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2025 (5) TMI 1720 - HC - Income TaxBogus purchases and sales - applicability of provisions of Section 145 (3) - CIT(A) and the learned ITAT concurrently found that making the said additions would amount to double taxation of the same income therefore had set aside the additions - AO had not rejected the books of accounts and had not passed any order u/s 144 as per ITAT - HELD THAT - The response of the Assessee and the statement of its Managing Director recorded during survey does not lead to the conclusion that the Assessee s books are not correctly drawn up. On the contrary the Assessee had disclosed that it had purchased certain goods for trading and the same were sold without any value addition. The same were also stored separately. This explanation did not present any reason for the AO to reject the books of accounts. AO had accepted the said information as correct. However the same would indicate that only a sum of Rs. 15.49 Crores (Rs. 44.65 Crores Rs. 29.16 Crores) was infused as revenue from allegedly bogus sales. It does appear that the AO had imputed the said information to all purchases and sales made by the Assessee and had sought to make an addition of a sum of Rs. 20, 24, 39, 341/- on the said basis. There is no discussion regarding any other elements of revenue or expenditure. However the AO also made observations to the effect that since purchases and sales were bogus there could be no allowance for expenses. The AO has in effect not accepted the accounts in entirety. In the given circumstances the second question must be answered in affirmative Additions would amount to double taxation - Whether the CIT(A) and the learned ITAT erred in deleting the addition? - As revenue from sales was already disclosed by the Assessee in its books. AO proceeded to make an addition on the basis of the difference between receipts on account of sales and payments made on account of purchases. Plainly the AO has failed to consider that the sales were already a part of the revenue declared by the Assessee. The payments also reflected the outflow on account of purchases. Thus in any event the net revenue being the difference between the sales and purchases was already surrendered to tax. AO could have disallowed the expenditure if any claimed on account of carrying on the trading activity. AO has proceeded to add net revenue from sales (that is sales less purchases) as income notwithstanding the same was already subsumed in the Assessee s declared income. CIT(A) also noted that the Assessee s declared income was in excess of the net revenue of Rs. 20, 24, 39, 341/- as computed by the AO. Thus it is apparent that the addition of net revenue (sales less purchases) to the declared income in effect results in the income being taxed twice. Decided in favour of the Assessee
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court were: A. Whether the Income Tax Appellate Tribunal (ITAT) erred in deleting the addition of Rs. 20,24,39,341/- made by the Assessing Officer (AO) on account of alleged bogus purchases and sales; B. Whether the ITAT erred in holding that the provisions of Section 145(3) of the Income Tax Act, 1961 (the Act) were not applied by the AO, despite findings that the purchases and sales were bogus, and whether such findings amounted to rejection of the books of accounts under Section 145(3) of the Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue A: Legality of deletion of addition of Rs. 20,24,39,341/- on account of bogus purchases and sales Relevant legal framework and precedents: The addition was made under the provisions of the Income Tax Act, based on the AO's conclusion that certain purchases and sales transactions were bogus and thus income from undisclosed sources was introduced. The AO relied on reports from investigation authorities and search and seizure operations under Section 132 and survey under Section 133A of the Act. The CIT(A) and ITAT's deletion of the addition was challenged by the Revenue. Court's interpretation and reasoning: The Court noted that the AO found payments of Rs. 1,10,89,61,370/- on bogus purchases and receipts of Rs. 1,31,14,00,711/- on bogus sales, and treated the difference of Rs. 20,24,39,341/- as undisclosed income. However, the AO did not reject the books of accounts entirely nor conduct a best judgment assessment under Section 144. The AO accepted the payments and receipts as recorded in the books but rejected the genuineness of the transactions. The Court observed that the Assessee had disclosed these sales and purchases in its books and declared income which included the net profit from such transactions. The CIT(A) and ITAT found that adding the net difference as undisclosed income resulted in double taxation because the income was already reflected in the declared income. Key evidence and findings: The AO's addition was based on a letter from the Deputy Director of Income Tax (Investigation) reporting bogus transactions