Section 69C Addition Without Proper Enquiry Based Solely on Sales Tax Info Unsustainable: ITAT Mumbai

ITO Vs Vaman International P. Ltd. (ITAT Mumbai)

This case involves an appeal by the Revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the assessment year 2010-11, where the Assessing Officer (AO) added ₹4,75,42,385/- under section 69C of the Income Tax Act, 1961, treating certain purchases made by Vaman International P. Ltd. as unexplained expenditure. The AO based this decision on information from the Sales Tax Department, which listed the suppliers as providing accommodation entries. The assessee, engaged in furniture trading, had made substantial purchases from Impex Trading Co. and Victor Intertrade Pvt. Ltd. The AO, after issuing notices to these suppliers which went unanswered, relied on statements from the suppliers’ representatives obtained by the Sales Tax Department, and dismissed the assessee’s evidence, including purchase invoices, bank statements showing payments, and stock ledgers, citing the lack of lorry receipts and the suppliers’ non-appearance. The AO also denied the assessees request to cross examine the people who gave the statements to the Sales tax department.

The CIT(A) overturned the AO’s order, finding legal infirmities and procedural lapses. The CIT(A) noted that the AO relied solely on the Sales Tax Department’s statements without considering the assessee’s evidence or allowing cross-examination. The CIT(A) emphasized that the AO failed to disprove the assessee’s evidence, which included proof of payments through banking channels and sales records corresponding to the disputed purchases. The CIT(A) relied on precedents, including the Bombay High Court’s ruling in Nikunj Eximp Enterprises Ltd., which highlighted that mere non-appearance of suppliers or statements without cross-examination cannot justify treating purchases as bogus. The CIT(A) concluded that the AO’s addition under section 69C was unsustainable, as the assessee had provided sufficient evidence of genuine transactions, and the AO failed to conduct adequate inquiries or disprove the submitted evidence. The CIT(A) ruled that the AO should have conducted further inquiries rather than relying solely on the information provided by the sales tax department.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)’s order, dismissing the Revenue’s appeal. The ITAT reiterated that the AO’s reliance on the Sales Tax Department’s information and statements without allowing cross-examination or conducting further inquiries was insufficient to treat the purchases as bogus. The ITAT emphasized that the assessee had provided substantial documentary evidence, including purchase invoices, bank statements, and stock ledgers, to prove the genuineness of the transactions. The tribunal also noted that the AO did not dispute the sales made by the assessee, implying that the corresponding purchases were necessary. The ITAT found that the AO’s failure to disprove the assessee’s evidence and the lack of evidence showing the payments were routed back to the assessee rendered the addition under section 69C unsustainable. The ITAT concluded that the CIT(A)’s order was justified and dismissed the Revenue’s appeal.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by Revenue is directed against the order of the CIT(A)-20, Mumbai dated 12.11.2014 for A.Y. 2010-11.

2. The facts of the case, briefly, are as under: –

2.1 Theassessee company, engaged in trading of furniture and other allied items, filed its return of income for A.Y. 2010-11 on 12.10. 2010 declaring income of ₹13,80,371/- under the normal provisions and ‘Book Profits’ of ₹14,55,806/- under section 115JB of the Income Tax Act, 1961 (in short ‘the Act’). The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. On the basis of information from the Sales Tax Department, Government of Maharashtra, received by the Assessing Officer (AO) in the course of assessment proceedings, it was found by the AO that certain dealers are providing accommodation entries/bills without doing any actual business. On going through the list of such bogus dealers listed by the Sales Tax Department, the AO noticed that the assessee had made purchases from the following dealers, the details of which are as under: –

