Mere classification of a supplier as a “bogus concern” doesn’t invalidate transactions outright

Polyspin Filteration India Pvt. Ltd. Vs ITO (ITAT Delhi)

The case of Polyspin Filteration India Pvt. Ltd. vs ITO, Delhi, highlights a crucial legal principle concerning transactions with entities labeled as “bogus concerns” by VAT authorities. Despite such classification, the validity of transactions, including those with the assessee, cannot be automatically dismissed.

Analysis: The appeal arose from the addition of unexplained cash credit and the classification of purchases made by the assessee as bogus. The Income Tax Officer (ITO) had erroneously added a sum under unexplained cash credit, overlooking that the assessee had made payments to M/s Krishna Enterprise, not received any sums from them.

Regarding the purchases from M/s Krishna Enterprise, the assessee provided invoices, bank statements, and ledger accounts to substantiate the transactions. Despite deficiencies pointed out by the Department, such as missing signatures and order details on invoices, the assessee demonstrated payments through regular banking channels.

Crucially, the appellate authority noted that the entire addition was based on suspicion, lacking concrete evidence of cash trail between the parties. It emphasized that suspicion alone cannot substitute legal evidence. Additionally, it highlighted that the classification of M/s Krishna Enterprise as a “bogus concern” by VAT authorities doesn’t automatically render all transactions invalid.

The appellate authority directed a fresh adjudication by the Income Tax Officer, emphasizing the need for factual scrutiny regarding whether the supplier indeed supplied goods to the assessee, which were utilized or sold subsequently.

Conclusion: The case underscores the importance of factual scrutiny and evidence-based decision-making in tax assessments. It reaffirms that mere classification of a supplier as a “bogus concern” doesn’t invalidate transactions outright. Instead, each transaction requires individual assessment based on concrete evidence.

This legal precedent serves as a guide for future tax disputes, emphasizing the necessity of fair and thorough evaluations in determining the validity of transactions, especially when dealing with entities labeled as “bogus” by regulatory authorities.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal of the Assessee arises out of the order of the Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘Ld. CIT(A)’] in DIN & Order No. ITBA/NFAC/S/250/2023-24/1055155394(1) dated 16/08/2023 against the order passed by Income Tax Officer, National Faceless Assessment Centre, Delhi (hereinafter referred to as the ‘Ld. AO’) u/s 147 r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) on 23/02/2022.

2. The Ground No. (i) raised by the assessee was stated to be not pressed by the ld.AR at the time of hearing for which necessary endorsement was duly made in our file. Accordingly the Ground No. (i) raised by the assessee is hereby dismissed as not pressed.

3. The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in confirming the addition made in the sum of Rs 2,28,960/- towards unexplained cash credit in the facts and circumstances of the case. The interconnected issue involved therein is as to whether the ld. CIT(A) was justified in confirming the value of purchases made by the assessee in the sum of Rs 4,28,960/- as bogus in the facts and circumstances of the case.

4. I have heard the rival submissions and perused the materials available on record. It is not in dispute that the assessee had made purchases of certain chemicals from M/s Krishna Enterprise to the tune of Rs 4,28,960/- during the year under consideration. The assessee made the payments to the said party by way of account payee cheques through regular banking channels in the following manner:-

5. The ld. AO made separate addition of Rs 2,28,960/- in the assessment on the pretext that the assessee had received the said sum from M/s Krishna Enterprise. This is factually incorrect as it is evident that the assessee had only made payment of Rs 2,28,960/- and not received any sum from them. Hence the addition made by the ld. AO in the sum of Rs 2,28,960/- u/s 68 of the Act is hereby directed to be deleted.

6. As far as the purchase of goods from M/s Krishna Enterprise the assessee furnished the following documents before the lower authorities:-

a) Invoice issued by M/s Krishna Enterprise vide Invoice No. 695 dated 8.12.2015 containing the description of goods supplied with goods dispatch time at 1.10. P.M. The said invoice also contained the amount of Rs 8,411/- being Central Sales Tax suffered at the rate of 2% on the value of goods.

b) Copy of Bank Statement duly highlighting the payments made to M/s Krishna Enterprises out of funds available in the bank

c) Copy of ledger account of M/s Krishna Enterprise for the period 1.4.2015 to 31.3.2017 as appearing in the books of the assessee company to prove that the payments were made to the said supplier and the account had been completely squared off in the immediately succeeding year.

7. The ld. DR before me vehemently argued that the invoice issued by the supplier contains lot of deficiencies as it does not contain the signature of the receiver of goods, details of delivery of goods and the details of Order Number thereon. The ld. AR stated that the goods purchased from M/s Krishna Enterprise had been used by the assessee in its business. I find from the perusal of the lower authorities that no cogent material has been brought on record by the revenue evidencing the cash trail between the assessee and M/s Krishna Enterprise. As far as the assessee is concerned, it had made payments to M/s Krishna Enterprise out of its regular banking channels. The revenue had not brought any material on record to prove that subsequent to payment by banking channels to the supplier, the supplier had in turn given back the cash to the assessee after reducing his / her commission if he / she is an accommodation entry provider. I find that the entire addition has been made in the hands of the assessee only on suspicion. It is trite law that suspicion howsoever strong cannot partake the character of legal evidence. Merely because M/s Krishna Enterprise had been classified as bogus concern by their VAT authorities, it does not mean all the transactions carried out by various parties with them including the assessee could be termed as bogus. What is required to be seen is that whether the said party had supplied the goods to the assessee and the said goods had been either consumed by the assessee or sold in the open market to a third party. This fact is not emanating from the orders of the lower authorities. Hence I deem it fit and appropriate to restore this issue to the file of ld. AO for denovo adjudication in accordance with law to give a factual finding in this regard. The assessee is at liberty to furnish further evidences, if any, in support of its contentions. Accordingly, the Ground No. (ii)(a) raised by the assessee is hereby allowed and Ground No. (ii)(b) raised by the assessee is allowed for statistical purposes.

8. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 23^rd January, 2024.