2025 (10) TMI 34 - AT - Income Tax

Additions for alleged bogus purchases based solely on sales tax remarks deleted where payments by account-payee cheques and books accepted

ITAT held that additions for alleged bogus purchases, based solely on sales tax observations, were unsustainable. AO had accepted corresponding sales, ... Bogus purchases - AO considered 12.5% of the amount of purchases as the profit element therein - HELD THAT:- The sales of doubted purchases were accepted by the AO and the evidence of payment by account payee cheques and stock reconciliation statement, although placed on record, but not doubted and even the books of accounts were not rejected. AO has not doubted the actual payment made though cheque and recorded in the books in respect of bills placed on recorded by the assessee. AO has failed to brought on record any evidence of cash being received back by the assessee. Even no independent verification was carried out by the AO. Although AO had accepted the sales but on the contrary had made additions by merely relying upon the observations of sales tax department without conducting independent enquiries. Therefore, additions made by the AO are unsustainable in the eyes of law and deserve to be deleted. Appeal filed by the assessee stands allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether additions under section 145(3) by applying a uniform percentage (12.5%) on purchases alleged to be non-genuine can be sustained where assessee produces purchase invoices, stock records, sale invoices, bank payments and ledger entries. 1.2 Whether reliance by the Assessing Officer on information from the Sales Tax Department (DGIT (Inv.) list alleging hawala/accommodation entries) without independent inquiry and without confronting the assessee with such information violates principles of natural justice and justifies making additions. 1.3 Whether, where sales out of the disputed purchases are accepted and taxed, the AO can nonetheless treat corresponding purchases as bogus and make peak additions without independent verification. 1.4 Whether the CIT(A) erred in law or on facts in upholding the additions made by the AO. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1. Validity of additions by applying a uniform percentage on purchases alleged to be non-genuine Legal framework: Section 145(3) permits computation of income by reference to results or accounts of any previous year in certain circumstances; AO may make adjustments where purchases/sales are found not genuine, but statutory and evidentiary requirements govern additions. Precedent treatment: The Tribunal followed coordinate Bench and High Court decisions (citations referred to in judgment) that where primary onus discharged by production of invoices, bank payments, stock and sale records, additions cannot be made merely on suspicion or third-party lists; those precedents were followed. Interpretation and reasoning: The Court examined the evidentiary matrix - third-party purchase invoices, stock register/quantity tallies, corresponding sale invoices, bank account pay-outs by account-payee cheques and ledger entries - and found no discrepancy noted by the AO in these documents. The Tribunal held that these documents establish the complete transactional cycle (purchase ? receipt ? sale ? accounting) and thus rebut the presumption of bogus purchases. Given the AO's acceptance of sales and lack of contradictory evidence, application of an arbitrary 12.5% addition was unsustainable. Ratio vs. Obiter: Ratio - where an assessee establishes transaction authenticity by cogent documentary evidence and AO accepts resultant sales, a mechanical percentage addition to purchases without independent contrary evidence is not sustainable. Obiter - observations on comparative gross profit analyses and consequences in other factual permutations. Conclusion: The addition computed as 12.5% of purchases is unjustified and liable to be deleted where the assessee has produced and reconciled invoices, stock, sales, bank payments and ledger records and the AO has not produced any independent evidence to the contrary. Issue 2. Legality of relying solely on Sales Tax Department information without independent inquiry or confronting the assessee (natural justice) Legal framework: Principles of natural justice require that adverse material relied upon by the AO be furnished to and, where appropriate, confronted with the assessee; AO must conduct independent enquiries if reliance is placed on third-party or departmental information before making additions. Precedent treatment: Tribunal applied earlier decisions holding that information from VAT/Sales Tax authorities is only a starting point for investigation and cannot substitute independent inquiry; such precedents were followed to hold AO cannot stop at initial information. Interpretation and reasoning: The AO merely noted the Sales Tax Department's list and made additions without carrying out further verification, without confronting the assessee with the contents of that information and without seeking corroborative material from third parties. The Tribunal found this approach to be a breach of natural justice and inadequate investigation - suspicion cannot replace evidence. The AO had not rebutted the documentary proof offered by the assessee nor shown cash-back or any other indicia of sham transactions. Ratio vs. Obiter: Ratio - reliance on information from other departments, without independent verification and without affording opportunity to the assessee to meet the allegations, is impermissible; such reliance cannot sustain additions. Obiter - observations on manner and extent of enquiries that an AO ought to undertake in varied factual matrices. Conclusion: The AO's unilateral reliance on Sales Tax Department information, without independent inquiry and without confronting the assessee, violated principles of natural justice and rendered the additions unsustainable. Issue 3. Effect of acceptance of sales on the validity of disallowing corresponding purchases Legal framework: Taxability of sales and acceptability of corresponding purchases are interrelated; if sales arising from alleged purchases are accepted and taxed, it undermines the proposition that purchases were wholly bogus unless independent contrary evidence is adduced. Precedent treatment: Tribunal relied on consistent judgments that if sales, quantity details and stock movements are accepted, purchases cannot be treated as bogus merely on the basis of third-party allegations; these authorities were followed. Interpretation and reasoning: The Tribunal noted that the AO had accepted sale invoices and corresponding quantities, and did not reject books of account. The existence of sales recorded and offered to tax establishes the commercial reality of earlier purchases. The Tribunal reasoned that if purchases were false, the assessee could not have credibly reflected sales and closing stock; hence the AO's addition conflicted with accepted aspects of the record and lacked supporting evidence of sham transactions (e.g., receipt of cash back, falsified deliveries). Ratio vs. Obiter: Ratio - acceptance of sales and corresponding quantitative records by AO militates against treating purchases as bogus; absent direct evidence of falsity, purchases cannot be disallowed. Obiter - commentary on scenarios where limited disallowance (e.g., to extent of lower gross profit) may be permissible if specific evidence supports such treatment. Conclusion: Where sales from the disputed purchases are accepted and taxed and documentary records of receipt and sale reconcile, the AO cannot hold purchases as bogus without independent and positive evidence; additions must be deleted. Issue 4. Validity of CIT(A)'s order upholding additions Legal framework: Appellate authority must evaluate whether AO applied correct legal principles, respected natural justice and based additions on evidence rather than conjecture; appellate authority must also weigh precedents. Precedent treatment: The Tribunal treated prior decisions of High Court and ITAT as applicable and distinguished none; those precedents were applied in setting aside the AO/CIT(A) approach. Interpretation and reasoning: The Tribunal examined the findings and records and concluded that the CIT(A) erred in upholding the addition because the AO's action was based on unverified departmental information and a mechanical percentage addition, despite full documentary proof and reconciliations filed by the assessee. The appellate order failed to appreciate that no independent enquiry was carried out and that principles of natural justice were breached by non-confrontation with the impugned information. Ratio vs. Obiter: Ratio - appellate confirmation of additions founded on untested third-party information and without addressing the assessee's documentary proof is unsustainable. Obiter - remarks on evidentiary weight to be accorded to different kinds of material in similar fact patterns. Conclusion: The CIT(A)'s confirmation of the AO's addition was legally infirm; the Tribunal deleted the addition and allowed the appeal.