2025 (10) TMI 808 - HC - Income Tax

Appeal dismissed; findings that assessee proved genuineness of purchases using VAT auditor certificate and 15% restricted addition sustained

Pr. Commissioner Of Income Tax-3 Pune Versus Ramelex Private Ltd.

HC upheld concurrent findings of CIT(A) and ITAT that the assessee discharged the onus of proving genuineness of purchases and accepted VAT auditor ... Estimating of income - bogus purchases - Addition based on information received by the Assessing Officer from the Sales Tax Department - ITAT restricting GP to 15% and in turn calculating the GP on amount of bogus purchases - HELD THAT:- As both the CIT(A) and the ITAT have examined all the facts in so far as the alleged bogus purchases are concerned and also that the Respondent-Assessee had discharged the onus of proving the genuineness of the purchases made from the respective purchase and also submitted the certificate from the VAT Auditor in respect of the transaction from M/s. Entech Enterprises, to the tune of Rs. 11,63,175/- as opposed to Rs. 1,16,53,175/-. Both the authorities i.e. CIT(A) and ITAT have reached their conclusion, on the basis of the facts and the material on record. It is our view the CIT(A) and ITAT on appreciation of the facts have recorded concurrent factual finding in respect of the bogus purchases and have rightly restricted the additions @ 15% of Hawala purchases. No substantial question of law arises. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal was justified in restricting additions for alleged bogus purchases to 15% of the disputed amount rather than adding the full amount claimed as bogus. 2. Whether the Tribunal was justified in accepting the assessee's contention that purchases from a particular supplier were overstated (typographical error) and limiting the disputed purchase figure accordingly. 3. Whether reliance by the Assessing Officer on information received from the Sales Tax/ VAT authorities, without furnishing that information to the assessee or permitting cross-examination of alleged suppliers, justified holding the purchases to be wholly bogus. 4. Whether payments routed through banking channels negate a finding of bogus purchases where the supplier is alleged to be non-existent. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of restricting addition to 15% of alleged bogus purchases Legal framework: Income Tax law permits addition of income where expenditure/ purchases are found to be bogus; assessing authorities must form a reasoned belief under sections permitting reassessment and make additions where income has escaped assessment. Precedent treatment: Tribunal and Commissioner (Appeals) applied a percentage method (15%) to quantify the portion of alleged hawala/bogus purchases attributable to unaccounted income, relying on prior judicial decisions permitting restriction of full additions to a reasonable embedded profit/taxable element. Interpretation and reasoning: The Court notes concurrent findings by the Commissioner (Appeals) and the Tribunal that (a) materials/ goods were consumed by the assessee; (b) payments were made through banking channels; (c) the assessee had offered and paid tax on high gross and net profit ratios for actual trading; and (d) the nature of alleged hawala transactions indicated inflation of purchases rather than complete siphoning of funds. Given these factual findings and authorities relied upon, the lower authorities concluded that the quantum of unaccounted income could not be equated with the entire amount of disputed purchases and a restricted addition of 15% was appropriate. Ratio vs. Obiter: Ratio - where there is no unequivocal proof that the entirety of disputed purchases are bogus, Assessing Officer must not make a full addition; quantification may be restricted to a reasonable percentage representing the taxable element. Obiter - considerations on the precise percentage chosen may depend on facts and precedents applied. Conclusion: The Court upheld the concurrent factual and legal conclusion of the lower authorities that restricting the addition to 15% of the hawala purchases was justified; this finding of fact does not raise a substantial question of law warranting interference. Issue 2 - Acceptance of corrected purchase figure for a specific supplier (typographical error) Legal framework: Assessing proceedings require verification of claimed purchases; where assessee produces documentary evidence (ledgers, purchase bills, bank payments, VAT auditor certificate) demonstrating error in reported figures, authorities must consider corrected figures. Precedent treatment: Lower authorities accepted certificate from the assessee's VAT auditor correcting the supplier amount and recalculated the disputed quantum accordingly. Interpretation and reasoning: The Court records that the assessee produced a VAT auditor's certificate indicating a typographical error (actual purchase much lower than recorded). The Tribunal and Commissioner (Appeals) found that the assessee furnished