TARUN SHARMA,MANDI GOBINDGARH vs. ITO WARD SIRHIND, PUNJAB

The Ld. DR opposed the condonation of delay.

We have heard the rival submissions and perused the condonation application placed on record. Upon consideration of the facts and circumstances of the case, we are satisfied that the assessee was prevented by reasonable cause from filing the present appeal within the prescribed period of limitation. Accordingly, the delay of 04 days in filing the appeal is condoned and the appeal is admitted for adjudication.

Since common issues are involved in both the appeals, therefore, the same were heard together and are being disposed of by this consolidated order for the sake of convenience and brevity.

Brief facts of the case are that the assessee, an individual engaged in the business of trading of iron and steel under the name and style of M/s Sharma Enterprises, filed his return of income declaring total income of Rs.4,90,540/-. The case was selected for scrutiny under CASS on the issue of “Business Purchase”, as it was noticed from the trading account and GST data that the assessee had made substantial purchases from certain suppliers who were non-filers or whose turnover reflected in GSTR-1 was disproportionately low. Notices under sections 143(2) and 142(1) of the Income Tax Act were issued from time to time and the assessee furnished certain details including GST returns, invoices, e-way bills and bank statements.

1 During the course of assessment proceedings, the Assessing Officer observed that the assessee had shown purchases amounting to Rs.16,41,00,157/- from various parties who were allegedly non-filers as per departmental database. The Assessing Officer reproduced the details of such parties and observed that the identity, genuineness and creditworthiness of the suppliers remained unverified in absence of filed returns of income by such parties. The Assessing Officer further noted that though the assessee furnished copies of invoices, e-way bills and bank statements, however, the bank account reflected unusual pattern of credits and debits occurring within short intervals on the same day, which according to the Assessing Officer was not normal in wholesale trading business. The Assessing Officer also observed that the e-way bills furnished by the assessee did not contain complete transporter details and the destination mentioned therein was only for short distances.

2 The Assessing Officer thereafter issued show cause notices proposing disallowance of 20% of the purchases amounting to Rs.3,28,20,031/- and also proposed rejection of books of account under section 145(3) of the Act. According to the Assessing Officer, the assessee failed to establish the genuineness of purchases from such non-filer parties despite opportunities granted. The Assessing Officer held that the purchases aggregating to Rs.16,41,00,157/- remained unverifiable and accordingly disallowed 20% thereof amounting to Rs.3,28,20,031/- and added the same to the income of the assessee.

Aggrieved against the assessment order, the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) noted that the assessee had maintained audited books of account along with quantitative stock tally and had furnished documentary evidences such as purchase bills, GST returns, ledger accounts, e-way bills, transport receipts and bank statements in support of the purchases. The Ld. CIT(A) further observed that the Assessing Officer had not brought any material on record to establish that the purchases were entirely bogus and no independent enquiry under sections 131 or 133(6) had been conducted from the suppliers. The Ld. CIT(A) also observed that the sales declared by the assessee had been accepted by the Assessing Officer and therefore the corresponding purchases could not be completely disregarded.

1 The Ld. CIT(A), however, held that certain doubts regarding genuineness of purchases could not be completely ruled out considering the status of the suppliers as non-filers and the deficiencies pointed out by the Assessing Officer. Accordingly, instead of sustaining the entire addition made by the Assessing Officer at 20% of the purchases, the Ld. CIT(A) restricted the disallowance to 8% of the impugned purchases, thereby granting partial relief to the assessee.

The Revenue is in appeal against the relief granted by the Ld. CIT(A), whereas the assessee is in appeal challenging sustenance of disallowance at 8% and also challenging rejection of books of account and alleged violation of principles of natural justice.

During the course of hearing, the Ld. DR strongly relied upon the assessment order and submitted that the Assessing Officer had made detailed enquiries during the course of assessment proceedings and had categorically found that the assessee had made huge purchases from various parties who were non-filers as per departmental database. It was contended that the assessee failed to establish the identity, genuineness and creditworthiness of such parties and merely furnishing invoices, e-way bills and bank statements could not conclusively prove the genuineness of the transactions. The Ld. DR further submitted that the bank statements reflected abnormal transactions wherein amounts credited were immediately debited on the same day, thereby creating serious doubt regarding the genuineness of the trading activities. It was further argued that the Assessing Officer had rightly rejected the books of account under section 145(3) of the Act and made disallowance of 20% of the unverifiable purchases. The Ld. DR contended that the Ld. CIT(A) was not justified in restricting the disallowance to 8% without properly appreciating the findings recorded by the Assessing Officer and without calling for any remand report before granting substantial relief to the assessee.

Per contra, the Ld. AR for the assessee supported the order of the Ld. CIT(A) and submitted that the assessee had maintained complete books of account along with quantitative stock records which were duly audited. It was submitted that during the assessment proceedings, the assessee furnished complete documentary evidence, including purchase invoices, GST returns, ledger accounts, bank statements, e-way bills and transport receipts, to substantiate the purchases. The Ld. AR further submitted that the Assessing Officer had not brought any cogent material on record to establish that the purchases were bogus and no independent enquiry under sections 131 or 133(6) was conducted from any of the suppliers. It was argued that the sales declared by the assessee had been fully accepted by the Department and without corresponding purchases such sales could not have been effected. The Ld. AR further contended that the addition made by the Assessing Officer was purely ad hoc in nature and there was no basis for estimating the disallowance at 20% of the purchases. It was also submitted that merely because certain suppliers were non-filers or had filed returns showing lesser turnover, the purchases made by the assessee could not automatically be treated as non-genuine. The Ld. AR accordingly prayed that the order passed by the Ld. CIT(A) restricting the disallowance to 8% being reasonable and justified under the facts and circumstances of the case deserves to be upheld.

