1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are:
(a) Whether the addition made by the Assessing Officer (AO) of 12.5% of the total alleged bogus purchases amounting to Rs. 3,33,69,047/- is justified in the absence of confirmation letters from the parties and failure of the assessee to produce the parties for cross-examination;
(b) Whether the reduction of the addition from 12.5% to 4% by the Commissioner of Income Tax (Appeals) [CIT(A)] is legally sustainable;
(c) Whether the affidavit filed by Mr. Pravin Kumar Jain retracting his earlier statement can be relied upon or should be disregarded as a self-serving document;
(d) Whether the decision of the Hon'ble Bombay High Court in the case of PCIT vs Kanak Impex (India) Ltd., which upheld 100% addition on account of non-genuine purchases, is applicable to the facts of the present case;
(e) Whether the AO can make additions based on statements of third parties without corroborative evidence and without providing an opportunity to cross-examine;
(f) The applicability of principles under the Evidence Act, 1872, and the procedural fairness owed by the quasi-judicial authority while making such additions;
(g) The extent of addition that can be made on account of alleged bogus purchases in the light of the evidence and submissions made by the assessee.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) and (b): Justification and quantum of addition on alleged bogus purchases
Relevant legal framework and precedents: The Income-tax Act, 1961 empowers the AO to make additions to the income if purchases are found to be bogus. The burden lies on the assessee to prove the genuineness of purchases. However, mere suspicion or non-production of parties is not sufficient to treat purchases as bogus if the assessee furnishes credible evidence. The Hon'ble Bombay High Court in Nikunj Eximp Enterprises Pvt Ltd. vs. CIT(A) [2015] 372 ITR 619 (Bom) held that purchases cannot be disallowed merely on suspicion when the assessee has furnished letters of confirmation, bank statements showing payments, invoices, and stock reconciliation statements, and there is no fault found in books of accounts or sales.
Court's interpretation and reasoning: The Tribunal noted that the assessee had furnished extensive documentary evidence including purchase bills ledger accounts, bank statements showing payments, stock registers, and details from the MCA website regarding the parties. The AO did not disprove these documents or find any fault with the books of accounts or sales. The AO's addition was based solely on the apprehension that the parties were not produced for cross-examination and disregarded the affidavit of Mr. Pravin Kumar Jain as self-serving. The CIT(A) reduced the addition from 12.5% to 4% considering the VAT rates applicable in Maharashtra, which were lower than the 12.5% profit margin assumed by the AO based on Gujarat sales tax rates.
Key evidence and findings: The assessee submitted detailed documents and explanations, including changes in company names of the alleged suppliers, TIN details, certificates of incorporation, and director details showing Mr. Pravin Kumar Jain was not a director in these companies. The affidavit retracting earlier statements was also submitted. The AO did not find any material to disprove these submissions.
Application of law to facts: Applying the principles from the Nikunj Eximp Enterprises case, the Tribunal held that the addition cannot be sustained merely on suspicion or failure to produce parties when credible documentary evidence is on record. The CIT(A)'s reduction of addition to 4% was found reasonable and in line with industry practice and VAT rates.
Treatment of competing arguments: The revenue argued for full addition of 12.5% or even 100% based on non-production of parties and reliance on statements of Mr. Pravin Kumar Jain. The assessee argued that the evidence on record disproved the allegations and the affidavit retracted the statements. The Tribunal found the assessee's submissions more credible and distinguished the revenue's reliance on the Kanak Impex case.
Conclusions: The addition of 12.5% was excessive and unsupported by evidence. The CIT(A)'s reduction to 4% addition was upheld.
Issue (c) and (e): Reliance on affidavit of Mr. Pravin Kumar Jain and statements of third parties without cross-examination
Relevant legal framework: Affidavits, especially those retracting statements, are considered self-serving unless corroborated. The principles of natural justice require that adverse findings based on statements of third parties must be tested by providing an opportunity for cross-examination.
Court's interpretation and reasoning: The AO disregarded the affidavit of Mr. Pravin Kumar Jain on the ground that it was self-serving. The Tribunal noted that the affidavit was a relevant piece of evidence and should not be discarded without consideration. Further, the AO's failure to provide an opportunity to cross-examine Mr. Jain or the alleged bogus suppliers was a procedural lapse. The Tribunal emphasized that the AO as a quasi-judicial authority must adhere to principles of fair hearing.
Key evidence and findings: The affidavit retracted earlier statements made under coercion. The assessee's inability to produce parties for cross-examination was due to circumstances beyond its control. The AO did not record any material adverse finding against the genuineness of the documents submitted.
Application of law to facts: The Tribunal held that adverse additions cannot be made solely on statements of third parties without corroborative evidence and without affording the assessee a chance to cross-examine.
Treatment of competing arguments: The revenue contended that the affidavit should be disregarded and additions made on the basis of statements recorded during search and seizure. The Tribunal found this approach inconsistent with principles of evidence and fair procedure.
Conclusions: The affidavit was relevant evidence, and the AO's failure to provide cross-examination opportunity was a procedural defect. The addition based on such statements was not sustainable.
Issue (d): Applicability of the Kanak Impex (India) Ltd. decision
Relevant legal framework and precedent: The Kanak Impex case upheld 100% addition on account of non-genuine purchases where the assessee failed to appear before the AO and did not prove the genuineness of purchases. The assessment was completed ex-parte under section 144 read with section 147 of the Act.
