2013 (1) TMI 88 - HC - Income Tax

Bogus purchases - suppliers were nonexistent and one of the parties had denied having any business dealings with the Assessee Company - ITAT deleted the addition made by AO - Held that - From the order of the Tribunal it can be concluded that it has deleted the additions on account of bogus purchases not only on the basis of stock statement i.e. reconciliation statement but also in view of the other facts. Books of Accounts of the assessee have not been rejected. Similarly the sales have not been doubted and it is an admitted position that substantial amount of sales have been made to the Government Department i.e. Defence Research and Development Laboratory Hyderabad. Further there were confirmation letters filed by the suppliers copies of invoices for purchases as well as copies of bank statement all of which would indicate that the purchases were infact made. Merely because the suppliers have not appeared before the AO or the CIT(A) one cannot conclude that the purchases were not made by the assessee. Disallowance merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them is not warranted- thus the order of the Tribunal is well a reasoned order taking into account all the facts before concluding that the purchases of Rs. 1.33 crores was not bogus - in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether the Income Tax Appellate Tribunal (Tribunal) was correct in deleting the addition of Rs.1,33,41,917/- made by the Assessing Officer towards bogus purchases, despite the fact that the suppliers were nonexistent and one party had categorically denied any business dealings with the assessee company. This question essentially involved the legitimacy of disallowing expenditure on alleged bogus purchases where the suppliers were not traceable or cooperative.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Validity of disallowance of expenditure on alleged bogus purchases when suppliers are nonexistent or deny business dealings.

Relevant legal framework and precedents: The provisions under the Income Tax Act, 1961 empower the Assessing Officer to disallow expenses if they are found to be bogus or not genuine. The burden lies on the Revenue to establish the non-genuineness of claimed purchases. Precedents emphasize that mere suspicion or non-appearance of suppliers is insufficient to disallow expenditure if the assessee maintains proper books of account and corroborative evidence supporting the genuineness of transactions.

Court's interpretation and reasoning: The Court examined the facts and the Tribunal's reasoning in detail. The Tribunal had relied on multiple pieces of evidence beyond the mere stock reconciliation statement, including confirmation letters from suppliers, copies of invoices, bank statements showing payments through account payee cheques, and the fact that the books of account were not rejected. The Tribunal also noted that a substantial portion of the assessee's sales were made to a Government Department (Defence Research and Development Laboratory, Hyderabad), which could not be considered bogus.

Key evidence and findings:

• Letters of confirmation from suppliers acknowledging business dealings.
• Bank statements evidencing payments made through account payee cheques to suppliers.
• Invoices corresponding to the purchases claimed.
• Stock reconciliation statement detailing opening stock, purchases, sales, and closing stock with no discrepancies found.
• Books of account maintained by the assessee were not rejected by the authorities.
• Substantial sales to a Government Department, indicating genuine business activity.

Application of law to facts: The Court held that the Assessing Officer and the Commissioner of Income Tax (Appeals) had disallowed the expenditure primarily based on suspicion arising from the non-appearance of suppliers and canvassing agents before the tax authorities. However, the Tribunal's finding that the purchases were genuine was supported by documentary evidence and the absence of any rejection of the books of account. The Court emphasized that non-appearance of suppliers alone cannot lead to the conclusion that purchases were bogus if the assessee has produced credible evidence to substantiate the transactions.

Treatment of competing arguments: The Revenue argued that the Tribunal erred in relying on the stock reconciliation statement and other documents without adequately considering the non-existence of suppliers and categorical denial of business dealings by one party. The Court rejected this argument, noting that the Tribunal's decision was based on a holistic appraisal of all evidence, not merely the stock statement. The Court further observed that suspicion without substantive proof cannot override the documented evidence presented by the assessee.

Conclusions: The Court concluded that the Tribunal's order deleting the addition of Rs.1.33 crores on account of bogus purchases was well-reasoned and justified on the facts and law. The question of law formulated was not a substantial question warranting interference by the High Court.

3. SIGNIFICANT HOLDINGS

The Court preserved the Tribunal's crucial legal reasoning verbatim in essence, holding that:

"Merely because the suppliers have not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases were not made by the respondent-assessee."

Further, the Court affirmed the principle that:

"The Assessing Officer as well as CIT(A) have disallowed the deduction of Rs.1.33 crores on account of purchases merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them."

The core principle established is that the genuineness of purchases cannot be negated solely on the ground of suppliers' non-appearance or denial if the assessee produces credible documentary evidence and maintains books of account that are not rejected.

Final determination on the issue was that the addition made by the Assessing Officer on account of bogus purchases was rightly deleted by the Tribunal, and the appeal by the Revenue was dismissed as the question was not a substantial question of law.