No income addition is warranted for fraudulent purchases if the goods were accurately recorded in the assessee's stock register

The Hon'ble Delhi Bench of the Income Tax Appellate Tribunal in ACIT v. Sharp Corp Ltd. [IT APPEAL NO. 6188 (DELHI) OF 2017 dated February  21, 2024] held that where the Assessing Officer had made an addition on account of purchases made by the assessee treating the same as bogus purchases, in view of the fact that the goods purchased from the supplier had been duly reflected in the stock registers maintained by the assessee and the same were sold by the assessee by making due reduction in the stock register to the extent of sales, moreover, the sales made by the assessee were not doubted by the revenue and the payments were made for the same through account payee cheques out of disclosed sources of income, the Commissioner (Appeals) was justified in deleting the impugned addition.

Facts of the Case:

M/s Sharp Corp Ltd. (“the Assessee”) was engaged in the business of importing items like pulses, edible oils, etc. in bulk quantities and selling the same on a wholesale basis. During the Assessment Year 2012-13 (“the Assessment Year”), a search and seizure action under section 132 of the Income Tax Act, 1961 (“the Act”) was carried out in the Sharp Group of cases, of which the assessee was a part.

In the course of the assessment proceedings under section 153A read with section 143(3) of the Act, the Assessing Officer found that the assessee had made purchases of goods worth Rs. 2,16,83,820/- from M/s Kamal Kishore Mukesh Kumar (KK) during the year. The Assessing Officer treated these purchases as bogus on the basis of a statement recorded from Shri Kamal Kishore, wherein he had allegedly admitted that his firm M/s KK was only on paper and was engaged in providing accommodation entries. No actual sales had taken place, as per his statement.

The Assessing Officer made an addition of Rs. 2,16,83,820/- to the assessee's income, treating the purchases from KK as bogus purchases made to inflate expenses and reduce profits.

The assessee filed a detailed reply before the Assessing Officer, providing evidence of the purchases made from KK. This included:

1. Details of purchases and corresponding sales of the goods purchased from KK, duly recorded in the stock registers maintained by the assessee.

2. Quantitative details of purchases from KK along with copies of purchase bills and confirmation of accounts from KK.

3. Details of payments made to KK through account payee cheques from disclosed sources of income.

4. Sales of goods purchased from KK made to RBRL Agro Commodities Ltd and Sharp Comtrade Ltd, which were accepted in their assessments by the same Assessing Officer.

5. Ledger account of KK showing total purchases of Rs. 2.62 crores during the year, of which only Rs. 2.16 crores were disputed.

The assessee contended that if the purchases of Rs. 2.16 crores were considered bogus, then the remaining purchases from the very same supplier could not be considered genuine. The assessee also stated that no evidence was found during the search to suggest that cash had flowed back from KK against these purchases.

Despite the assessee's submissions, the Assessing Officer disallowed the purchases of Rs. 2,16,83,820/- made from KK as bogus, relying solely on the statement of Shri Kamal Kishore which was not provided to the assessee for rebuttal or cross-examination.

Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (“CIT(A)”), who deleted the addition made by the Assessing Officer after considering the documentary evidence furnished by the assessee.

Against the CIT(A)'s order, the revenue filed an appeal before the Income Tax Appellate Tribunal.

Issue:

Whether the CIT(A) was justified in deleting the disallowance made on account of alleged bogus purchases in the sum of Rs. 2,16,83,820/- in the facts and circumstances of the case.

Held:

The Hon'ble Delhi Bench of the ITAT held as under:

• Observed that:

1. The assessee had furnished all necessary documents to prove the purchases from KK of Rs. 2.16 crores.

2. The goods purchased were duly reflected in the assessee's stock registers and sold by making due reduction in the stock to the extent of sales.

3. The sales made by the assessee were not doubted by the revenue.

4. The purchases were reflected in the books and payments made through account payee cheques from disclosed sources.

5. The total purchases from KK for the year were Rs. 2.62 crores, out of which the supplier could not be considered genuine for some supplies and ingenuine for the disputed Rs. 2.16 crore supplies.

Relied on the judgments of:

• Hon'ble Supreme Court in Kishinchand Chellaram v. CIT - holding that the assessee must be given an opportunity to cross-examine statements relied upon.

• Hon'ble Delhi High Court in CIT v. J.M.D. Communications P. LTD - holding similarly that statements must be put to the assessee for rebuttal/cross-examination.

• Its own decision in Unique Metal Industries - holding that statements denying sales cannot be taken at face value when there is a documented trail of purchases and sales.

Held that the CIT(A) was justified in deleting the addition of Rs. 2.16 crores made by the AO treating the purchases as bogus, as the assessee had discharged its onus by providing documentation of the purchases and corresponding sales.

Relevant Sections:

The relevant sections mentioned in the order are:

Section 69C of the Income-tax Act, 1961 - Relating to unexplained expenditure/bogus purchases.

• 69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year:

Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.

• Section 132 of the Income-tax Act, 1961 - Relating to search and seizure.

• Section 133A of the Income-tax Act, 1961 – Power of survey operations.

• Section 143(3) of the Income-tax Act, 1961 - Relating to assessment procedures.

• Section 153A of the Income-tax Act, 1961 - Relating to assessment in case of search or requisition.