2025 (8) TMI 1647 - AT - Income Tax

Genuine purchases accepted; additions under s.69C deleted; examine s.234A, s.234B, s.234C interest; s.271AAC(i) penalty unsustainable

Deepak Pawar Versus ACIT, Circle-43, Delhi

Deepak Pawar Versus ACIT, Circle-43, Delhi - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether addition under section 69C (unexplained expenditure) can be sustained in respect of purchases alleged to be bogus where invoices, e-Way bills and bank payments are produced by the assessee. 2. Whether the profit element embedded in disputed purchases can be estimated and, if so, the appropriate method and rate for such estimation. 3. Whether provisions of section 115BBE (enhanced rate of tax on unexplained income) are attracted when additions are made under section 69C and do not pertain to amounts chargeable under sections 68 to 69D. 4. Whether interest under sections 234A, 234B and 234C is chargeable in the circumstances of reassessment following notice under section 148A/148. 5. Whether penalty under section 271AAC(i) can be sustained where section 115BBE is held not to be applicable and the underlying additions are disallowed. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainment of addition under section 69C where invoices, e-Way bills and bank payments are produced Legal framework: Section 69C applies to unexplained expenditure; if a taxpayer is able to satisfactorily explain the nature and source of an entry (including by production of corroborative documents and evidence of payment), addition under section 69C should not be made. The assessing authority must displace the explanation and show cogent reasons/evidence for concluding the expenditure is bogus. Precedent treatment: The judgment follows the controlling principle that documentary evidence of transaction (invoices, e-Way bills) and bank payments, absent convincing contrary material from revenue, rebut an allegation of bogus expenditure. (Precedents are applied in principle as reflected in the Court's reasoning; none were overruled or distinguished explicitly.) Interpretation and reasoning: The Tribunal found that the assessee furnished sample purchase invoices, corresponding e-Way bills evidencing delivery and bank statements showing account-payee cheque payments. The revenue failed to produce evidence of cash withdrawals from the supplier's account or any material showing that cash was substituted and the transaction back-to-back with the assessee was fabricated. In absence of any contradictory material, the factual foundation for treating purchases as bogus was lacking. Ratio vs. Obiter: Ratio - where a taxpayer produces credible documentary and bank evidence demonstrating genuine purchases, and the revenue produces no material to rebut that evidence (e.g., showing circular cash flows or supplier cashing back cheques), an addition under section 69C cannot be sustained. Conclusion: Addition under section 69C was not justified and could not survive; grounds on merits allowed. (Cross-ref to Issue 2 as to quantum.) Issue 2: Estimation of profit element embedded in disputed purchases and appropriate rate Legal framework: When assessing unexplained purchases as income, the authorities may estimate the profit element embedded in purchases; the rate must be based on relevant and reliable material - e.g., assessee's own gross profit percentages for comparable periods or objective market data - and not arbitrary figures. Precedent treatment: The Tribunal upheld that estimation must be reasonable and anchored in facts; the appellate authority (CIT(A)) rightly substituted the assessing officer's arbitrary 12.5% by averaging comparable gross profit percentages and applying a modest market adjustment. Interpretation and reasoning: The Assessing Officer applied a flat 12.5% profit element without reconciling with the assessee's declared gross profits. The CIT(A) considered the assessee's gross profit for the year, preceding and succeeding years, arrived at an average GP of 2.54%, and added an estimated 0.5% grey-market saving, arriving at 3.04%. The Tribunal accepted that approach as factually grounded. However, having held the purchases to be proved genuine (Issue 1), the Tribunal concluded that no addition should survive at all, making the estimation exercise unnecessary to sustain any addition. Ratio vs. Obiter: Ratio - estimation must be based on contemporaneous/comparative books and reasonable market adjustments; arbitrary higher percentages without material are unsustainable. Obiter - computation of 3.04% accepted as reasonable in the facts but ultimately rendered moot by acceptance of purchases. Conclusion: The assessing officer's 12.5% was unjustified; the CIT(A)'s method (average GP plus small market adjustment) was reasonable but, since purchases were proved, no addition on that basis survives. (See cross-ref to Issue 1.) Issue 3: Applicability of section 115BBE when additions are not under sections 68-69D Legal framework: Section 115BBE prescribes a special tax treatment for certain unexplained incomes; it applies in contexts defined by the Act, particularly where additions fall within the scope of sections 68 to 69D as reflected in legislative language and judicial interpretation. Precedent treatment: The Tribunal follows the established principle that enhanced provisions like section 115BBE are inapplicable where the character of the addition does not fall within the specified categories (sections 68-69D); appellate authority's conclusion that 115BBE does not apply was affirmed. Interpretation and reasoning: The CIT(A) and the Tribunal found that the addition made by the AO did not fall within the types of income contemplated by sections 68-69D and therefore section 115BBE could not be invoked. The Tribunal endorsed that conclusion and relied on the merits finding that purchases were proved genuine, further negating any basis for section 115BBE applicability. Ratio vs. Obiter: Ratio - section 115BBE cannot be applied where additions are not of the nature specified by sections 68-69D; such application would be inconsistent with statutory scheme. Conclusion: Section 115BBE is not attracted in the facts; any attempt to levy tax under that provision is unsustainable. (Cross-ref to Issue 5 on penalty.) Issue 4: Chargeability of interest under sections 234A, 234B and 234C following reassessment Legal framework: Section 234A interest depends on delay in filing return relative to the due date; section 234B relates to shortfall in advance tax; section 234C penalizes deferment of instalments. Interest liability is dependent on factual timelines and amounts returned/assessed. Precedent treatment: The Tribunal noted settled law that section 234C interest is chargeable only on returned income and not on income assessed in reassessment beyond returned figures. Interpretation and reasoning: The Tribunal directed the AO to examine whether the return filed after notice under section 148 was within the due date prescribed in response to that notice for purposes of section 234A. Section 234B liability was held consequential (i.e., dependent on revised tax liability). For section 234C, the Tribunal reiterated that liability is limited to returned income and cannot be computed on assessed income beyond the returned figure. Ratio vs. Obiter: Ratio - (a) AO must verify compliance with return-filing timelines under reassessment for section 234A; (b) section 234C interest is chargeable only on returned income, not assessed additions. These are binding directions in the context of this appeal. Conclusion: Interest under section 234A to be examined by AO with reference to the return filing date under reassessment notice; section 234B is consequential; section 234C limited to returned income as a matter of law. Issue 5: Viability of penalty under section 271AAC(i) where section 115BBE and the additions are disallowed Legal framework: Penalty provisions for misreporting or unexplained income depend on the nature of additions and the statutory basis for enhanced tax treatments; if the foundational addition is set aside or the provision underlying penalty (via 115BBE or similar) is inapplicable, penalty may not stand. Precedent treatment: The Tribunal endorses the principle that penalty cannot survive where the statutory basis for the penal charge is negated by appellate findings on the substantive additions or by non-applicability of the taxing provision relied upon. Interpretation and reasoning: Given the CIT(A)'s finding and the Tribunal's acceptance that section 115BBE is inapplicable and that the purchases were proved genuine, the consequential levy of penalty under section 271AAC(i) lacks foundation. The Tribunal therefore allowed the ground challenging penalty. Ratio vs. Obiter: Ratio - penalty predicated on inapplicable statutory provisions or disallowed additions cannot be sustained; penalty must be founded on valid substantive findings. Conclusion: Penalty under section 271AAC(i) cannot stand in the facts and is disallowed.