2025 (6) TMI 2004 - AT - Income Tax

Addition u/s 69C treating the purchases as bogus - addition of estimated profit element - HELD THAT - While upholding the fundamental legal proposition that when sales are not doubted entire purchases cannot be disallowed merely on the ground that suppliers were non-genuine we deem it appropriate to restore the matter back to the file of the AO for carrying out limited verification as under i. AO shall obtain the bank account details of M/s. Mahadev Trading Co. (or any other relevant bank account connected to the transaction) and verify whether there exists any cash trail i.e. whether the payments made by the assessee through banking channels were withdrawn in cash by the supplier or its associates after deposit of cheques received from the assessee. ii. If such cash withdrawals are established and the Revenue is able to demonstrate that the payments were routed back to the assessee or utilized as part of accommodation transactions the Assessing Officer shall proceed to make disallowance in accordance with law considering the full or partial disallowance as warranted. iii. However if no such cash-back trail is established upon verification and payments are found to have remained within the banking system then in that event the addition shall be restricted only to the embedded profit element for which the profit estimation of 5% as adopted by the CIT(A) may be applied as reasonable and fair estimation considering the segmental profit declared by the assessee and judicial precedents discussed above. iv. On perusal of the ledger extract placed on record it is observed that while total purchases recorded from Mahadev Trading Co. aggregate to Rs. 1, 40, 03, 670.00 total payment made to the said party stands at Rs. 1, 24, 94, 654.00 leaving an outstanding balance of Rs. 15, 09, 016.00 unpaid which represents approximately 10.78% of the total purchase value. This aspect has not been specifically dealt with or examined by the CIT(A) in the impugned order. The Assessing Officer shall specifically verify whether the said balance payment has been subsequently made by the assessee. If the assessee establishes that the entire unpaid amount has been fully discharged no adverse inference shall be drawn. However if the outstanding amount or any part thereof remains unpaid the Assessing Officer shall examine the nature status and reasons of such unpaid amount in the context of the overall factual matrix of the transaction and after affording due opportunity to the assessee to explain the same shall factor such aspect appropriately while determining the addition on account of bogus purchases in accordance with the directions contained herein above. v. The assessee is directed to fully cooperate and provide all necessary evidences to facilitate the bank trail verification by the Assessing Officer. vi. The Assessing Officer shall afford reasonable opportunity of hearing to the assessee and shall complete the verification and fresh assessment strictly within the limited scope as defined hereinabove.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these cross appeals include:

- Whether the reopening of assessment under section 147 of the Income-tax Act, 1961 was valid and within jurisdiction, given the material relied upon by the Assessing Officer (AO) was third-party information from GST authorities without independent application of mind or confrontation with the assessee.

- Whether the addition made by the AO under section 69C of the Act treating purchases from M/s. Mahadev Trading Co. as bogus and unexplained expenditure was justified on the facts and law.

- The applicability and correctness of invoking section 69C read with section 115BBE for disallowance of the entire purchase amount versus restricting addition to estimated profit element embedded in such purchases.

- Whether the assessee discharged the onus of proving the genuineness of the purchases through documentary evidence, including invoices, bank payments, stock records, GST returns, and supplier confirmations.

- The effect of the supplier M/s. Mahadev Trading Co. being found non-existent or non-traceable during field verification and failure to respond to summons under section 133(6), on the validity of the purchases.

- The principles of natural justice and whether the AO violated them by not furnishing material relied upon or providing opportunity of cross-examination to the assessee.

- The correctness of the CIT(A)'s approach in estimating 5% profit margin on disputed purchases rather than disallowing the entire amount.

- The relevance and applicability of judicial precedents, including recent decisions of Hon'ble Gujarat High Court and Hon'ble Bombay High Court, to the facts of the case.

- The necessity and scope of further verification by the AO regarding the cash trail of payments made to the supplier and the outstanding balance in the ledger.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reopening under Section 147

The reopening was challenged as bad in law and without jurisdiction, contending that the AO's "reason to believe" was based solely on third-party information from the GST Anti-Evasion Wing without independent application of mind or confrontation with the assessee. The Tribunal examined the statutory framework governing reopening and relevant judicial pronouncements, emphasizing that at the reopening stage, the AO requires only "reason to believe" and not conclusive proof of escapement of income. The information regarding accommodation entries issued by M/s. Mahadev Trading Co. was held to constitute tangible material sufficient to form a prima facie belief. The Tribunal upheld the reopening as legally sustainable, dismissing the assessee's ground challenging it.

Genuineness of Purchases and Applicability of Section 69C

The AO treated the entire purchases of Rs. 1,40,03,670/- as bogus, invoking section 69C on the ground that the supplier was non-existent, transport and weighment documents unverifiable, and payments suspected to be routed back in cash. The assessee produced comprehensive documentary evidence including purchase invoices, ledger extracts, supplier confirmations, transport receipts, weighment slips, RTGS payment proofs, GST returns (GSTR-2A), and ROC records showing company name change, to substantiate the genuineness of purchases.