Court's interpretation and reasoning: The Tribunal distinguished the present case from Kanak Impex on facts. In Kanak Impex, the assessee deliberately did not participate in reassessment proceedings, failed to produce evidence, and did not discharge the initial onus. The Tribunal noted that in the present case, the assessee actively participated, furnished detailed evidence, and the AO did not disprove the submissions.
Key evidence and findings: The assessee furnished confirmations, bank statements, invoices, and other documents. The AO did not complete the assessment ex-parte. The assessee challenged the addition and made submissions before the CIT(A).
Application of law to facts: The Tribunal held that the Kanak Impex decision is not applicable as the factual matrix is different. The principle that an assessee who does not participate cannot complain about lack of details before addition was inapplicable here.
Treatment of competing arguments: The revenue sought to rely on Kanak Impex to justify 100% addition. The Tribunal rejected this reliance on grounds of factual distinction.
Conclusions: The Kanak Impex decision is distinguishable and not applicable to the present facts.
Issue (f): Applicability of the Evidence Act and procedural fairness
Relevant legal framework: Section 3 of the Indian Evidence Act, 1872, requires that facts must be proved by evidence. Affidavits are not substantive evidence unless corroborated. Quasi-judicial authorities must follow principles of natural justice including the right to cross-examine.
Court's interpretation and reasoning: The Tribunal observed that the AO ignored the procedural safeguards by relying on statements without cross-examination and disregarding the affidavit. The Tribunal emphasized that the AO's role as a quasi-judicial authority requires adherence to evidentiary rules and fair procedure.
Key evidence and findings: The AO's addition was based on untested statements and suspicion. The assessee's evidence was not disproved.
Application of law to facts: The Tribunal held that addition based on untested evidence and without affording opportunity to cross-examine is not sustainable.
Treatment of competing arguments: The revenue argued that affidavit is not evidence before AO. The Tribunal agreed but noted that the affidavit was part of the overall evidence and the AO should have considered it rather than ignoring it outright.
Conclusions: Procedural fairness and evidentiary requirements were not complied with, rendering the addition unsustainable.
Issue (g): Extent of addition on alleged bogus purchases
Relevant legal framework: Additions must be based on cogent evidence and reasonable basis. The addition should reflect the actual benefit derived from bogus transactions.
Court's interpretation and reasoning: The CIT(A) considered the VAT rates in Maharashtra and the assessee's submissions regarding gross profit margins to reduce the addition from 12.5% to 4%. The Tribunal found this approach reasonable and in line with industry standards.
Key evidence and findings: The assessee's declared gross profit was 8.51%, higher than the average of 8.47% for previous years. The AO's addition of 12.5% was based on Gujarat sales tax rates, not applicable here.
Application of law to facts: The Tribunal upheld the reduction to 4% addition as justified and proportional.
Treatment of competing arguments: Revenue sought higher or full addition; assessee argued for minimal addition based on actual profit margins. Tribunal sided with the assessee's submissions.
Conclusions: Addition restricted to 4% of alleged bogus purchases is upheld.
3. SIGNIFICANT HOLDINGS
"The respondent assessee having been filed letters of confirmation of suppliers, copies of bank statement showing entries of payment through account payee cheques to the suppliers, copies of invoices for purchases and stock statement i.e. stock reconciliation statement giving complete details with regard to opening stock, purchases, sales and closing stock and no fault with regard to it being found and the books of accounts not being rejected and the sales not being doubted, the purchases cannot be treated as bogus and be disallowed merely on the basis of suspicion. One cannot conclude that the purchases were not made by the respondent assessee merely because the parties were not produced, when there are materials on record to prove otherwise." (Nikunj Eximp Enterprises Pvt Ltd. vs. CIT(A))
"We fail to understand that the respondent-assessee having consciously and intentionally decided not to join the investigation, cannot now contend that the appellant-revenue should have given them all the details before making the addition. In our view, such a conduct of the respondent-assessee cannot be accepted. It was incumbent upon the respondent-assessee to have joined the re-assessment proceedings, discharge the initial onus of proving the purchases and seek details, if any." (Kanak Impex (India) Ltd. case, distinguished)
Core principles established include:
- The necessity of credible documentary evidence to disallow purchases as bogus;
- The requirement of procedural fairness including opportunity for cross-examination before making adverse additions;
- The inadmissibility of additions based solely on suspicion or uncorroborated third-party statements;
- The importance of distinguishing precedents based on factual matrix, particularly regarding assessee's participation in proceedings;
- The reasonableness in determining the quantum of addition based on industry standards and applicable tax rates.
Final determinations on each issue are as follows:
- The addition of 12.5% on alleged bogus purchases made by AO is excessive and unsustainable;
- The reduction of addition to 4% by CIT(A) is upheld;
- The affidavit retracting statements by Mr. Pravin Kumar Jain is relevant and should not be disregarded outright;
- The AO's failure to provide opportunity for cross-examination renders the addition unsustainable;
- The Kanak Impex decision is distinguishable and not applicable to the present facts;
- The appeal filed by the revenue is dismissed.
9911796707
Advanced Search 
