2025 (5) TMI 1079 - AT - Income Tax

Addition u/s 68 - appellant opts for presumptive taxation u/s 44AD - HELD THAT - In the case of Nandlal Popli 2016 (6) TMI 883 - ITAT CHANDIGARH it was held that even where appellant opts for presumptive taxation scheme the addition u/s. 68 can be made. Neither in section 68 nor in section 44AD there is an express prohibition that an addition relating to cash credit cannot be made where appellant opts for presumptive taxation method. On 21.3.2025 during the hearing proceedings before the ITAT the Ld. AR of the appellant has pleaded that the purchase transaction is genuine and they can prove the same before the AO if an opportunity is given as the payment for purchase of these diamonds in question was made through banking channel in subsequent year and the same was not examined by any authority. As decided by the Bench that the issue of payment through banking channels in subsequent year may be verified and genuineness of payment is to be examined by the Ld. AO. As the issue was not examined by the Ld. AO on these lines the same is remanded to the file of the Ld. AO and accordingly the Ld. AO is directed to pass the order after giving an opportunity to the appellant. If the transaction is found to be fictitious and its only an accommodation entry the recent decision in the case of PCIT Vs. Buniyad Chemicals Ltd. 2025 (3) TMI 881 - BOMBAY HIGH COURT may be taken into consideration by the Ld. AO. Secondly the purchases made through the entity Namo Diamonds and corresponding sales of these diamonds may be thoroughly investigated to find out the genuineness of the transaction. Issue is remitted to the file of the Ld. AO.The appeal of appellant is allowed as above for statistical purposes.

Summary

The core legal questions considered in this appeal include:

1. Whether additions under section 68 of the Income Tax Act can be made when the assessee has opted for presumptive taxation under section 44AD.

2. Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming additions without proper application of mind and investigation.

3. Whether the invocation of section 68 was justified on the facts, particularly concerning alleged fictitious purchases from a purported supplier company.

4. Whether the addition of Rs. 53,09,550/- on account of unexplained purchases was sustainable.

5. Whether the AO was justified in rejecting the assessee's claim of genuine transactions based on the non-existence of the supplier company at the given addresses and other investigative findings.

Issue-wise Detailed Analysis:

Issue 1: Applicability of Section 68 Additions Despite Presumptive Taxation Under Section 44AD

Legal Framework and Precedents: Section 44AD provides a presumptive taxation scheme where income is deemed to be a specified percentage of turnover or gross receipts, and the assessee is not required to maintain detailed books of account. Section 68 deals with unexplained cash credits, allowing the AO to make additions if the source of credit is not satisfactorily explained.

Several precedents were cited by the appellant to contend that no additions under section 68 can be made if presumptive taxation under section 44AD is opted, relying on the non-obstante clause in section 44AD. However, the Tribunal noted that neither section 44AD nor section 68 expressly prohibits additions under section 68 where presumptive taxation is opted.

Cases such as Nandlal Papli vs. DCIT were examined, where the Tribunal upheld additions under section 68 despite the assessee opting for presumptive taxation, thus negating the appellant's contention. Other cases cited by the appellant were found distinguishable on facts, particularly where no books of account were maintained, unlike the present case where the assessee maintained detailed books, invoices, and bank statements.

Court's Reasoning and Application: The Court held that the non-obstante clause in section 44AD does not bar the AO from invoking section 68 if there is a credible reason to doubt the genuineness of transactions. The maintenance of books of account and availability of transaction records further supported the applicability of section 68 in this case. Thus, the AO's and CIT(A)'s invocation of section 68 was legally sustainable.

Issue 2: Validity of Addition of Rs. 53,09,550/- Under Section 68 on Account of Alleged Purchases

Key Evidence and Findings: The AO relied on information from the Directorate of Revenue Intelligence (DRI) and the Income Tax Department's "Insight Portal" which flagged suspicious transactions involving "Namo Diamonds Pvt. Ltd." The DRI investigation suggested that this company was a conduit or accommodation entry provider used to inflate import prices and facilitate outward remittances, adversely affecting forex reserves.

The AO attempted to summon "Namo Diamonds Pvt. Ltd." under section 131 but found that the company did not exist at the addresses provided by the assessee. The Income Tax Inspector's report, supported by statements from the building caretaker and adjacent shop owners, confirmed the non-existence of the company at those locations. The AO thus treated the purchases as fictitious and accommodation entries, concluding a planned conspiracy to camouflage transactions.

Court's Interpretation and Treatment of Competing Arguments: The appellant submitted invoices, ledger accounts, and bank statements to prove genuineness, arguing that the purchases were real and payment was made through banking channels in the subsequent year. However, the AO and CIT(A) found the evidence insufficient, emphasizing the investigative findings and the absence of the supplier company at declared addresses.

The Tribunal acknowledged the appellant's submission regarding payment through banking channels but noted that this aspect was not examined by the AO. The Tribunal remanded the matter to the AO for verification of payment genuineness and further investigation into the supplier's existence and the nature of transactions.

Issue 3: Whether the CIT(A) and AO Erred in Confirming Additions Without Proper Application of Mind

The appellant contended that the CIT(A) confirmed additions without applying proper mind. However, the Tribunal found that the CIT(A) had carefully considered the submissions, investigative reports, and relevant case law before confirming the addition. The CIT(A) also relied on the DRI's findings and the failure to produce the supplier company at the given addresses as a basis for sustaining the addition.

The Tribunal observed that the CIT(A) and AO had conducted adequate inquiries, including issuing summons and inspection reports, and had provided opportunities to the appellant to present evidence. The Tribunal found no merit in the contention that the authorities failed to apply their mind.

Issue 4: Invocation of Section 68 in the Present Facts

The appellant argued that section 68 was not applicable as the income was declared under presumptive taxation and that the purchases were genuine. The Tribunal, after reviewing the facts and precedents, held that section 68 can be invoked if the AO has reasons to believe that the credits are unexplained or fictitious, regardless of presumptive taxation.

The Tribunal emphasized that the non-existence of the supplier company at the stated addresses and the investigative findings constituted sufficient cause to invoke section 68. However, it also directed the AO to verify the genuineness of payment through banking channels and conduct a thorough investigation of the purchases and sales involving "Namo Diamonds Pvt. Ltd." before passing a final order.

Significant Holdings:

"Neither in section 68, nor in section 44AD, there is an express prohibition that an addition relating to cash credit cannot be made where appellant opts for presumptive taxation method."

"In the case of Nandlal Popli ITA No. 1161/Chd/2013, it was held that even where appellant opts for presumptive taxation scheme, the addition u/s. 68 can be made."

"The issue of payment through banking channels in subsequent year may be verified and genuineness of payment is to be examined by the Ld. AO. As the issue was not examined by the Ld. AO, on these lines, the same is remanded to the file of the Ld. AO and accordingly, the Ld. AO is directed to pass the order after giving an opportunity to the appellant."

"If the transaction is found to be fictitious and its only an accommodation entry, the recent decision of Hon'ble Bombay High Court in the case of PCIT Vs. Buniyad Chemicals Ltd. dated 19.3.2025 may be taken into consideration by the Ld. AO."

The Tribunal ultimately remitted the matter to the AO for further investigation and verification of the genuineness of transactions and payments, directing that the AO pass a fresh order after providing the appellant an opportunity to be heard. The appeal was allowed for statistical purposes, reflecting the procedural nature of the remand.