2.2 To ascertain the genuineness of such purchases (supra) the AO required the assessee to show cause as to why the aforesaid purchases amounting to ₹4,75,42,385/- should not be treated as unexplained expenditure. In reply thereto, the assessee in submission claimed that purchases from the above two parties (supra) are genuine and reflected in the assessee’s books of account and furnished copies of purchase and sales invoices for these purchases, extracts of stock ledger showing the entry and exit of materials, bank statement to show that the above two parties have been paid for purchases made through banking channels by account payee  The AO then, in order to ascertain the genuineness of these parties issued notices to these parties to which there was no response. The AO made available to the assessee copies of sworn statement of Shri Pradeep Vyas, Director, M/s. Victor Intertrade Pvt. Ltd. and Shri Ketan Shah, partner, M/s. Impex Trading Co. and asked the assessee  to  show  cause  why  the  above  purchases  amounting  to ₹4,75,42,385/- should not be treated as unexplained expenditure. The assessee in replies dated 06.03.2013 and 10.03.2013 furnished copies of purchase and sale invoices and challan-cum-tax invoice in respect of purchases made from these two concerns; i.e. M/s. Victor Intertrade Pvt. Ltd. and M/s. Impex Trading Co., extracts of stock ledger showing entry/exit of materials, etc. to show that the payment for the said purchases were made through regular banking channels, etc. The assessee also stated in its submissions that it challenges the statements/ declaration on oath of Shri Pradeep Vyas and Ketan Shah and stated its intention for cross examination of the aforesaid two parties since their statements were false and misleading. The AO did not accept the explanation put forth by the assessee and brushed aside the evidence placed before him as he was of the view that the assessee’s documentary evidences were not supported by lorry receipts or delivery challans; that the assessee was not able to produce the three parties from whom alleged purchases were made before him for verification and placed reliance on the sworn statement on oath of Shri Pradeep Vyas of M/s. Victor Intertrade Pvt. Ltd. and Shri Ketan Shah of M/s. Impex Trading Co. given before the Sales Tax Department. In that view of the matter, the AO treated the aforesaid  purchases  from  these  two  parties  (supra)  amounting  to ₹4,75,42,385/- as unexplained expenditure under section 69C of the Act and accordingly concluded the assessment under section 143(3) of the Act vide order dated 22.03.2013 wherein the income of the assessee was determined at ₹4,89,50,972/-, in view of the addition of ₹4,75,42,385/- under section 69C of the Act in respect of bogus purchases.

3.1 Aggrieved by the order of assessment for A.Y. 2010-11 dated 22.03.2013,the assessee preferred an appeal before the CIT(A)-20,  Before the learned CIT(A), the assessee reiterating its stand taken before the AO and in order to establish the veracity of the purchases, once again placed before the learned CIT(A) detailed submissions, explanations and representation and copies of evidence such as copies of purchase/sale invoices, challan-cum-tax invoice, extracts of stock ledger showing movements of materials received and sent and detailed bank statements to establish that the payments for said purchases were made by normal banking channels., etc. which were forwarded by the learned CIT(A) to the AO for his comments. In his reply dated 23.07.2014, the AO reiterated the stand taken in assessment proceedings. A copy of the AO’s report was given to the assessee for rejoinder thereon for which detailed reply was filed by the assessee vide letter dated 11.08.2014 alongwith a paper book (190 pages) containing copies of assessee’s financial statements, copies of sworn statements of Shri Pradeep Vyas and Shri Ketan Shah given to Sales Tax Department and relied on by the AO. In submissions made, the learned A.R. of the assessee, apart from reiterating the details and evidences put forth to establish that the purchases were not bogus, contended that the AO having not doubted or questioned the sales affected in respect of the said purchases, therefore the purchases made by the assessee could not be held to be bogus, as without the said purchases the assessee could not have effected sales. Merely because these two parties did not respond and appear before the AO in response to the notices issued under section 133(6) of the Act, no adverse inference could be drawn against the assessee.

