ITAT Upholds Section 69C addition for Bogus Purchases from Dummy Companies

AAA Teleshopping Pvt. Ltd Vs ACIT (ITAT Delhi)

Introduction: The case of AAA Teleshopping Pvt. Ltd. vs. ACIT (ITAT Delhi) revolves around the addition made under section 69C of the Income Tax Act, 1961 for the Assessment Year 2011-12. The appeal filed by the assessee challenges the order of the Commissioner of Income Tax (Appeals)-I, New Delhi, dated 14.10.2019.

Detailed Analysis: In this appeal, the primary contention of the assessee is that the Assessing Officer (AO) erred in making an addition under section 69C of the Income Tax Act, and the Commissioner of Income Tax (Appeals) was unjustified in upholding the same.

The crux of the matter lies in the assertion that the purchases made by the assessee cannot be considered bogus. The assessee argues that these purchases were supported by bills, payments were made through account payee cheques or banking channels, and the suppliers confirmed the transactions. Furthermore, there was no concrete evidence to prove that the purchase consideration paid to the seller companies had come back to the assessee in cash. The sales stemming from these purchases had been accepted by the Department, and the supplier had accounted for the purchases and paid the requisite taxes.

In contrast, the Department contended that the purchases made by the assessee were from dummy companies controlled by certain individuals, who admitted to using these companies for providing accommodation entries. The AO, after considering the evidence, concluded that the purchases were not genuine and made an addition under section 69C of the Act.

The case also involved a detailed examination of the legality of the re-assessment proceedings, including the issuance of notices and the appellant’s right to cross-examine witnesses. The AO maintained that the appellant had been given all the statements recorded during the search, bank statements of the parties, and other relevant evidence for their defense.

The CIT(A) considered the information received from the Asst Director of Income Tax, which highlighted the involvement of the appellant in receiving accommodation entries in the form of bogus purchases from dummy companies. In light of the evidence and findings, the CIT(A) upheld the AO’s decision to add the disputed amounts to the assessee’s income under section 69C of the IT Act.

Conclusion: After careful consideration of the submissions, it is evident that the AO, supported by the CIT(A), rightly concluded that the appellant had engaged in bogus purchases from dummy companies, controlled by individuals who admitted to providing accommodation entries. As such, the addition under section 69C was upheld. The appeal of the assessee was subsequently dismissed.

This case highlights the importance of thorough documentation and transparency in financial transactions to avoid potential tax-related complications and underscores the need for taxpayers to adhere to the legal and procedural requirements during tax assessments.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-I, New Delhi dated 14.10.2019 for Assessment Year 2011-12.

2. In this appeal, the assessee has raised as many as 13 grounds of appeal but sole grievance of assessee is that the AO has erred in making addition under section 69C of the Income-tax Act, 1961 (for short ‘the Act’) and the learned CIT(A) was also not correct and justified in upholding the same.

3. When the appeal was called for hearing neither the assessee nor any authorised representative or Counsel appeared nor any adjournment application has been filed despite due service of notice. Therefore, we proceed to decide the appeal ex parte qua assessee after hearing the arguments of learned Sr. D.R. on behalf of the Department.

4. From the grounds raised by the assessee as well as submissions raised before learned CIT(A) noted in para 6 of first appellate order, we note that the AO made addition by observing that Shri Himanshu Verma and Shri Anjani Kumar had admitted on oath that they were using companies for providing accommodation entries and the impugned purchase was not genuine. The AO after observing our factual position made addition in the hands of the assessee under section 69 of the Act by recording the finding that the entire money received back by the assessee from such companies amounting to Rs.21,89,190/- requires to be added to the income of the assessee under section 69C of the Act. Before the authorities below, assessee submitted that the purchases cannot be treated as bogus if they are duly supported by the bills, payments have been made by account payee cheque or through banking channel, the supplier/seller has confirmed the transactions, there was no evidence to show that the purchase consideration paid to seller companies has come back to the assessee in cash, the sales out of purchases have been accepted by the Department and the supplier/seller has accounted for the purchases made by the assessee had also paid due taxes thereon. The learned AR thus submitted that the AO was not correct and justified in making baseless addition in the hands of the assessee without bringing on record any adverse positive material or evidence against the assessee to show that the amount transferred by the assessee through banking channel against the impugned purchases was received back by the assessee from the sellers, therefore, addition may kindly be deleted.