The CIT(A) observed that the assessee discharged the initial onus by producing primary evidence and that the AO did not dispute payments through banking channels, recording of purchases and sales in books and audited financials, or existence of goods in stock. The AO's conclusion was found to be based on suspicion and conjecture without direct evidence rebutting the documentary proof. The non-traceability of the supplier during field verification, conducted five years after the transaction, was held insufficient to vitiate the documented transactions. Further, the AO's failure to furnish material relied upon or provide opportunity for cross-examination was held to violate principles of natural justice.

The Tribunal analyzed section 69C, which deals with unexplained expenditure where the source is not explained. Here, the source of payment was undisputed, being through banking channels from disclosed funds. Therefore, the application of section 69C was factually and legally misplaced.

Estimation of Profit Element

While accepting the genuineness of payments and sales, the CIT(A) allowed for the possibility of some inflation or accommodation billing and estimated 5% profit margin on disputed purchases as addition. This approach was supported by binding precedents from the Hon'ble Gujarat High Court, which consistently hold that when sales are not doubted and payments are through banking channels, entire purchases cannot be disallowed; only the embedded profit element may be estimated.

The assessee contended that the addition should be deleted entirely or further reduced, noting that the declared profit was already 5.11%, and that adding the entire purchase amount as unexplained expenditure would result in an unrealistically high gross profit ratio of 26.36%. The Tribunal found the CIT(A)'s 5% estimation reasonable and consistent with judicial precedents.

Effect of Supplier's Non-Existence and Field Verification

The Revenue relied on the non-existence of the supplier at the given address and failure to respond to summons as conclusive proof of bogus purchases. The Tribunal noted that absence of the supplier during field verification conducted years later cannot automatically vitiate the transactions, especially when the assessee produced extensive documentary evidence. The Tribunal emphasized that the AO must conduct effective inquiry and confront the assessee with adverse findings, which was not done here.

Natural Justice and Cross-Examination

The AO's failure to furnish the material relied upon (such as third-party statements and GST reports) to the assessee or provide opportunity for cross-examination was held to be a serious violation of principles of natural justice, undermining the validity of the addition.

Applicability of Judicial Precedents

The Tribunal distinguished the recent Hon'ble Bombay High Court decision in Shree Ganesh Developers, which involved independent bank account verification and accepted partial additions by the assessee, from the present case where no independent verification was conducted and the assessee never admitted bogus purchases. The Tribunal also distinguished the Hon'ble Gujarat High Court decision in N.K. Industries Ltd., which arose from a search case with direct incriminating material, unlike the present reassessment based on external GST information.

The Tribunal relied heavily on binding decisions of the Hon'ble Gujarat High Court which hold that when sales are not disputed, payments are through banking channels, and documentary evidence is furnished, full disallowance of purchases is not justified and only reasonable profit estimation is permissible.

Need for Further Verification and Directions

Given the conflicting contentions, the Tribunal directed limited factual verification by the AO regarding the bank account of M/s. Mahadev Trading Co. to ascertain whether payments made through banking channels were withdrawn in cash by the supplier or its associates, indicating accommodation entries. The Tribunal directed that:

• If a cash-back trail is established, the AO may make full or partial disallowance as warranted.
• If no cash-back trail is found, addition shall be limited to the profit element estimated at 5% as adopted by the CIT(A).
• The AO shall also verify the outstanding balance of Rs. 15,09,016/- in the ledger and examine its payment status, giving the assessee opportunity to explain.
• The assessee is directed to cooperate fully and provide necessary evidence.
• The AO shall complete the verification and fresh assessment within the defined limited scope and afford reasonable opportunity of hearing.

3. SIGNIFICANT HOLDINGS

"The reopening was upheld as legally sustainable since information received from the GST anti-evasion wing constituted tangible material sufficient to enable the Assessing Officer to form a prima facie belief that income chargeable to tax had escaped assessment."

"The Assessing Officer's conclusion that the purchases were bogus was based purely on suspicion, surmises, and conjectures, without direct evidence to rebut the documentary evidence filed by the assessee."

"Non-appearance of the supplier to summons and non-traceability during field verification conducted years after the transaction cannot ipso facto vitiate otherwise documented purchases."

"Failure of the Assessing Officer to furnish material relied upon and provide opportunity of cross-examination amounted to a serious violation of principles of natural justice."

"Section 69C applies to unexplained expenditure where the source of expenditure is not explained; here, payments were made through banking channels from disclosed funds, rendering invocation of section 69C factually and legally misplaced."

"When sales are not doubted and payments are through banking channels, entire purchases cannot be disallowed merely on the ground that suppliers were non-genuine; only reasonable estimation of profit element embedded therein is permissible."

"The Assessing Officer shall conduct limited verification of bank accounts to ascertain if payments were withdrawn in cash, and based on such verification, make appropriate disallowance; absent cash-back, addition shall be restricted to estimated profit element."

"The outstanding balance in the ledger shall be verified and examined for payment status, with due opportunity to the assessee to explain."

These holdings establish the principle that reopening assessments require tangible material to form reason to believe, but additions under section 69C must be supported by direct evidence. Documentary evidence, banking transactions, and undisputed sales records form a strong basis to rebut allegations of bogus purchases. Where doubts persist, estimation of profit element is the appropriate remedy rather than full disallowance. Further, adherence to principles of natural justice and opportunity for cross-examination are indispensable in such proceedings.