between the Assessee and SEL Manufacturing Company Limited. The Assessee's explanation, supported by statements during survey proceedings, described the nature of trading transactions, storage, and movement of goods. The CIT(A) and ITAT found that the Assessee's books disclosed the transactions and income, and that the AO's approach ignored this fact. Application of law to facts: The Court emphasized that the AO's addition was effectively taxing the same income twice - once as declared income and again as undisclosed income based on the alleged bogus nature of the transactions. The AO's failure to reject the books entirely or make a best judgment assessment under Section 144 was critical. The Court held that the AO could have disallowed expenses related to bogus purchases but could not add the net revenue already declared. Treatment of competing arguments: The Revenue argued that the AO was entitled to ascertain profits from bogus transactions and implicitly rejected the books under Section 145(3). The Assessee contended that the income was already declared and the AO's addition amounted to double taxation. The Court sided with the Assessee, noting the absence of formal rejection of accounts or best judgment assessment by the AO. Conclusions: The Court upheld the concurrent findings of the CIT(A) and ITAT that the addition was not justified and would result in double taxation. Therefore, the deletion of the addition was affirmed. Issue B: Whether the AO applied Section 145(3) of the Act and whether the books of accounts were rejected Relevant legal framework: Section 145(3) empowers the AO to make an assessment under Section 144 (best judgment assessment) if dissatisfied with the correctness or completeness of the accounts. Section 144 requires the AO to give the assessee an opportunity of being heard and to consider all relevant material before making such assessment. Court's interpretation and reasoning: The Court examined the assessment order to determine if the AO had invoked Section 145(3) and made a best judgment assessment under Section 144. The AO's order showed that while the AO concluded the purchases and sales were bogus, there was no explicit rejection of the books of accounts or invocation of Section 144. The AO accepted the payments and receipts recorded in the books but treated the difference as undisclosed income. The Court noted that the AO did not provide any finding that the books were not correctly drawn up or that the method of accounting was not regularly followed. The Assessee's explanations and statements during survey were not found to justify rejection of accounts. The AO's approach was inconsistent as he accepted some parts of the books (payments and receipts) but rejected the transactions as bogus without rejecting the accounts entirely. Key evidence and findings: The AO relied primarily on the DDIT (Investigation) report and the Assessee's responses during survey. The AO's order did not mention any notice or opportunity given under Section 144, nor did it specify making a best judgment assessment. Application of law to facts: Since the AO did not formally reject the books or invoke Section 145(3) and Section 144, the Court held that the ITAT was correct in concluding that the AO had not applied these provisions. The AO's addition was thus not made under the statutory framework for rejection of accounts but on a different premise. Treatment of competing arguments: The Revenue contended that the AO's findings on bogus transactions amounted to rejection of books and application of Section 145(3). The Assessee argued that no such rejection or best judgment assessment was made. The Court agreed with the Assessee, emphasizing the statutory requirements for rejection and best judgment assessment were not met. Conclusions: The Court answered the question affirmatively that the AO did not apply Section 145(3) and did not reject the books of accounts. However, the Court noted this question was not central to the ultimate controversy. 3. SIGNIFICANT HOLDINGS The Court made the following crucial legal determinations: "The AO has not recorded any finding to the effect that it has rejected the books of the Assessee in its entirety and the assessment is based on his best judgment." "The response of the Assessee and the statement of its Managing Director recorded during survey does not lead to the conclusion that the Assessee's books are not correctly drawn up." "The AO's addition was effectively taxing the same income twice - once as declared income and again as undisclosed income based on the alleged bogus nature of the transactions." "The CIT(A) and the learned ITAT concurrently found that making the said additions would amount to double taxation of the same income, therefore, had set aside the additions." "The AO had not rejected the books of accounts and had not passed any order under Section 144 of the Act." Core principles established include:
Final determinations:
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