Addition towards alleged bogus purchases unsustainable as cross examination not allowed

ACIT Vs Neena Hardeep Singh (ITAT Delhi)

ITAT Delhi held that addition towards alleged bogus purchases unsustainable as cross examination of person based on which AO was drawing inferences was not allowed and payments were made through banking transactions.

Facts- The assessee had claimed to be engaged in the business of fabrication and trading of readymade garments. AO found that the assessee has shown purchases amounting to Rs. 76,88,380 /- from M/s. Thakur Associates but on investigation made at the premises it was found that it was a residential house of the brother of Sanjiv Thakur, the proprietor of M/s. Thakur Associates.

The assessee was directed to ensure the presence of the party himself for verification of genuineness of transactions. However, as assessee failed to produce anyone, Ld. AO considered M/s. Thakur Associates to be an entity created to provide accommodation entries. Ld. AO observed that the confirmation filed by the assessee from M/s. Thakur Associates was not reliable and thus in the absence of any other details like purchase bills, challans, details of material purchase and their utilization for making sales, Ld. AO treated the purchase made from M/s. Thakur Associates as bogus purchases.

CIT(A) deleted addition on account of alleged bogus purchases from Ms/. Thakur Associates. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that when the Ld. AO was not believing the confirmation submitted by the assessee from M/s. Thakur Associates then it was necessary to give an opportunity to rebut the same to the assessee. Ld. AO was drawing inferences from the statement of Rahul, and Ld. CIT(A) has rightly observed that no reason have been given in the assessment order in not allowing cross examination of Rahul which is a violation of principle of natural justice. Ld. CIT(A) has taken into consideration the assessment record and observed that assessee was never asked by Ld. AO to produce Sanjeev Thakur for verification. The Revenue in this appeal does not dispute that this was an incorrect factual aspect of the assessment proceedings as recorded by Ld. CIT(A) on the basis of records before it. Further what transpires is that the payments were made through banking transactions and without any factual evidences, Ld. AO concluded that the amount deposited in the account of Thakur Associates was withdrawn as cash by the assessee. The findings of Ld. CIT(A) require no interference. Thus this Ground has no substance. Same is decided against the Revenue.

FULL TEXT OF THE ORDER OF ITAT DELHI

The appeal has been filed by the Revenue against order dated 23.01.2008 passed in appeal no. 295/06-07 for assessment year 2004-05, by the Commissioner of Income Tax (Appeals)-III, New Delhi (hereinafter referred to as the First Appellate Authority or in short ‘Ld. F.A.A.’) in regard to the appeal before it u/s 250 of Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of assessment order dated 27.12.2006 u/s 143(3) of passed by ACIT, Circle-18, New Delhi (hereinafter referred as Ld. Assessing officer or in short Ld. AO) and Cross objection have been raised by assessee.

2. The facts in brief are that assessee had claimed to be engaged in the business of fabrication and trading of readymade garments. Return declaring income of Rs. 1,56,891/-was filed and statutory notice u/s 143(2) of the Act was issued. Ld. AO had found that assessee has shown purchases amounting to Rs. 76,88,380 /- from M/s. Thakur Associates but on investigation made at the premises it was found that it was a residential house of brother of Sanjiv Thakur, the proprietor of M/s. Thakur Associates, who lived in Joint family. Sanjiv Thakur was not available and inquiries were made from Rahul who was nephew of Sanjiv Thakur. Based on the statement of Rahul that the premises is of his deceased father, N.K.Thakur and that his uncle Sanjiv Thakur resided in the premises till April, 2013 and that he is not aware of the existence of the firm M/s. Thakur Associates, the assessee was directed to ensure the presence of the party himself for verification of genuineness of transactions. However, as assessee failed to produce anyone, Ld. AO considered M/s. Thakur Associates to be an entity created to provide accommodation entries. Ld. AO observed that the confirmation filed by the assessee from M/s. Thakur Associates was not reliable and thus in the absence of any other details like purchase bills, challans, details of material purchase and their utilization for making sales, Ld. AO treated the purchase made from M/s. Thakur Associates as bogus purchases. Ld. AO also made an observation that the payments made against these purchases have been withdrawn from the bank in cash on the same day. He thus concluded that it appears that this cash was used to be sent to a foreign country by Hawala channels to be received as sale proceeds in convertible foreign exchange.