5. Controverting aforesaid submissions of assessee, the learned Sr. DR vehemently supported the order of the authorities below and submitted that the AO has rightly made addition under section 69C of the Act as the assessee made impugned purchases from two dummy companies viz., Ridhi Sidhi Clothing Co. Pvt. Ltd. and Shri Hari Clothing Co. Pvt. Ltd., which were controlled by Shri Himanshu Verma. He further submitted that the AO has categorically noted that Shri Himanshu Verma and his associate Shri Anjani Kumar in their statements has admitted on oath that they were controlling and using said companies for providing accommodation entries. Learned Sr. DR, further drawing our attention towards relevant para of appellate order, submitted that the learned CIT(A) after considering the basis taken by the AO and material available on record, rightly upheld the findings of the AO that since Shri Himanshu Verma and Shri Anjani Kumar had admitted on oath that they were using said two companies for providing accommodation entries. The Ld. senior DR thus submitted that the AO had rightly held that the purchases made by the assessee during F.Y. 2010-11 from the said two companies controlled by Shri Verma were not genuine purchase. Learned Sr. D.R. submitted that in the present case, it is clearly established by the AO that the appellant has taken accommodation entry in the form of bogus purchases from two dummy companies, therefore, he rightly made addition of Rs.21,89,190/- u/s 69C of the Act treating the impugned purchases as bogus and unexplained expenditure and also rightly upheld the addition of Rs.21,890/- on account of commission for arranging accommodation entries or bogus purchases. The learned Sr. DR submitted that the orders of AO as well as learned CIT(A) may kindly be upheld dismissing the appeal of assessee.

6. On careful consideration of the submissions, we note that the Learned CIT(A) upheld the addition of Rs.21,89,190/- on account of bogus purchases and second addition of Rs.21,890/- on account of commission received by the assessee for arranging accommodation entries with following observations and findings:

“7.1 In the present case, the AO had received information from the Asst Director of Income Tax (Inv.), Unit 6(3), New Delhi vide letter dated 18.09.2017 that a search operation was conducted in Himanshu Verma Group of concerns and it was found that Sh. Himanshu Verma was engaged in the business of providing accommodation entries by providing cheques/PO/DD in lieu of cash to a large number of beneficiary companies through various paper and dummy companies floated and controlled by them. As per the information received from the ADIT(Inv) Unit-6(3), New Delhi, one of such concerns was the appellant company which had received Rs, 21,89.190/- from the following two companies as bogus purchase during the previous year relevant to A.Y. 2011-12 as given hereunder:

The AO had reasons to believe that income chargeable to tax, had escaped assessment. A satisfaction note u/s 148 of the IT. Act was drawn by the AO on 22.03.2018 wherein the AO noted that income chargeable to tax, amounting to Rs. 21,89,190/- had escaped assessment. Notice u/s 148 of the IT Act was issued by the AO on 30.03.2018 after obtaining the approval of the Principal Commissioner of Income Tax, Delhi-1, New Delhi.

