2025 (6) TMI 1466 - AT - Income Tax

Addition u/s 69A - bogus purchases - CIT(A) deleted addition - HELD THAT - As evident that assessee claimed before the AO that he is engaged in a work of milling of rice wherein he has to deliver 67% of his production to government and the balance rice produced and the bye products are traded. Purchases of assessee are consisted of packaging material in cash. Cash entries in the bank statement in absence of any nexus with entry operator cannot be made on account of bogus purchase. AO did not find any defect in books of account. AO accepted sales so no addition on account of bogus purchase could be sustained. Therefore the discussion reasons and findings recorded by CIT(A) being just fair reasonable and legal deserves to be upheld. There are no reason to interfere with the process of reasoning and findings of Ld.CIT(A). Appeal of Revenue is dismissed.

Summary

The core legal questions considered in this appeal revolve around the validity and correctness of the addition of Rs. 1,80,50,000/- made under Section 69A of the Income Tax Act, 1961, on the ground of alleged bogus purchases. Specifically, the issues include:

• Whether the reassessment initiated under Section 147 read with Section 144B was valid and based on proper reasons.
• Whether the assessee's transactions with M/s. Shri Vaishno Devi Exim constituted bogus purchases leading to unexplained cash credits under Section 69A.
• Whether the assessee failed to furnish sufficient documentary evidence to prove the genuineness of the transactions.
• Whether the findings of the Assessing Officer (AO) regarding the cash credits and admissions of the proprietor of M/s. Shri Vaishno Devi Exim justified the addition.
• Whether the appellate authority (CIT(A)) erred in deleting the addition made by the AO.

Issue-wise Detailed Analysis

1. Validity of Reassessment Proceedings under Section 147 and Section 144B

The reassessment was initiated based on information received from the Investigation Wing and the Insight Portal, which indicated bogus purchases amounting to Rs. 1,80,50,000/-. The AO recorded reasons and obtained prior approval from competent authority before issuing notice under Section 148. The legal framework under Section 147 mandates that reassessment can be initiated if the AO has reason to believe that income has escaped assessment. Section 144B prescribes faceless assessment procedures. The Court observed that these procedural requirements were duly complied with, and no challenge was raised by the assessee regarding the validity of reassessment initiation. Hence, the reassessment proceedings stood on firm legal footing.

2. Legitimacy of Addition under Section 69A on Account of Bogus Purchases

Section 69A deals with unexplained cash credits. The AO relied heavily on the statement of Shri Kapil Kumar Jain, proprietor of M/s. Shri Vaishno Devi Exim, who admitted that the bank account was used to show bogus purchases and that amounts deposited were not related to any genuine business transactions. The AO also noted multiple cash credit and debit entries in the assessee's bank account that corroborated this admission. Based on these findings, the AO concluded that the transactions were bogus and added the amount to the assessee's income under Section 69A.

However, the CIT(A) took a different view. The CIT(A) accepted the assessee's explanation that the business involved milling of rice with mandatory delivery of 67% of production to the government, and the remaining rice and by-products were traded. The purchases primarily consisted of "Bardana" (packing material), which were old gunny bags purchased in cash. The CIT(A) held that mere cash transactions or cash entries in bank statements do not ipso facto prove bogus purchases. It was emphasized that unless a nexus with the entry operator or evidence of manipulation was established, the addition under Section 69A could not be sustained.

The CIT(A) further observed that the AO did not reject the books of account or find defects therein and accepted the sales declared by the assessee. The absence of any clearing debit entries (such as cheques or RTGS) in the bank account also weighed against the presumption of bogus purchases. Therefore, the CIT(A) deleted the addition.

3. Evidentiary Value of Statements and Bank Transactions

The AO's reliance on the statement of Shri Kapil Kumar Jain was crucial. The proprietor admitted to using the bank account for bogus purchases and receiving commissions. However, the CIT(A) pointed out that the mere presence of cash credits and debits in the assessee's bank account does not establish the assessee's involvement in bogus transactions. The CIT(A) required a direct nexus or corroborative evidence linking the assessee to the bogus entries, which was not found.

This treatment reflects the principle that unexplained cash credits must be directly attributable to the assessee, and mere association or indirect linkage is insufficient for addition. The Court noted that the AO's approach lacked this critical evidentiary nexus.

4. Treatment of Competing Arguments

The Revenue argued that the assessee failed to produce documentary evidence to prove the genuineness of transactions and that the AO's findings and the proprietor's admissions warranted addition. The assessee contended that the transactions related to genuine business purchases of packing material paid in cash, which is customary in the trade, and that the books of account were not defective or rejected.

The CIT(A) carefully weighed these contentions, emphasizing the absence of any defect in books or rejection of accounts, acceptance of sales, and lack of direct evidence linking the assessee to bogus purchases. The CIT(A) found the assessee's explanation plausible and consistent with the nature of the business.

The Court upheld the CIT(A)'s reasoning, noting that the Revenue's arguments did not sufficiently demonstrate that the addition was justified.

5. Application of Law to Facts and Final Conclusions

The Court found that the AO's addition under Section 69A was based on the proprietor's admissions and bank statement entries but lacked direct evidence connecting the assessee to bogus purchases. The CIT(A) applied the legal principle that unexplained cash credits must be attributable to the assessee and that mere cash entries or third-party statements without nexus cannot sustain addition. The CIT(A)'s deletion of the addition was therefore justified.

The Court held that the reassessment proceedings were valid but the addition was not sustainable on the facts and evidence. The deletion by CIT(A) was upheld, and the Revenue's appeal was dismissed.

Significant Holdings

"On perusal of bank account statement maintained by the assessee in SBI, it has been noticed that there are so many cash credit and debit entries which endorse the statement of Shri Kapil Kumar Jain. In the statement he clearly admitted that the bank account of M/s. Shri Vaishno Devi Exim was used by him for showing bogus purchases. All the transactions made through this account number 134905500281 were not related to any business. He further admitted that different purchase parties used to deposit amounts in the said bank account showing bogus purchases and Shri Kapil Kumar Jain used to either withdrawn the cash from his account or transfer the amounts to other concerns, which were generally also bogus. Shri Kapil Kumar Jain returned the cash to those purchase parties as stated by him. Shri Kapil Kumar Jain also admitted that he used to receive commission in cash from such purchase parties for the transactions routed through his bank account."

"There could be entries in the bank statement of the appellant but until or unless any nexus with the entry operator is established, no addition can be made on account of bogus purchase in the hands of the appellant."

"The AO has not found any defect in the books of accounts of the appellant and the same are not rejected by him. The AO has accepted the sales of the appellant. Thus no addition on account of bogus purchase can be sustained."

The core principle established is that for additions under Section 69A on account of unexplained cash credits alleged to be from bogus purchases, the Revenue must establish a direct nexus between the assessee and the bogus transactions. Mere third-party admissions and cash entries in bank statements without such nexus are insufficient. The integrity of the books of account and acceptance of sales further strengthen the assessee's position.

Accordingly, the final determination was to dismiss the Revenue's appeal and uphold the deletion of the addition of Rs. 1,80,50,000/- made under Section 69A for the assessment year 2014-15.