2025 (6) TMI 1696 - AT - Income Tax

Bogus purchases - Denial of principles of natural justice - Assessee argued that addition confirmed without dealing with the assessee s contention that the addition was made in gross violation of the principle of the natural justice without affording adequate opportunity of hearing to the assessee and without considering the material that was placed on record before the AO. HELD THAT - It is clear that the addition on account of non-genuine purchases has been made without giving a fair opportunity of hearing to the assessee and against the principles of natural justice. Assessment unit has found both the purchases and sales to be not genuine which in fact means that they have found business conducted by the assessee to be bogus. But addition has been made only on account of purchases found to be not genuine which is not inconsonance with the findings of the assessment unit from the investigation conducted by it showing the entire business conducted by the assessee to be bogus. Assessment has been done in an ad hoc manner without any application of min or without adhering to the principles of natural justice. We therefore set aside the assessment order directing the AO to redo the assessment afresh after giving the assessee due opportunity of hearing confronting it with all materials in his possession and adhering with the principles of natural justice. The Ld.AO is thereafter directed to pass order in accordance with law. Appeal filed by the assessee is allowed for statistical purposes.

Summary

The core legal questions considered in this appeal revolve around the validity of the addition made to the assessee's income by treating certain purchases as non-genuine, the adherence to principles of natural justice during the assessment proceedings, the attribution of third-party non-compliance to the assessee, and the initiation of penalty proceedings under the Income Tax Act, 1961.

First, whether the entire purchases amounting to Rs. 5,21,27,915/- could be treated as non-genuine and added to the assessee's income without proper consideration of the assessee's submissions and supporting evidence.

Second, whether the order confirming the addition violated the principles of natural justice by failing to provide the assessee adequate opportunity to rebut the findings or cross-examine third parties whose statements or non-compliance were relied upon.

Third, whether the non-compliance or non-response of third parties to notices issued under Section 133(6) of the Income Tax Act could be attributed to the assessee, thereby justifying the disallowance.

Fourth, whether the initiation of penalty proceedings under Section 270A for alleged misreporting of income was justified given the assessee's disclosure and cooperation.

The Tribunal's analysis primarily focused on the first three issues, as the penalty proceedings were not substantively argued before it.

Regarding the addition of Rs. 5,21,27,915/- treating purchases as non-genuine, the legal framework involves the provisions of the Income Tax Act, particularly Section 133(6) which empowers the Assessing Officer (AO) to issue notices to third parties to verify transactions. The AO relied on the non-response of two of the three vendors to these notices and the conflicting confirmation from the third vendor, who admitted to selling only cloths, not gold, to the assessee. The Designated Verification Unit (DVU) reported non-response from the vendors, and the AO issued a show cause notice to the assessee, which remained unanswered. Consequently, the AO treated the purchases as non-genuine and added the amount to the income, a decision upheld by the Commissioner of Income Tax (Appeals) (CIT(A)).

The Court scrutinized the procedural fairness and substantive basis of this addition. The assessee contended that submissions and confirmations supporting the genuineness of purchases were made, albeit to the jurisdictional AO rather than the assessment unit, and that these were not considered. Further, the assessee claimed that an adjournment request was ignored when the assessment unit closed its portal, preventing timely submission of evidence. The assessee also highlighted that the assessment unit found sales transactions suspicious but did not confront the assessee with this adverse information, violating natural justice.

The Court found that the AO and CIT(A) had proceeded without adequately considering the assessee's submissions and without providing a fair opportunity to rebut adverse findings. The failure to confront the assessee with the investigation findings regarding sales, alongside the purchases, indicated a lack of comprehensive and fair inquiry. The Court emphasized that the addition was made on an ad hoc basis, without application of mind or adherence to natural justice principles.

On the issue of attributing third-party non-compliance to the assessee, the Court noted that non-response of vendors to Section 133(6) notices cannot automatically be held against the assessee without giving the assessee an opportunity to challenge or explain. The Court underscored that the assessee cannot be penalized merely for third parties' non-cooperation, especially when the assessee had attempted to provide evidence and explanations.

Regarding the initiation of penalty proceedings under Section 270A, the Court observed that the assessee had disclosed all relevant details and cooperated in good faith. However, since the penalty issue was not extensively argued, the Court did not make a substantive ruling on this point.

The Court concluded that the assessment order was vitiated by procedural lapses and lack of adherence to natural justice. It noted the contradictory findings of the AO's investigation that both purchases and sales were found to be non-genuine, yet only purchases were added to income, reflecting inconsistency and arbitrariness.

Accordingly, the Court set aside the assessment order and directed the AO to re-conduct the assessment afresh, ensuring that the assessee is given due opportunity of hearing, all materials in possession of the AO are confronted to the assessee, and principles of natural justice are strictly followed. The AO was further directed to pass the order in accordance with law.

In its significant holdings, the Tribunal stated verbatim: "It is clear that the addition on account of non-genuine purchases has been made without giving a fair opportunity of hearing to the assessee and against the principles of natural justice." Further, it observed, "the assessment has been done in an ad hoc manner without any application of mind or without adhering to the principles of natural justice."

The core principles established include the imperative that additions to income based on non-genuine transactions must be founded on proper investigation, fair opportunity to the assessee to rebut adverse findings, and adherence to natural justice. Non-compliance by third parties cannot be imputed to the assessee without due process. Moreover, assessment orders must be consistent with the findings of investigations and not selectively applied.

On the principal issue of addition of Rs. 5,21,27,915/- as non-genuine purchases, the final determination was that the addition could not be sustained in the present form and the assessment must be redone after proper opportunity and consideration of all evidence.