7.2. I have carefully considered the facts of the case. It is noted that the AO has not acted mechanically before framing the reasons to believe. He has applied his mind by considering all the information before him and then has taken the approval of the higher authorities as required u/s 151 of the Act before issuing notice u/s 148 of the Act. He has not acted under the borrowed belief or under any direction. At the stage of forming belief, it was necessary for the A.O. to see the existence of the reasons and not the sufficiency of the reasons. The case laws relied upon by the appellant in his submission have been gone through and it is found that the facts of the present case are different from the case laws relied upon by the appellant. The reasons recorded by the A.O. are based upon specific information, based upon investigation conducted by the Department and, therefore, the reasons framed by the A.O. are based by the credible information. It is not important that the AO should have initially ascertained the facts by making further investigations and should have drawn conclusions as at this stage of proceedings it is not relevant. The important question is whether there was relevant material on which a reasonable person could have formed a belief is necessity which definitely there was in this case. Whether or not the material would conclusively establish the escapement is not important. This aspect has to be examined subsequently in the re-assessment proceedings. It is noted that the A.O. has applied his mind to the information independently to arrive at the belief on the basis of material which was available with him. In view of the above facts and discussion, it is held that the AO. has validly assumed jurisdiction u/s 148 of the Act by recording the reasons to belleve in accordance with the provisions of the Act u/s 147 of the Act and, therefore, the same is hereby held to be valid

7.3 Notice u/s 143(2) was issued by the AO on 16.10.2018 Notice u/s 142(1) alongwith questionnaire was issued by the AO on 16.10.2018 The appellant failed to comply with the notice on 12.11.2018. As there was no response from the appellant, a show cause notice was issued on by the AO on 19/11/2018 asking the appellant to comply with the requirement of notice U/s 142(1) Vide the letter dated 19.11.2018 the appellant had submitted the copy of annual reports and financials list of items dealt with by the appellant copy of invoices along with ledger copies of telephone and advertisement expenses. However, the appellant did not submit any reply in response to questionnaire issued with Notice u/s 142(1) of the IT Act. On 27.11.2018 the appellant had appeared before the AO and submitted commission on sale and purchase invoices of M/s Sri Hari Clothing Co Ltd and M/s Ridhi Sidhi Clothing Co Ltd, sundry creditors and their details along with the address. The AO had also informed the appellant that letters u/s 133(6) were returned back by the postal authority. Further, the AO had asked the appellant to produce the parties Le M/s Sri Hari Clothing Co Ltd and M/s Riddhi Siddhi Clothing Pvt Ltd before him by 12.12.2018. The income tax inspector (ITI) was also deputed by the AO for field enquiry of the above companies. The inspector has reported as under :

“I have been deputed to serve the notice it’s 133(6) of the IT Act 1961 to The Principal officer: M/s Hari Clothing Company Pvt Ltd. 2262/2 West Patel Nagar New Delhi 1101)08 We visited the address on 11.12.2018 but the venue was found to the residential premise We visited the address on 11.12.2018 but the venue was found to be residential premise. We knocked the door, a man opened it and on enquiry we were informed that no such company of said name is functioning there and also have no knowledge of such company. Having no option left with, notices was served by affixture.”

7.4. As regards the request of the appellant for cross examination of Mr. Himanshu Verna, the AO has relied on the decision of Hon’ble Allahabad High Court in the case of Prem Casting P. Ltd. wherein Hon’ble High Court had rejected the appellant’s argument of denial of opportunity of cross examination of witness stating that when the assessee could not prove the identity of the investors which is the primary requirement to be fulfilled, granting opportunity of cross examination is largely inconsequential. In the assessment order, the AO has given categorical findings that the appellant was in touch with the parties till 2014 because of C form has been taken from the parties in the year 2014 and the appellant has entered into transaction with them till 2016. Then also appellant could not produce the party. The AO has also relied on the decision of Hon’ble Allahabad High Court in the case of Motilal Padampat Udyog Ltd. v. C.I.T. (160 Taxman 233) wherein it is held that right of cross-examination of persons from whom the Assessing Officer has collected the evidence is not required by law. The requirement of the statute for a valid assessment would be met if all the evidence collected which is to be used against the assessee while framing the assessment order is placed before the assessee and he is given an opportunity to rebut the evidence. In the assessment order the AO has further observed that the appellant has been given all the statements recorded during the search and after that, bank statement of the parties. The appellant has been given all the evidences which are used for concluding the assessment.

