2018 (3) TMI 2034 - AT - Income Tax

Bogus purchases - addition made on account of purchases made from five parties which were declared by Sales Tax Department as suspicion suppliers - AO made the addition of the purchases on the ground that VAT authorities have treated the sales as non-genuine since these suppliers had not paid VAT on the sales effected by them - CIT(A) deleted addition - HELD THAT - CIT(A) observed that the assessee has requested the AO to give them copies of all the materials/ information/ evidences on the basis of which AO has formed his opinion to make disallowance of such referred purchases. No such materials were supplied to the assessee before using the same against it. CIT(A) further observed that no infirmity has been pointed out in the documents submitted by the assessee. CIT(A) observed that assessee has produced the proof of such payment through banking channel but the AO has failed to substantiate that the assessee received it back in cash. During the year the GP was higher as compared to the last three years which clearly indicates that the current year income is not understated. As per CIT(A) if the suppliers have not paid VAT charges to the Govt. but taken the same from the purchases such differential amounts need to be added in the hands of dealer and they are liable for any action for their defaults. CIT(A) also stated that the assessee on its part has submitted purchase invoice stock movement records VAT registration number ledger account bank statement reflecting entries made to the said parties against the purchases from it etc. however no fault has been found in all these documents by the AO. Thereafter CIT(A) recorded detailed finding which has not been controverted by learned DR by bringing any positive material on record. We also found that GP rate of the assessee during the year has doubled as compared to the earlier year. Accordingly we do not find any reason to interfere in the finding so recorded by CIT(A) resulting into deletion of addition made on account of purchases made from suspicion parties. Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made on account of purchases from five parties declared as suspicious suppliers by the Sales Tax Department.

Issue-wise Detailed Analysis:

1. Deletion of addition made on account of purchases from five parties declared as suspicious suppliers by the Sales Tax Department:

The core issue in this case revolves around the addition made by the Assessing Officer (AO) on account of purchases from five parties that were declared suspicious suppliers by the Sales Tax Department. The AO reopened the assessment for AY 2009-10 based on information from the Sales Tax Department, which indicated that these suppliers had not paid VAT on sales made to the assessee.

Evidence Submitted by Assessee:
The assessee provided several documents to substantiate the genuineness of the purchases:
- Photocopies of Purchase bills
- Reconciliation of Stock Statement showing inward & outward movement of materials
- Bank Statements depicting transactions made by way of Account Payee cheques & through banking channels only
- Ledger Accounts of parties
- Itemwise Quantitative details of purchases and sales

AO's Stand:
Despite the evidence provided, the AO made an addition of Rs. 2,16,32,006/- on the ground that the VAT authorities treated the sales as non-genuine since the suppliers had not paid VAT.

CIT(A)'s Observations:
The CIT(A) deleted the addition, observing that:
- The addition was based solely on information from the Investigation Wing and Sales Tax Authorities without confronting the assessee.
- The assessee had produced ledger accounts, bills/tax invoices, and bank statements showing payments through banking channels.
- There was no evidence of cash flowing back to the assessee.
- The AO had not provided the assessee with copies of the materials/information/evidence used against it, violating the principles of natural justice.
- The AO did not allow the assessee to cross-examine the suppliers, which is a breach of natural justice.

Judicial Precedents:
The CIT(A) referenced several judicial pronouncements to support the deletion of the addition:
- Permit Textiles Vs ITO: The ITAT Mumbai held that without adverse material, additions based on presumption cannot be sustained.
- CIT vs. Nikunj Eximp Enterprises(P) Ltd: The Bombay High Court held that where sales supported the purchases and payment was made through banks, the purchase could not be treated as bogus merely because suppliers did not appear before the AO.
- Mahalaxmi Cotton Ginning Pressing Industries: The Bombay High Court directed that non-payment of VAT by suppliers does not render purchases bogus.
- Umacharan Shaw & Bros v. CIT, Dhakeshwari Cotton Mills v. CIT, Sbeo Narain Duli Chand v. CIT: These cases emphasize that suspicion, however strong, cannot replace proof.

Violation of Principles of Natural Justice:
The CIT(A) highlighted that the AO's actions violated principles of natural justice, as the assessee was not given an opportunity to cross-examine the suppliers or rebut the information used against it.

Conclusion:
The CIT(A) concluded that the purchases from the said parties could not be held as bogus solely based on the Sales Tax Department's declaration. The Income Tax Act requires assessments to be framed based on concrete evidence and rational judgment, which was lacking in this case. The CIT(A) directed the deletion of the addition of Rs. 2,16,32,006/-.

ITAT's Decision:
The ITAT upheld the CIT(A)'s decision, noting that the AO's addition was based on mere suspicion without concrete evidence. The ITAT emphasized that the assessee had provided substantial evidence to prove the genuineness of the purchases, and the AO failed to disprove this evidence or show that the payments were received back in cash. The ITAT dismissed the revenue's appeal, confirming the deletion of the addition.