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2021 (6) TMI 1184 - AT - Income TaxBogus purchases - evidences regarding claiming bogus purchases were found during the search - HELD THAT - As agreed by the assessee that it has indulged in taking bogus purchase bills from various parties and the documents found during search clearly indicates that the assessee had utilised the same making payment to farmers and other similar parties for acquiring the lands for the purpose of its business. Assessee also claimed that it had incurred other expenditures for the purpose of development of land in cash. However the assessee has not brought any material on record to demonstrate the same before the Ld CIT(A). CIT(A) has observed that the cash payments were recorded in the documents found during search which include details of parties GAT numbers etc. Therefore it clearly indicates that the assessee had utilised the cash received from the accommodation entry providers in their business. The purchase of lands and developing the same is part of the business operation of the company. It is only the case of the Revenue that the assessee has indulged in taking bogus purchase bills from the entry providers. It is proved beyond doubt that the assessee has indulged in the above transactions. Cash generated in the above transactions were in turn utilised by the assessee for the purpose of business only. There is no material brought by the AO to prove contrary or utilised by the assessee in any other personal use or illegal activities. Decided against revenue.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are: (a) Whether the learned Commissioner of Income Tax (Appeals) erred in restricting the disallowance of bogus purchases to Rs. 2,35,84,376, when the Assessing Officer had established bogus purchases to the extent of Rs. 4,71,68,757? (b) Whether the learned CIT(A) erred in giving relief to the assessee by relying on the declaration made before the Income Tax Settlement Commission (ITSC), which was ultimately rejected? (c) Whether the Assessing Officer was justified in making addition of the entire purchase amount on the ground of bogus purchases, ignoring the assessee's submissions and evidence regarding utilization of cash for business purposes such as land acquisition and development expenses? 2. ISSUE-WISE DETAILED ANALYSIS Issue (a): Extent of disallowance of bogus purchases Relevant legal framework and precedents: The Income Tax Act, 1961 empowers the Assessing Officer under Section 144 to make best judgment assessments when the assessee fails to substantiate claims or comply with notices. However, the Supreme Court has ruled in various decisions that such assessments must not be arbitrary or capricious but should have reasonable nexus to the material on record (State of Orissa v. Maharaja Shri B.P. Singh Deo; State of Kerala v. C. Velukutty; Brij Bhushan Lal Parduman Kumar v. CIT). Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer had made an addition of the entire purchase amount of Rs. 4,71,68,757 on the ground that the purchases were bogus and unsupported by documents. However, the assessee submitted that 50% of this amount was actually utilized in business operations, including payments to farmers for land acquisition and development expenses such as leveling, fencing, and infrastructure development, which required cash payments. The assessee contended that the bogus purchase bills were accommodation entries to generate cash used for these business purposes. The CIT(A) accepted the assessee's contention to the extent of 50% of the amount, relying on seized material from search proceedings that showed cash payments to farmers and land development. The CIT(A) directed deletion of 50% of the addition, allowing the same as business expenditure. Key evidence and findings: The Tribunal examined detailed statements recorded under sections 132(4) and 131 of the Act from various brokers and persons involved, confirming cash payments to farmers and brokers for land acquisition. Seized documents contained particulars of land transactions, including village details, GAT numbers, government values, cash paid, and deal values. The assessee's application before the ITSC also admitted that 50% of the amount was offered as income in a subsequent assessment year. Application of law to facts: The Tribunal held that while the purchases were bogus in form, the cash generated was used for legitimate business purposes. Since the cash was utilized in the business and not for personal or illegal use, the entire addition was not justified. The Tribunal applied the principle that tax can only be levied on real income and disallowed expenses must have a reasonable nexus with business operations. Treatment of competing arguments: The Revenue argued that the entire amount should be disallowed as bogus purchases, emphasizing that the parties to whom notices under section 133(6) were issued could not be traced and that the assessee had not produced evidence during assessment. The Revenue relied on a Supreme Court decision holding that best judgment assessments must be sustained where the assessee fails to substantiate claims. The Tribunal, however, found that the seized material and statements sufficiently demonstrated the business use of the cash generated and that the CIT(A)'s approach was justified. Conclusions: The Tribunal upheld the CIT(A)'s order restricting the addition to 50% of the bogus purchase amount, i.e., Rs. 2,35,84,376, recognizing the legitimate business expenditure incurred by the assessee. Issue (b): Reliance on declaration before the