We have heard the rival submissions and perused the material available on record including the assessment order, appellate order and documentary evidences placed before us. We find that the Assessing Officer made the impugned addition primarily on the ground that the assessee had effected purchases from certain suppliers who were allegedly non-filers as per the departmental database; therefore, according to the Assessing Officer, the genuineness and credibility of such purchases remained unverified. The Assessing Officer further observed that certain bank transactions reflected immediate credits and debits within short intervals and also noted deficiencies in transporter details mentioned in e-way bills. On the basis of such observations, the Assessing Officer rejected the books of account under section 145(3) and proceeded to make an estimated disallowance @20% of the purchases amounting to Rs.3,28,20,031/-.

1 We further find from the record that the assessee had placed on record various documentary evidences including audited books of account, quantitative stock tally, GST returns, purchase invoices, ledger accounts, e- way bills, transport receipts and bank statements in support of the purchases. The assessee had also consistently contended before the lower authorities that the sales declared by the assessee had been accepted by the Department and therefore corresponding purchases could not have been completely disregarded. However, it is equally evident from the record that neither the Assessing Officer carried out any independent enquiry from the alleged suppliers by invoking powers under sections 131 or 133(6) of the Act, nor any meaningful verification exercise was undertaken to examine the quantitative reconciliation, transportation trail or movement of goods in entirety.

2 We also find that the Ld. CIT(A), while partly accepting the contentions of the assessee, restricted the disallowance from 20% to 8% on estimated basis. The relevant findings recorded by the Ld. CIT(A) at page 70 & 71 are reproduced hereinbelow:-

2 While the assessee has relied on various judicial precedents to highlight that genuine purchases supported by documentary evidence, such as invoices, e-way bills, and banking transactions, should be fully accepted, these precedents are distinguishable in the present case. In the instant facts, although the assessee has produced substantial records, there remain certain verification gaps that cannot be ignored. These include instances where the identities of some suppliers could not be fully confirmed, partial non-filing of income-tax returns by certain parties, and minor discrepancies in the e-way bills and supporting documentation. Such gaps create a situation where a complete acceptance of the purchases without any disallowance would not be appropriate. Taking a balanced and pragmatic approach, it is necessary to recognize and give due weight to the evidence furnished by the assessee while also takinginto account the shortfalls and limitations identified by the AO during the assessment proceedings. Considering the relatively low profit margin declared by the assessee on the purchases, it is reasonable to reduce the disallowance from the 20% applied by the AO to 8% of the total claimed purchases. This approach ensures that the disallowance is proportionate to the actual risk of unverified purchases while acknowledging the genuineness of the bulk of the transactions. Accordingly, the appellant authority finds it just and equitable to partly allow the grounds 6 and 8 of the appeal, by restricting the disallowance to 8% of the purchases instead of the 20% determined by the AO. The AO’s action, in making a proportionate disallowance based on verifiable deficiencies and discrepancies, is upheld as legally valid. Consequently, the appeal of the assessee on these grounds is disposed of to this limited extent. Accordingly assessee’s appeal is partially allowed on these grounds.

3 From the above findings of the Ld. CIT(A), it is apparent that though partial relief was granted to the assessee, the restriction of addition to 8% was also made on an estimation basis without there being any specific benchmark, comparable material or independent verification brought on record. We further notice that the Ld. CIT(A) has not called for any remand report from the Assessing Officer while granting substantial relief to the assessee, despite the fact that extensive documentary evidence and factual submissions were relied upon before the appellate authority. The Assessing Officer in para 4.2 on page of the assessment order has noted down that the assessee had made substantial purchases from suppliers who were non-filers. The Assessing Officer at page 4 has given the list of 15 such non filers and thereafter, the Assessing Officer has mentioned.

4 In our considered opinion, both the authorities below have proceeded primarily on estimations without carrying out complete factual verification of the transactions in question.

5 We also find merit in the contention of the assessee that adequate and effective opportunity deserves to be granted for substantiating the purchases by producing complete documentary evidences including confirmations from suppliers, transportation details, quantitative stock reconciliation, GST reconciliation and movement of goods. Simultaneously, the Revenue authorities are also required to independently verify the correctness and genuineness of the transactions through proper enquiry mechanism as contemplated under the Act instead of proceeding merely on the basis of database information regarding non-filing status of suppliers.

6 In our considered view, the issues involved in the present appeals require thorough re-examination at the level of the Assessing Officer. The matter cannot be conclusively adjudicated merely on estimated percentages either at 20% adopted by the Assessing Officer or at 8% sustained by the Ld. CIT(A) unless proper verification of the underlying transactions is undertaken. The principles of natural justice also require that the assessee should be afforded sufficient and effective opportunity to substantiate the purchases with supporting evidences and explain the alleged discrepancies noticed by the Assessing Officer.

7 Accordingly, considering the entirety of facts and circumstances of the case, we deem it appropriate to set aside the impugned appellate order as well as the assessment order and restore the entire matter back to the file of the Assessing Officer for fresh adjudication de novo in accordance with law. The Assessing Officer shall independently verify the purchases, GST records, movement of goods, transportation details, stock records and banking transactions and shall also be at liberty to make an enquiry from the concerned suppliers by exercising powers available under the Act. The assessee shall furnish all requisite evidence and extend full cooperation during remand proceedings.

8 Needless to say, the Assessing Officer shall afford a reasonable and effective opportunity of being heard to the assessee and thereafter pass a speaking order in accordance with law after duly considering all evidence and submissions that may be placed on record.

In the result, both the appeal of the Revenue as well as the appeal of the Assessee are treated as allowed for statistical purposes.

""थ"/ The Respondent 3. आयकरआयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"ीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File