7.5 Accordingly, the AO concluded that the appellant has made bogus purchases from these two companies. The appellant was provided with copies of statements of Shri Himanshu Verma dated 29.03.2012 during the course of scrutiny assessment on 08.12.2017. The AO had asked the appellant to explain as to why the addition u/s 69C of the IT Act should not be made in its case for an amount of Rs 21,89,190/- received from Ridhi Sidhi Clothing Co Pvt. Ltd and Sri Hari Clothing Co Pvt. Ltd in respect of accommodation entry in the form of bogus purchases Shri Himanshu Verma and Shri Anjani Kumar had admitted on oath that they were using these companies for providing accommodation entries. Accordingly, the AO has held that the money received by the appellant during FY 2010-11 from these two companies controlled by Shri Himanshu Verma was not a genuine purchase. The entire money received from such companies amounts to Rs. 21,89,190/- which has been added by the AO to the income of the appellant u/s 69C IT. Act. The AO has also added Rs 21,890/- being 1% of the above amount as commission for arranging the accommodation entries. I have carefully considered the submission of the appellant company. It is found that there is no merit in the submission of the appellant company. In the present case the appellant has taken accommodation entry for the amount of Rs. 21,89,190/- in the form of bogus purchases from two dummy companies, viz. Ridhi Sidhi Clothing Co Pvt. Ltd and Sri Han Clothing Co Pvt Ltd. which are controlled by Shri Himanshu Verma Accordingly. (1) the addition of Rs.21,89,190/- u/s 69C in respect of accommodation entry for the amount of Rs 21,89,190/- in the form of bogus purchases from two dummy companies, viz Ridhi Sidhi Clothing Co Pvt. Ltd and Sri Hari Clothing Co. Pvt Ltd and (ii) the addition of Rs.21,890 on account of commission for arranging accommodation entries for bogus purchases are confirmed Ground No. 1 to 9 are decided against the appellant.”

7. On careful consideration of submissions placed by the assessee before authorities below, contentions of Learned Sr. DR, from careful perusal of the orders of the authorities below, first of all, we note that the assessee made purchase from the two companies viz., purchase of Rs.14,93,750/- from M/s. Ridhi Sidhi Clothing Co. Pvt. Ltd. and purchases of Rs.6,95,440/- from Shri Hari Clothing Co. Pvt. Ltd. totalling to Rs.21,89,190/-. The AO made addition of said amount in the hands of the assessee u/s 69C of the Act by observing that Shri Himanshu Verma and his associates Shri Anjani Kumar have admitted in their statements that the said two companies were controlled by Shri Himanshu Verma and he was using these companies for providing bogus accommodation entries to various persons including the assessee. The AO after considering the explanation of the assessee and documentary evidences supported by the statement of Shri Himanshu Verma and his associate held that the impugned purchases were bogus transactions and he made addition under section 69C of the Act treating the purchases as unexplained expenditure. From the first appellate order, we note that the learned CIT(A) had not only considered the findings of the AO but also considered explanations and documentary evidences submitted by the assessee and thereafter, held that there was no merit in the submissions of appellant company as appellant had taken the accommodation entry of Rs.21,89,190/- in the form of bogus purchases from said two dummy companies controlled by Shri Himanshu Verma. With these observations, the learned CIT(A) upheld the addition of Rs.21,89,190/- under section 69C of the Act in respect of bogus purchases and had also upheld the addition of Rs.21,890/-on account of unexplained expenditure on commission paid for arranging impugned accommodation entries of bogus purchases. We are unable to see any valid reason to interfere with the findings arrived by the learned CIT(A) while confirming both the additions made by AO. Therefore, sole grievance of assessee being devoid of merits is dismissed.

8. In the result, appeal of the assessee is dismissed.

Order pronounced in the open court on 09.10.2023