Tribunal emphasized that the adverse findings are material and required consideration; deletion of additions without dealing with those adverse findings was insufficient. Ratio vs. Obiter: Ratio - where the AO records adverse material on identity/creditworthiness derived from independent physical verification, the appellate authority cannot properly delete additions under Section 69C solely on the basis of invoices, ledger confirmations and bank entries without addressing and reconciling such adverse evidence. Obiter - none beyond observations about evidentiary sufficiency. Conclusion: Deletion by the appellate authority was not sustainable without addressing adverse DVU findings; matter restored to Assessing Officer for further enquiry and reasoned decision on genuineness, including examination of additional material as directed. Issue 2 - Deletion of addition on account of purchases from parties found untraceable / treated as non-genuine Legal framework: Where suppliers are not traceable or where there are serious doubts about the identity/existence of suppliers, Assessing Officer may treat purchases as non-genuine and make additions; corroborative evidence (delivery proofs, commercial substance, third-party confirmations, GST returns/ITC) bears on genuineness. Precedent treatment: No precedents were relied upon in the order; therefore, none followed/distinguished/overruled. Interpretation and reasoning: The Tribunal observed that three suppliers were found untraceable by DVU and that the AO treated 10% of purchases from them as additional profit while two other suppliers were found to have occupations inconsistent with the volume of purchases. The CIT(A) deleted additions relying on invoices, ledgers and bank payments but failed to address (a) non-traceability findings, (b) absence of evidence of actual delivery/commercial substance, and (c) whether GST Input Tax Credit in respect of these purchases was claimed or accepted. The Tribunal held these are material lacunae that could not be ignored. Ratio vs. Obiter: Ratio - where suppliers are found untraceable or independent enquiries raise serious doubts about the commercial substance of transactions, appellate relief cannot be granted without thorough examination of delivery evidence, corroborative commercial records and GST/ITC implications. Obiter - the adequacy of ledger confirmations and bank payments as sole proof of genuineness is questioned. Conclusion: Deletion of additions in respect of purchases from untraceable/non-genuine parties was set aside; the matter remitted to Assessing Officer to examine GST/ITC status, suppliers' bank accounts, and related proceedings to determine genuineness and correct tax treatment, with opportunity to the assessee to be heard. Issue 3 - Necessity and materiality of reconciling Input Tax Credit (ITC) and GST returns in assessing genuineness of purchases Legal framework: GST regime records (GST returns, ITC claims/acceptance) are material evidence in income-tax scrutiny for purchases; reconciliation between ITC claimed and underlying commercial transactions demonstrates whether supply was genuine and whether the tax incidence was borne/accepted under GST. Precedent treatment: No specific precedents were invoked; the Tribunal treated GST/ITC reconciliation as a necessary element of inquiry based on statutory and commercial rationale. Interpretation and reasoning: The Tribunal noted an unexplored GST component (3% on aggregate purchases) and that neither AO nor CIT(A) examined whether ITC was claimed, accepted or rejected by GST authorities. The Tribunal reasoned that GST/ITC treatment has direct bearing on commercial reality and economic burden - e.g., if purchases were fictitious, ITC loss or mismatch should arise and be traceable. Consequently, verification of GST returns/ITC and coordination with GST authorities and supplier proceedings is a material and necessary step before concluding on genuineness. Ratio vs. Obiter: Ratio - reconciliation of GST returns and ITC claims is a material aspect in determining genuineness of purchases and must be examined where there is doubt; remand is appropriate to procure and examine GST records and correlate them with income-tax enquiries. Obiter - steps such as calling suppliers' bank accounts and correlating with suppliers' assessments are recommended investigative measures. Conclusion: The Tribunal directed restoration to the Assessing Officer to obtain and reconcile GST/ITC information from GST authorities (if required), examine suppliers' bank accounts and any proceedings against suppliers, provide the assessee a reasonable opportunity to be heard, and thereafter pass a speaking, reasoned order determining genuineness and tax consequences. Cross-references and Procedural Directions The Tribunal emphasized that the Assessing Officer should: (a) obtain GST return/ITC status and, if necessary, seek information from GST authorities; (b) correlate findings with any assessments/proceedings against the five suppliers; (c) call and examine suppliers' bank accounts to trace ultimate destination of funds; (d) afford the assessee a reasonable opportunity of being heard and permit submission of evidence/clarifications; and (e) pass a speaking and reasoned order thereafter. These directions form the operative relief and constitute the binding procedural mandate on remand.