3.2 The learned CIT(A), after considering the submissions/evidence put forth by the assessee, the material on record and the AO’s views in the matter, observed that the order of assessment suffered from legal infirmities, deficiencies and was against the due procedure of natural justice. He found that the AO while holding the said purchases from the two parties (supra) as bogus basically relied on the statements of Shri Pradeep Vyas of M/s. Victor Intertrade Pvt. Ltd. and Shri Ketan Shah of M/s. Impex Trading Company given before the Sales Tax Department without controverting the evidences produced by the assessee and without affording it the opportunity of cross-examination of the two witness whose statements were relied on. The learned CIT(A) held that the AO’s view that the expenditure on purchases from the above two parties are unexplained under section 69C of the Act, is not tenable because the said purchases had been explained with necessary evidences to establish that the said purchases from these two parties were genuine and which has not been controverted by the AO. No material was brought on record by the AO to establish that the payments made for purchases to the above two parties were received back in cash by the assessee. According to the learned CIT(A), the assessee has submitted documentary evidence before the AO and also before him to establish that the said purchases were genuine and was of the view that the AO could not have made the additions without recording findings controverting the evidences produced/placed before him. The learned CIT(A), inter alia, placing reliance on the decision of the Hon’ble Bombay High Court in the case of Nikunj Eximp Enterprises  Ltd. (372 ITR 619) (Bom) by which he held the assessee’s case was squarely covered, deleted the addition of ₹4,75,42,385/- under section 69C of the Act.

4.1 Aggrieved by the order of the CIT(A)-20, Mumbai dated 12.11.2014 for A.Y. 2010-11, Revenue has preferred this appeal raising the following grounds: –

“i. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) right in deleting the addition u/s.69C of the Act to the tune of 4,75,42,385/- on account of non-genuine purchases made from Two Vendors viz M/s. Impex Trading Co. and M/s. Victor Intertrade Pvt. Ltd.?

ii. Whether on the facts and in circumstances of the case and in law, Ld.CIT(A) was right in ignoring the fact that the vendors did not file any reply or submission in the response to notice u/s.133(6) of the Act nor did assessee produce these vendors before the A.O during the assessment proceeding to establish the genuineness of the transactions?

iii. Whether on the facts and in circumstances of the case and in Law, the Ld (CIT)(A) was right in ignoring the fact that no  delivery challans are available in respect of delivery of goods by the alleged parties no  physical stock register, inward register, lorry /Transportation bills have been produced to prove that goods have actually been delivered /purchase?

vii. The appellant prays that the order of the CIT (A) on the above grounds be set aside and that of the A.O. be restored.

vii. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

Though numbered (i) to (viii), we record that the grounds raised are only five as extracted above.

4.2 The learned R. was heard in support of the grounds raised (supra). It was contended that since the two parties from whom purchases were made by the assessee did not respond to the notices issued by the AO and lorry receipts/transportation bills in respect of the said purchases were not produced, the genuineness of the said purchases from the two parties could not be verified. Therefore, the AO was justified in treating the purchases as bogus and in invoking the provisions of section 69C of the Act.

4.3 Per contra, the learned A.R. of the assessee supported the order of the learned CIT(A) deleting the addition on account of bogus purchases of ₹4,75,42,385/- under section 69C of the Act. It was submitted that the assessee in order to prove the genuineness of the said purchase transactions had produced material evidence in the form of copies of purchase bills issued by these parties, purchase /sale invoices, challan-cum-tax invoices, extracts of stock ledgers to show the movement of materials received/sent and bank statements to establish that the payment for said purchases were made through normal banking channels. It is contended that, on the contrary, the AO has not brought on record even a shred of evidence to prove the said purchases were bogus and in coming to an adverse finding in the matter. The AO merely relied on the information of purchase parties listed by the Sales Tax Department and relied on statements of parties in respect of which the assessee was not afforded any opportunity for cross examination of these witness. The learned A.R. of the assessee submitted that on similar facts and in similar circumstances, the Hon’ble Bombay High Court and various Coordinate Benches of the Tribunal had deleted such additions made under section 69C of the Act in, inter alia, the following cases: –

(i) CIT Nikunj Eximp Enterprises P. Ltd.(372 ITR 619) (Bom)