2.1 Further with regard to other six parties, the Ld. AO was not satisfied of the purchases made as no confirmation was provided, accordingly, addition of Rs. 28,43,799/- was made.

2.2 Ld. AO also observed that there was an advance appearing in the books of Rs. 16,09,094/- from M/s. Wexco Trading Company with which there is no transaction during the year. Accordingly considering it to be unexplained credits appearing in the books of accounts, addition was made.

2.3 Ld. AO further observed that expenses of Rs. 5,65,490/- has been shown as payments made for fabrication expenses but there was no corresponding TDS. As assessee did not provide confirmations of these parties, Ld. AO considered these as non-genuine expenditure, not incurred for purpose of business and addition of this amount was made.

2.4 Further, AO observed that as purchases and fabrication expenses are not genuine the local sale of garments of Rs. 2,02,56,951/- is also not genuine. Ld. AO considered the fact that sales tax returns has not been filed so the local sales of Rs. 74,96,688/- to M/s. Golden Harvest, a related party of the assessee, were alleged to be bogus sales and addition was made.

3. Ld. AO concluded and re-calculated taxable income as follows;

“I hold that assessee has made bogus export by exporting/booking some other type of goods of no commercial value in the name of some of genuine existing parties/ improter situated in foreign countries,, but those parties are in no way involved in actual export/import with assessee’s concern. The goods exported by assessee were of no commercial value or are of meager value. Hence, assessee has booked export invoice at the exorbitant high amount in the name of non-genuine importer existing in Hungary/Netherlands, however, the sales invoices and shipment of goods were received by assessee’s own persons in Hungary/Netherlands. In its investigation conducted by the Investigation Wing, Delhi it was revealed that Neena Hardeep Singh and Shri hardeep Nihal Singh visit frequently abroad and own M/s. Trans Europe (Textiles) BV, 124, M.J. Street, the Netherlands. This concern appears to be special purpose company. The assessee has made total export sales to this one company i.e. M/s. Trans Europe(Textiles) BV which is owned by the assessee alongwith Shri Hardeep Nihal Singh. The assessee executes bogus exports in names of these concerns and bring equivalent sale proceeds to invoice value in convertible foreign exchange in India through banking channels in the name of the assessee. Against these fictitious exports, assessee has also claimed export benefits i.e. duty drawback of Rs. 9,34,254/- and DEPB of Rs. 4,92,174/-.

Considering the above, it is crystal clear that assessee-concern has not made any actual sale whether local or export but the money received against export sale received in convertible foreign exchange is only the Hawala amount brought into India through the garb of export followed by the assessee. Further, the assessee has not proved genuineness of purchases and fabrication and making charges against local sales made by the assessee. Therefore, the sales made by the assessee is not genuine and income received on account of the same is assessed as income from undisclosed sources.

With these remarks, the total income of the assessee is computed as under :

4. As the assessee went in appeal before Ld. First Appellate Authority he got the relief of deletion of the addition of Rs. 1,18,41,518/-, made by the Ld. AO taking the peak export of the month of May, 2003 for the relevant year. The addition of Rs. 28,43,799/- on account of alleged bogus purchases to other parties was sustained. The addition of Rs. 16,09,094/- on account of unexplained cash credits from the account of M/s. Wexco Trading Company was deleted. The addition on account of fabrication of Rs. 5,65,490/- was deleted . However, it was observed that the addition if any can be made u/s 40A(3) in respect of these cash payments if there is any violation of the same for which there was direction to do so. Ld. CIT(A) also deleted addition of Rs. 76,88,380/- on account of alleged bogus purchase to M/s. Thakur Associates.

4.1 Accordingly, the Revenue is in appeal raising following grounds :-

“1. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs. 1,18,41,518/- made on account of peak export by the A.O.

2. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs. 74,96,688/- made by the AO on account of bogus sales to M/s. Golden Harvest.

3. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs. 76,88,380/- made by the AO on account of bogus purchase from M/s. Thakur Associates.

4. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs. 16,09,094/- made by the AO on account of unexplained cash credit.

5. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs. 5,65,490/-made by the AO on account of disallowance of fabrication expenses had not been incurred on the business.

6. The order of the CIT(A) is erroneous and not tenable in law and facts.

7. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”

4.2 The assessee has also raised following grounds in the cross objections :

“1. That on the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) should have independently entertained and examined the documentary evidences placed as additional evidence in respect of alleged bogus purchase of Rs. 76,86,380/- from M/s. Thakur Associates.

2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the addition of Rs. 28,43,799/- made by the assessing officer, holding the same to be bogus purchases from various parties.

3. That on the facts and in the circumstances of the case, the appellant should have been held entitled to deduction for expenditure amounting to Rs. 1,06,09,019/- claimed by the appellant in the profit and loss account.

4. That the assessing officer erred on facts and in law in not allowing deduction under section 80HHC of the Act on the export sales.”

5. Heard and perused the record.

6. DR submitted that Ld. AO had heavily relied statement of the nephew of Sri Sanjiv Thakur, proprietor of M/s. Thakur Associates as the firm was found to be non-existing entity. It was submitted that Ld. AO has taken into account all the relevant and suspicious circumstances which indicated that the transactions of purchase and sales reflected in the books of accounts were all fictitious and intended to take money out of India in the form of false exports and bring back through Hawala.

6.1 It was submitted by Ld. DR that Ld. First Appellate Authority has fallen in error in taking into consideration certain facts which were not part of the assessment proceedings. Ld. DR also relied the written submissions filed on 14.03.2022.

7. On the other hand, on behalf of the assessee in regard to addition of Rs. 1,18,41,518/-, Ld. Sr. Counsel heavily relied the Tribunal’s order in case of assessee’s husband, ITA No. 1422/Del/2018 for A.Y. 2004-05 to submit that similar allegations of fictitious exports and transaction have been found not sustainable and deleted. It was submitted that evidences placed before the tax authorities, exhibited genuine exports including clearance from the custom department and same has been rightly relied to make the deletion. It was submitted that at one hand export sales were held to be bogus but draw back and DEPB income on such exports has been accepted and added back. Ld. Sr. Counsel submitted that the cryptic manner in which the assessment order is passed while calculating the additions, there is no logic and reason or justification for taking a peak export for addition.

7.1 In regard to the addition of Rs. 74,96,688/- on account of sales to Golden Harvest it was submitted that the sales of readymade garments were lesser than the sales tax turnover threshhold and required no sales tax. It was submitted that Ld. CIT(A) has taken into consideration all the relevant facts including that the payment were received through banking channels and no adverse evidence was available with the Ld. AO to make the addition. Ld. Sr. Counsel also relied the judgment in case of husband of assessee where similar addition was deleted by the Tribunal.

7.2 In regard to deletion of Rs. 76,88,380/- towards alleged bogus purchases from Thakur Associates, Ld. Sr. Counsel submitted that without giving any opportunity to the assessee to cross examination, Rahul, who was nephew of Sanjiv Thakur, the statement was relied by the Ld. AO and Ld. CIT(A) has rightly observed that the statement cannot be made basis for addition. It was submitted that Ld. CIT(A) has rightly observed that Ld. AO had not produced any evidence except statement of Rahul to substantiate that purchases were not genuine. It was submitted that the payments were made through banking channels and same were unnecessarily doubted by Ld. AO. Ld. Sr. Counsel submitted that the books of accounts were duly audited and without rejecting them, the purchases could not be disputed. Again Ld. Counsel submitted that the identical addition in the hands of husband of assessee has been deleted by the Tribunal.

7.3 In regard to addition of Rs. 16,09,094/- towards unexplained cash credits, Ld. Sr. Counsel submitted that the amount was received in the immediately preceding year which can not be treated as income during the present assessment year. It was submitted that Section 68 of the Act, is not applicable to outstanding balance of creditors.

