Bogus sales / purchases- Addition based on mere statement of supplier not justified

Case Law Citation:  ACIT vs. Tristar Jewellery Exports Pvt. Ltd (ITAT Mumbai), I.T.A. No. 7593/Mum/2011, I.T.A. No. 6435/Mum/2013 & I.T.A. No. 8292/Mum/2011, Date of decision – 31^st July 2015, Assessment year: 2006-07

Brief of the case- ITAT Mumbai has held in the case of ACIT vs. Tristar Jewellery Exports Pvt. Ltd. That Reliance on statement of supplier who confesses to providing accommodation entries without giving assessee right of cross-examination violates principles of natural justice. . A statement recorded at the back of a party cannot be used against such party without confronting such statement to the party. So addition base on such statement are not justified.

Brief Facts of the Case and Grounds of Appeal

Brief Facts of the case:

The Assessee is in the business of purchase and sale of jewellery in the export promotion zone. During the year under consideration, the assessee has purchased diamonds worth Rs. 4,09,12,718/- from M/s Zalak Impex.

As per the record, the completed assessment of the assessee for the year under consideration, i.e. A.Y. 2006-07 was reopened on the basis that information was received from the ITO -25(20(1), Mumbai, that during the survey proceedings conducted at the premises of M/s Zalak Impex. The proprietor of the said entity has confessed in the statement recorded u/s 131 of the Income Tax Act 1961, to have provided accommodation entries in the form of sales and purchases to various parties, including the assessee, who had allegedly obtained bogus bills for non existing purchases of Rs. 4,09,12,718/- during the year. The A.O. added 25% of such alleged bogus purchases to the income of the assessee. The ld. CIT(A) reduced the addition to 7%, amounting to Rs. 35 lacs.

ITA No. 7593/Mum/2011 has been filed by the Department whereas ITA No. 8292/Mum/2011, stands filed by the assessee, against the action of the ld. CIT(A) in restricting the disallowance of 25% of purchases made by the A.O. to 7%. The Department’s contention is that the disallowance had to be confirmed in toto, whereas according to the assessee, the disallowance requires to be deleted in full.

ITA No. 6435/Mum/2013, for A.Y. 2006-07 is Department’s appeal against the ld. CIT(A)’s action of deletion of concealment penalty of Rs. 11,94,545/- imposed on the assessee in the aforesaid matter.

Grounds of Appeal:

The Revenue failed to appreciate that appellant has not given the opportunity to cross-examine Shri Hiten Rawal, proprietor of M/s Zalak Impex even after specifically asking for the same.

Contention of the Revenue:

The Revenue contended that as per the assessment order, the A.O. had asked the assessee to produce Shri Hiten L. Rawal, which the assessee did not do; and that therefore, the addition made by the A.O. was perfectly justified and it ought to have been confirmed in its entirety.

Contention of the Assessee:

It has been submitted that the statement of Shri Hiten L. Rawal, proprietor of Zalak Impex was never provided to the assessee and no opportunity of cross examination of Shri Rawal was afforded to the assessee, thereby leading to the illegal addition, which was wrongly sustained in part by the ld. CIT(A), though it ought to have been deleted in full.

Held by the Tribunal:

It remains undisputed that the assessee was never provided any opportunity to cross examine Shri Hiten L. Rawal, though he specifically asked for such cross examination. On the other hand, the burden was sought to be shifted on the assessee by the A.O., by asking him to produce Shri Rawal, even though it was the A.O. who had relied on the statement of Shri Rawal, without either confronting this statement to the assessee, or providing opportunity to the assessee to cross examine Shri Rawal. Therefore, the reassessment order is as a result of violation of the natural principle of audi alteram partem. A statement recorded at the back of a party cannot be used against such party without confronting such statement to the party.

Also, as the Assessee is in Export Promotion zone, the movement of its goods is controlled and customs approved. The assessee had also submitted customs certified invoices, therefore there was no question of their being bogus purchases. It was noted that the payments made by the assessee to Zalak Impex were through account payee cheques only. Also nothing was brought by Revenue on record to prove that the invoices were fabricated. In the result, ITA Nos. 7593/Mum/2011 and 6435/Mum/2013 filed by the Department are dismissed.

The addition made by Revenue is not sustainable as it did not stand confirmed that the assessee had willfully submitted in-accurate particulars to conceal its income. Therefore the basis of the levy of penalty in question no longer survives. Hence ITA No. 8292/Mum/2011 filed by the assessee is allowed.

Best Regards
K.K Singh