(ii) Hiralal Chunilal Jain  ITO (ITA No. 4547/Mum/2014 dated 01.01.2010)

(iii) Imperial Imp & Exp  ITO (ITA No. 5427/Mum/2015 dated 18.03.2016)

(iv) CIT Ashish International (ITA No. 4299 of 2009 (Bom)

(v) Rajeev Kalathil (ITA  5312/Mum/2013 dated 05.02.2016)

4.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. On an appreciation of the material on record, it is evident from the order of the assessment that it is on the basis of information obtained from Sales Tax Department that the AO issued the show cause notice to the assessee to explain the said purchases and issued notices under section 133(6) of the Act to the said two parties from whom the said purchases were made, to which there was no response. The AO primarily relying on the information obtained from the Sales Tax Department and sworn statements given before the Sales Tax Department by Sri Pradeep Vyas of M/s. Victor Intertrade P. Ltd. and Shri Ketan Shah of M/s Impex Trading Company held the said purchases to be bogus. While it may be true that the said two purchase parties did not appear before the AO, for whatever reasons, the fact remains that the assessee itself had filed copies of purchase bills, copies of purchase/sale invoices, challan-cum tax invoices in respect of purchases, extracts of stock ledgers showing entry/exit of materials; copies of bank statements to evidence that payment from these purchases were made through normal banking channels, etc. to establish the genuineness of the said purchases. It is a fact evident on record that the AO has not doubted the sales effected by the assessee and therefore it is in order to conclude that without corresponding purchases being effected, the assessee could not have made sales.

4.4.2 In our considered view, the AO has not brought on record any material evidence to conclusively prove that the said purchases are bogus. Mere reliance by the AO on information obtained from the Sales Tax Department or the sworn statement of two parties before the Sales Tax Department, without affording the assessee any opportunity to cross examine those witnesses in this regard or the fact that these parties did not respond to notice under section 133(6) of the Act, would not in itself suffice to treat the purchases as bogus and make the addition. If the AO doubted the genuineness of this said purchases, it was incumbent upon him to cause further inquiries in the matter to ascertain the genuineness or otherwise of the transactions. Without causing any further enquires in respect of the said purchases, the AO cannot make the addition under section 69C of the Act by merely relying on information obtained from the Sales Tax Department, the statement/affidavit of third parties, Shri Pradeep Vyas and Ketan Shah; without the assessee being afforded any opportunity of cross examination of that persons and for non-response to notices under section 133(6) of the Act.

4.4.3 In the factual matrix of the case, where the AO failed to cause any enquiry to be made to establish his suspicions that the said purchases are bogus, the assessee has brought on record documentary evidences to establish the genuineness of the purchase transactions, the action of the AO in ignoring these evidences cannot be accepted. Further, the Hon’ble Bombay High Court in the case of Ashish International (supra) has held that the genuineness of the statements relied upon by Revenue is not established when the  assessee disputes the correctness of those statements and has not been afforded adequate opportunity to cross examine these parties even though he has asked for the same. Moreover, as correctly observed by the learned CIT(A), when the payment for the said purchases to the concerned two parties is through proper banking channels and there is no evidence brought on record by the AO to establish that the said payments were routed back to the assessee, the addition made by the AO under section 69C of the Act is unsustainable. We are fortified in this view of ours by the decisions of, inter alia, the Hon’ble Bombay High Court in the cases of Nikunj Eximp Enterprises Pvt. Ltd. (supra), Ashish International (supra), the decision of the Coordinate Benches of this Tribunal in the case of Hiralal Chunilal Jain (supra) and Imperial Imp & Exp (supra). In this factual matrix of the case, as discussed above, we find no requirement for interference in the order of the learned CIT(A) and consequently uphold the same. Therefore, Revenue’s five grounds (i) to (vii) are dismissed.

5. Inthe result, Revenue’s appeal for Y. 2010-11 is dismissed.

Order pronounced in the open court on 16th November, 2016.