Income Tax Settlement Commission (ITSC) Relevant legal framework and precedents: The ITSC's role is to facilitate settlement of disputes and allow disclosures in exchange for immunity or reduced penalties. However, rejection of an application by the ITSC on technical grounds does not necessarily invalidate the declaration made by the assessee. Court's interpretation and reasoning: The CIT(A) relied on the assessee's declaration before the ITSC that 50% of the bogus purchase amount was offered as income in a subsequent year, which was rejected by the ITSC on technical grounds because the income was declared in AY 2011-12 instead of AY 2009-10. The CIT(A) observed that the expenses were included in Work In Progress (WIP) in AY 2009-10 and only claimed as expense in AY 2011-12 when the land was sold. Key evidence and findings: The Tribunal noted that the bogus purchase expenses were not claimed as expense in AY 2009-10 but included in WIP, and thus the income corresponding to those expenses could only be offered in the year when the expense was actually claimed, i.e., AY 2011-12. The Tribunal relied on judicial precedents that tax liability arises only when income is actually earned or expenses claimed (Principal CIT v. Ashwin Kantilal Raval; CIT v. Excel Industries Ltd.). Application of law to facts: The Tribunal held that the CIT(A)'s reliance on the declaration before ITSC was justified despite the ITSC's rejection, as the rejection was on technical grounds unrelated to the genuineness of the disclosure. The timing of income offer was consistent with accounting principles and tax law. Treatment of competing arguments: The Revenue criticized the CIT(A) for relying on a declaration that did not succeed before the ITSC. The Tribunal, however, distinguished the technical rejection from the substantive admission by the assessee and accepted the CIT(A)'s approach. Conclusions: The Tribunal upheld the CIT(A)'s reliance on the declaration made before the ITSC for the purpose of restricting the addition, finding no error in this approach. Issue (c): Justification of addition of entire purchase amount by Assessing Officer ignoring submissions and evidence Relevant legal framework and precedents: Section 144 of the Income Tax Act requires that best judgment assessments must be made after considering all relevant material and after giving the assessee an opportunity of being heard. The Supreme Court has emphasized that such assessments must not be arbitrary or capricious and must have reasonable nexus to the material on record. Court's interpretation and reasoning: The Tribunal found that the Assessing Officer ignored the detailed submissions and evidence produced by the assessee, including statements of brokers and persons involved, seized documents showing utilization of cash payments for land acquisition and development expenses, and the fact that no cash was found during search indicating utilization of cash. Key evidence and findings: The Tribunal highlighted the statements recorded under sections 132(4) and 131, which admitted the modus operandi of bogus purchases generating cash used for legitimate business purposes. The seized documents corroborated these statements. The Tribunal also noted that the Assessing Officer's notices under section 133(6) could not be served as the parties were untraceable, but this did not justify ignoring the material on record. Application of law to facts: The Tribunal applied the principle that best judgment assessments must be based on material and not arbitrary assumptions. Since the assessee had demonstrated that a substantial portion of the cash generated was used for business purposes, the entire addition was not warranted. Treatment of competing arguments: The Revenue argued for sustaining the entire addition on the basis of non-traceability of parties and lack of evidence produced by the assessee. The Tribunal found that the seized material and statements formed a sufficient basis to accept the assessee's claim of business utilization of cash and that the Assessing Officer's approach was unjustified. Conclusions: The Tribunal held that the Assessing Officer erred in making addition of the entire amount without appreciating the material on record and the assessee's submissions, and thus confirmed the CIT(A)'s order reducing the addition. 3. SIGNIFICANT HOLDINGS "It is proved beyond doubt that the assessee has indulged in the above transactions. However, the cash generated in the above transactions were in turn utilised by the assessee for the purpose of business only. The purchase of lands and developing the same is part of the business operation of the company." "There is no material brought by the Assessing Officer to prove contrary or utilised by the assessee in any other personal use or illegal activities. Therefore, we do not see any reason to interfere with the findings of the Ld CIT(A) and, hence, we are inclined to dismiss the grounds raised by the Revenue." "The bogus expenses which are being added to the income of the assessee were never claimed as an expense by the assessee in AY 09-10 in the first place. The same was merely added by the assessee in its Closing WIP. Thus, the same could have been added only in the year in which the same was actually claimed as an expense by the assessee." "Though there is an element of guesswork in a best judgment assessment, it should not be a wild one, but should have a reasonable nexus to the available material and the circumstances of each case." Core principles established include:
Final determinations:
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