2025 (6) TMI 69 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - We delete the addition to the extent of Rs. 14, 09, 614/- which the assessee has written back and offered to tax in the return for AY 2014-15 out of the total addition of Rs. 17, 00, 076/. For the balance amount of Rs. 2, 90, 462/- we direct the Ld.AO to apply the same margin of 12.5% as applied in the case of spouse of the assessee to make the addition in the hands of the assessee and delete the balance. Accordingly grounds raised by the assessee in this respect are partly allowed.

Summary

The core legal questions considered in this appeal revolve around the validity and correctness of the addition made by the Assessing Officer (AO) under Section 69C of the Income-tax Act, 1961, relating to alleged bogus purchases. The issues include:

1. Whether the order passed by the Commissioner of Income Tax (Appeals) upholding the AO's addition under Sections 143(3)/147 is legally valid and consistent with principles of natural justice.

2. Whether the addition of Rs. 17,00,076 as bogus purchases under Section 69C was justified, particularly in light of the assessee's opportunity to cross-examine third-party statements and the absence of such opportunity.

3. Whether the addition was properly based solely on third-party investigation reports without further inquiry or verification by the AO or CIT(A).

4. Whether the disallowance of the entire amount of purchases as bogus was appropriate despite the genuineness of sales not being doubted, and whether the corresponding purchases should be presumed genuine if sales are genuine.

Regarding the first issue concerning the validity of the order and adherence to principles of natural justice, the assessee contended that the order was void ab initio due to non-provision of opportunity to cross-examine third-party witnesses and non-supply of statements relied upon. The legal framework mandates adherence to principles of natural justice, including the right to be heard and to cross-examine witnesses where adverse material is relied upon. However, the Court noted that the assessee had actively participated in the assessment proceedings and furnished detailed explanations and documentary evidence, including purchase invoices, bank statements, and tax audit reports. The Court found no indication that the assessee was denied a reasonable opportunity to present its case. The reliance on statements from third-party investigating agencies did not, in itself, violate natural justice where the assessee was given a chance to rebut the allegations. Thus, the Court did not find the order to be void on grounds of natural justice.

On the second and third issues concerning the basis of addition under Section 69C and the reliance on third-party investigation reports, the legal framework under Section 69C permits addition of unexplained expenditure or investment, including accommodation entries, if the assessee fails to satisfactorily explain the nature and source of such transactions. Precedents emphasize that the AO must make a thorough inquiry and not rely solely on third-party reports without independent verification. In this case, the AO relied on information from the Directorate of Income Tax (Investigation) and the Sales Tax Department, which identified the sellers as "Hawala dealers," and concluded the purchases were bogus. The AO noted the assessee failed to produce the sellers for verification and did not provide delivery challans, octroi receipts, or other corroborative documents typically accompanying genuine purchases. The AO rejected the assessee's submission that payments made by account pay cheques and presence of purchase bills were conclusive proof of genuineness. The Court observed that the AO's approach was consistent with the statutory mandate to disallow unexplained accommodation entries and was supported by the lack of adequate documentary evidence to establish genuineness.

However, the Court noted a significant factual distinction from a cited precedent where the assessee failed to participate in reassessment proceedings. Here, the assessee actively participated and furnished evidence. The Court also noted the assessee had already written back Rs. 14,09,614 of the alleged bogus purchases and offered the same to tax in Assessment Year 2014-15, arguing that taxing the same amount again would amount to double taxation. This contention was ignored by both the AO and CIT(A). The Court found merit in this argument and held that the addition could not be sustained to the extent of the amount already offered to tax in a subsequent year.

Regarding the fourth issue on the disallowance of the entire purchases despite undisputed genuineness of sales, the assessee argued that if sales are genuine, then corresponding purchases must also be genuine. The Court examined the gross profit margin calculations submitted by the assessee, which showed a gross profit of 10.39% on sales of Rs. 1.67 crore and purchases of Rs. 1.68 crore. The AO's addition of the entire Rs. 17,00,076 as bogus purchases would inflate the gross profit margin to an unrealistic 20.53%, which the assessee contended was unreasonable for the nature of the business. The Court found this argument persuasive and noted that in the case of the assessee's spouse, on similar facts, the AO had applied only a 12.5% profit margin on the alleged bogus purchases to determine the addition rather than disallowing the entire amount. The Court directed that the same approach be applied to the balance disputed amount of Rs. 2,90,462 (Rs. 17,00,076 less Rs. 14,09,614 already taxed), thereby reducing the addition accordingly.

The Court also distinguished the cited decision of the Hon'ble Bombay High Court in Kanak Impex (India) Ltd., relied upon by the Revenue, on the ground that in that case the assessee had not participated in the reassessment proceedings and had failed to prove genuineness of purchases, whereas in the present case, the assessee participated fully and furnished evidence. The Court quoted the High Court's observation that an assessee who chooses not to participate cannot later complain of lack of opportunity. Since the present assessee did participate, the precedent was not applicable.

In conclusion, the Court partly allowed the appeal by deleting the addition of Rs. 14,09,614 already offered to tax in AY 2014-15 and directing the AO to apply a 12.5% profit margin on the remaining Rs. 2,90,462 as addition under Section 69C, consistent with the treatment in the spouse's case. The grounds of appeal challenging the addition on principles of natural justice and on the basis of the AO's reliance on third-party reports were rejected. The Court thus balanced the need to curb bogus purchases with the assessee's right to avoid double taxation and to have additions made on a reasonable basis.

Significant holdings include the following verbatim excerpt from the Court's reasoning:

"We delete the addition to the extent of Rs. 14,09,614/- which the assessee has written back and offered to tax in the return for AY 2014-15 out of the total addition of Rs. 17,00,076/-. For the balance amount of Rs. 2,90,462/-, we direct the Ld.AO to apply the same margin of 12.5% as applied in the case of spouse of the assessee, to make the addition in the hands of the assessee and delete the balance."

Core principles established are:

• An addition under Section 69C for alleged bogus purchases must be based on proper inquiry and cannot rely solely on third-party investigation reports without opportunity to the assessee to rebut.
• The principles of natural justice are not violated where the assessee participates fully and is given opportunity to present evidence, even if third-party statements are relied upon.
• Double taxation must be avoided; amounts already offered to tax in subsequent years cannot be taxed again in earlier years.
• Where sales are undisputedly genuine, disallowing entire corresponding purchases as bogus may be unreasonable; a reasonable profit margin approach may be adopted.
• Precedents where the assessee failed to participate in reassessment proceedings are distinguishable and not binding where the assessee has participated.

Final determinations were that the addition of Rs. 17,00,076 was partly deleted to the extent of Rs. 14,09,614 and on the remaining Rs. 2,90,462, addition was to be made applying a 12.5% margin, thereby reducing the addition significantly. The appeal was partly allowed accordingly.