7.4 In regard to disallowance of Rs. 5,65,490/- of fabrication expenses, Ld. Sr. Counsel submitted that all the details of the expenses were submitted which have been duly appreciated by Ld. CIT(A).

7.5 7.4 Ld. Sr. Counsel relied following judgments :-

“1. ACIT vs. Shri Hardeep Nihal Singh : ITA No. 1422/Del/2008 (Del. Trib.)

2. Andaman Timber Industries vs. CCE : 52 GST 355(SC)

3. Kishanchad Chellaram v. CIT : 125 ITR 713 (SC)

4. CIT vs. Usha Stud Agriculture Farms Ltd. : 301 ITR 384 (Del.)

5. CIT vs. Parmeshwar Bohra : 267 ITR 698 (Raj.)

6. PCIT v. Jugal Kishore Mahendra Biyani : Tax Appeal No. 1000 of 2018 (Guj.)

7. ACIT v. Kishan Lal Jewels (P) Ltd. : ITA No. 229/Del/2011 (Del.Trib.)

8. CIT v. Fancy International : [2008] 166 Taxman 183 (Del.)

9.CIT v. Nikunj Eximp Enterprises (P.) Ltd. : [2015] 372 ITR 619 (Bom)

10. Diagnostics v. CIT : [201] 334 ITR 111(Cal.)

11. CIT vs. Nangalia Fabrics Pvt. Ltd. : [2013] 40 com 206 (Guj.)

12. Geolife Organics v. ACIT : [2017] 58 ITR 297 (Mum Trib.)

8. Further, in regard to ground no. 2 raised in assessee’s cross objections, it was submitted that Ld. CIT(A) has failed to appreciate that the details of expenses were duly placed before Ld. AO by reply dated 17.03.2006 made available at page no. 31-33 of the paper book. It was submitted that without rejecting the books and without conducting independent inquiries on basis of alleged bogus purchases, addition could not have been made and sustained.

8.1 As with regard to ground no. 3 and 4 in assessee’s cross objection, it was submitted that the Ld. AO while calculating assessable income erroneously did not reduce the remaining undoubted expenses of Rs. 1,06,09,019/- as claimed in the profit and loss account by the assessee. No reason for disallowing such expenses have been given by the Ld. AO, yet the same were not reduced while computing the assessed total income. That the aforesaid expense, were undisputedly incurred for business purposes need to be reduced from the total income/ business income.

9. Further, it was contended that assessee has also claimed deduction under section 80HHC of the Act of Rs.36,557/- which is not allowed in the computation at end of the assessment order without any cogent reasons being provided thereof. Since the assessee undisputedly satisfies all the conditions, the same calls for being allowed.

9.1 Ld. Sr. Counsel has submitted that the said grounds and issue raised in the cross objection are undisputedly emanating from the order of the assessing officer and CIT(A) deserves to be considered and allowed as issues raised in the cross objection undisputedly emanate from the order of the assessing officer or CIT(A). Reliance was placed on the following cases to submitting that Courts/ Tribunals have held that an assessee can raise additional grounds/ claims in cross objection filed in response to the Departmental appeal before the Tribunal, provided facts are on record:

√ CIT vs Silver Line: 383 ITR 455 (Del)

√ CIT vs K Venkatesh Dutt: 319 ITR 331 (Kar)

√ DCIT vs. Turquoise Investment & Finance Ltd.: 299 ITR 143 (MP)

√ Fast Booking (I) (P.) Ltd. vs DCIT: 378 ITR 693 (Del)

√ DCIT vs Liquid Investment & Trading Co. Ltd.: ITA No.4802/Del/2002 (Del Trib.)

√ Steri Sheets Ltd in ITA No.546 & 547/Del/2000 (Del Trib.)

√ Daler Singh Mehndi vs DCIT: [2018] 91 taxmann.com 178 (Del Trib.)

We have given thoughtful consideration to the facts, submissions and law relied and the grounds are determined as follows in accordance with flow of events in assessment order.