detailed documents and that the corrected figure was supported on the record; hence they reduced the disputed purchase amount for that supplier accordingly. Ratio vs. Obiter: Ratio - where documentary evidence, including a VAT auditor's certificate, establishes a bona fide correction of recorded purchase figures, assessing authorities should accept and base additions on the corrected amount unless there is contrary cogent evidence. Obiter - the weight to be accorded to such certificates depends on the whole evidence. Conclusion: The Court affirmed the reduction of the specific supplier's purchase figure to the corrected amount as a concurrent factual finding, not raising a substantial legal question for interference. Issue 3 - Reliance on Sales Tax information without furnishing it or permitting cross-examination; natural justice Legal framework: Principles of natural justice and fair procedure require that material relied upon to form an opinion affecting taxpayer's rights be disclosed so the taxpayer can respond; Assessing Officer's re-opening and additions based solely on third-party information must be supported by furnishable, specific material. Precedent treatment: The Court referred to an earlier decision (Principal Commissioner v. SVD Resins and Plastics Pvt. Ltd.) holding that general information from Sales Tax authorities, without specific corroborative proof and without furnishing to the assessee, is an insufficient basis to wholly reject documents produced by the assessee. Interpretation and reasoning: The Court found that the re-opening and additions were based primarily on information from the Sales Tax Department which was not furnished to the assessee and which did not conclusively demonstrate that transactions with the assessee were bogus. The VAT assessments were pending; the assessee had filed bills, bank proofs and other documents and asserted no acceptance of hawala purchases. The Court held that making full additions without allowing the assessee to cross-examine the alleged suppliers or furnishing the Sales Tax material breached fairness and was an improper approach. Ratio vs. Obiter: Ratio - general information from Sales Tax authorities, not placed on record or specific as to the assessee's transactions, cannot justify making full additions; the assessee is entitled to be furnished the material and an opportunity to meet it. Obiter - coordination between Income Tax and Sales Tax authorities is desirable to avoid anomalous outcomes. Conclusion: The Court held that reliance on undisclosed Sales Tax information and denial of opportunity to cross-examine suppliers rendered the Assessing Officer's approach invalid for sustaining full additions; thus the Tribunal's and CIT(A)'s approach (which required more specific proof and reduced the addition) was justified. Issue 4 - Sufficiency of banking channel payments to rebut allegation of bogus purchases Legal framework: Evidence of payment through banking channels is a relevant factor bearing on genuineness of transactions but is not, by itself, conclusive; assessment requires overall appraisal of documents and inquiry outcomes. Precedent treatment: Lower authorities considered payments through account-payee cheques and other documentary proofs as supporting genuineness; they nonetheless examined whether purchases were inflated. Interpretation and reasoning: The Court observed that the assessee produced bank payment proofs and that payments were routed through banking channels. While the revenue argued that non-existence of a supplier can render transactions bogus despite banking payments, the Court accepted the concurrent finding that banking payments, consumption of material, and absence of defects in invoices warranted a restricted approach rather than a full addition. Ratio vs. Obiter: Ratio - banking channel payments constitute material relevant to veracity of purchases and, together with other documents, may rebut a finding of wholly bogus transactions; they should be considered in the assessee's favour in absence of specific contrary proof. Obiter - banking payments alone may not be decisive if independent evidence establishes supplier non-existence. Conclusion: The Court accepted the lower authorities' factual conclusion that banking channel payments, along with other documentary material, supported restricting the addition rather than treating the entire purchase amount as bogus. OVERALL CONCLUSION The Court affirmed the concurrent factual findings of the Commissioner (Appeals) and the Tribunal that: (i) the Assessing Officer's wholesale rejection of disputed purchases based solely on undisclosed Sales Tax information was improper; (ii) the assessee had produced documentary evidence (including corrected VAT auditor certificate and bank payments) justifying reduction/ re-quantification; and (iii) a restricted addition of 15% of disputed hawala purchases was appropriate. These are findings of fact which do not raise any substantial question of law; the appeal by revenue is dismissed.