10. Ground no. 3 in appeal of Revenue : The record shows that Ld. AO has considered the whole business activity and fund flow of the assessee to be sham and intended to circulate the money outside of India and bring it back. However, what he relied heavily was the fact that purchases of the assessee from M/s. Thakur Associates were not found to be genuine as at the address of M/s. Thakur Associates the entity was not found to be existing and for that purpose statement of Rahul, who was nephew of Sanjeev Thakur, the proprietor of M/s. Thakur Associates was heavily relied. The impugned assessment order specifically mentions that by letter dated 17.03.2006, assessee had made specific request for the cross examination of Rahul, however, without giving any discussion on this what to say reason to decline, the ld. AO considered the statement of Rahul to conclude that M/s. Thakur Associates was providing bogus entries and shifted burden upon the assessee to produce the proprietor of M/s. Thakur Associates. Thus, being unable to produce Mr. Sanjeev Thakur for verification of the transaction, purchases from M/s. Thakur Associate was branded as suspicious and bogus purchase and further conclusion was drawn that the cash shown as bogus purchase was sent to foreign country by Hawala from receipts as sale proceeds in convertible in foreign exchange.

11. The Bench is of considered opinion that when the Ld. AO was not believing the confirmation submitted by the assessee from M/s. Thakur Associates then it was necessary to give an opportunity to rebut the same to the assessee. Ld. AO was drawing inferences from the statement of Rahul, and Ld. CIT(A) has rightly observed that no reason have been given in the assessment order in not allowing cross examination of Rahul which is a violation of principle of natural justice. Ld. CIT(A) has taken into consideration the assessment record and observed that assessee was never asked by Ld. AO to produce Sanjeev Thakur for verification. The Revenue in this appeal does not dispute that this was an incorrect factual aspect of the assessment proceedings as recorded by Ld. CIT(A) on the basis of records before it. Further what transpires is that the payments were made through banking transactions and without any factual evidences, Ld. AO concluded that the amount deposited in the account of Thakur Associates was withdrawn as cash by the assessee. The findings of Ld. CIT(A) require no interference. Thus this Ground has no substance. Same is decided against the Revenue.

12. Ground no 2 in appeal of Revenue. The order of ld. Assessing Officer shows that the sales which were made to M/s. Golden Harvest were considered to be bogus sales without commenting anything on the plea of assessee that the local sales were made within the limits for which registration under the relevant sales tax was not necessary. It appears that this finding of bogus sales has its seeds in the alleged bogus purchase from Thakur Associates. What transpires from record and rightly held by Ld. CIT(A) is that apart from his own belief, Ld. AO did not make any inquiry with regard to sales from M/s. Golden Harvest. The fact that the amounts were received from M/s. Golden Harvest from banking channel was taken into consideration by Ld. CIT(A). Ld. CIT(A) also concluded that without inquiry from M/s. Golden Harvest and without confronting specifically to the assessee why the sale should not be treated as bogus the same could not have been discarded and treated as undisclosed income from undisclosed source. Thus, the findings of Ld. CIT(A) in deleting the additions on account of alleged bogus purchases and sales do not require interference. Ground is decided against the Revenue.

13. Ground no 5 in appeal of Revenue. It can be observed that with regard to fabrication charges being not genuine the foundation of Ld. AO was the treatment he has given to purchase and sales of the assessee. Which have been found genuine by Ld. CIT(A) and here also. The bench is of considered opinion that the Ld. AO without making any inquiry and contradicting the claim of assessee has made disallowance of fabrication expenses. Assessee had claimed that there is general practice to make cash payments to small time workers and it is difficult to keep records of cash payments but the same was not considered without any reasonable observations. Ld. CIT(A) has rightly deleted the addition and need no interference.

14. Ground no 1 in appeal of Revenue. AO has considered the export sales made to an entity in Netherland to be doubtful on the basis of report and investigation wing. The fact of matter is that in para no. 5.1 of the order of Ld. CIT(A) a list of 11 documents is mentioned which assessee had furnished before Ld. AO to substantiate the exports made were genuine. Thus, there is no denial to fact that these all statutory documents were prepared and submitted for relevant custom clearance by the custom authorities. There is no matter on record to show that if any inquiry was made with the custom department questioning genuineness of these documents. The export proceeds were received throuhg banking channel and duty draw back, DEPB received on account of export were duly accounted by the assessee. The finding of Ld. AO that assessee has exported some other types of good instead of those mentioned in the export documents cannot be accepted as it is not supported with any direct or circumstantial evidence and to the contrary the custom clearance documents being records of a statutory authority have to be presumed to be correct. Thus, Ld. CIT(A) taking into account all the aforesaid aspects and pointing deficiencies in the order of ld. AO, including the contrary stand of rejecting the exports and allowing shipping and forwarding and travelling expenses incurred on these export, had set aside the peak addition which need no interference.

16. Ground no 4 in appeal of Revenue. It can be observed that Revenue cannot dispute the fact that the opening balances in the book of accounts has been added as an unexplained credits. While the settled proposition of law is that Section 68 of the Act cannot be invoked in case of outstanding balances of creditors as recorded at the ebgning of FY. Reliance in this regard can be placed on the judgment of Hon’ble Jurisdictional Delhi High Court in CIT vs. Usha Stud Agricultural Farms Ltd. 301 ITR 384 (Del.), CIT vs. Om Prakash Mahajan & Sons: 152 ITR 583 (Del.) and Co-ordinate Bench judgment in DCIT vs. Nipun Builders & Developers Ltd. : ITA No. 558/Del/2010 (Del. Tri.). CIT(A) has rightly deleted the addition and the same requires no interference.

17. Ground no. 2 arising out of assessee’s cross objections. CIT(A) primarily considered the fact that there was failure on the part of assessee to provide confirmed copies of accounts and referring to M/s. Priya Agencies it was observed that the address was not filed. The assessee has claimed that she was not given opportunity to furnish confirmed copies of the accounts while the details of expenses was placed before Ld. AO vide letter dated 17.03.2006. The Bench is of considered opinion that as assessee had failed to establish that payments were made by any banking transaction then in the absence of establishing the genuineness of parties with respect to specific purchase made for them by relevant evidences, the Ld. Tax Authorities cannot be faulted for making the addition. However, taking into consideration the observations of Ld. CIT(A) in para 6.3 of the order, where certain observations are made on the basis of record of assessment, that the Ld. AO was informed that party wise details along with address has been filed which it seems was not taken into consideration by Ld. AO. The Bench is of view that as he had prejudiced himself on account of disbelieving the purchases made from M/s. Thakur Associates and all the local and exports sales of the assessee, the Ld AO failed to be judicious in approach to examine the claims of asssessee. The issue requires to be restored to the files of Ld. AO to give an opportunity to the assessee to establish the expenses by the fact that the same were by way of any banking transaction and if assessee succeeds to establish it to be so, the purchases be allowed. Accordingly, this ground is allowed for statistical purposes.

18. Ground no. 3 and 4 in the assessee’s cross objections. It appears that the ground were not specifically raised before Ld. AO. The ground with regard to failure of Ld. AO to take into consideration the undoubted expenses to the extent of Rs. 16,09,094/- was certainly required to be allowed from the total income, however, the manner in which Ld. AO had proceeded to summarily re-compute the total taxable income, it appears these expenses were impliedly disallowed by him as he had disbelieved the sales purchase and cash credits.

19. Further the deduction u/s 80HHC of the is a natural consequence of the nature of income derived and as the additions made by Ld. AO have been substantially deleted a re-computation of the total taxable income is required to be done and therefore these issues are also restored to the files of Ld. AO to take into consideration the relevant evidences of assessee and allow the expenses and give benefit of exempt income in accordance with law.

20. As consequence of above discussion, the appeal of Revenue is dismissed and Cross-objection of assessee are allowed for statistical purposes with consequential effects to be given by Ld. AO as directed above.

Order pronounced in the open court on 14^th June, 2023.