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Facts
The assessee, engaged in diamond trading, was subjected to a search that revealed allegations of accommodation entries. The Assessing Officer (AO) concluded that the assessee's purchases and sales were bogus, and diversions of funds as loans and advances indicated non-genuine trading. The AO rejected the assessee's books under Section 145(3) and made additions.
Held
The Tribunal held that the CIT(A) erred by passing an ex-parte order without adjudicating the appeal on merits, violating principles of natural justice. While the assessee has a duty to cooperate, the CIT(A) failed to provide a sufficient opportunity of hearing.
Key Issues
Whether the CIT(A) erred in passing an ex-parte order without adjudicating the grounds of appeal on merits and violating the principles of natural justice. Whether the AO's rejection of books and subsequent additions were justified.
Sections Cited
143(3), 145(3), 234A, 234B, 270A, 271AAD, 250
AI-generated summary — verify with the full judgment below
Before: SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
PER PRABHASH SHANKAR [A.M.] :- The present appeal is filed by the assessee against the order passed by the Learned Commissioner of Income-tax, Appeal, CIT(A) 53, Mumbai [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 29.12.2022 for the Assessment Year [A.Y.] 2021-22. P a g e | 2 A.Y. 2021-22 Aadinath Merchandise Pvt Ltd, Gujarat 2. The grounds of appeal are as under:-
On the facts and circumstances of the case and law, the Ld. CIT(A) erred in passing ex-parte order without adjudicating the grounds of appeal on merits.
On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the assessment order passed by the Ld Assessing Officer u/s 143(3) instead of passing the assessment order u/s 144 ignoring the fact that the books of accounts of the appellant were rejected u/s 145(3) and hence the assessment order is itself bad in law and invalid.
On the facts and circumstances of the case and law, the Ld CIT(A) erred in confirming the action of Ld AO of estimating the commission income of Rs. 11,22,896/- (being 0.5% of the total sales and purchases amounting to Rs. 22,45,79,110)
On the facts and circumstances of the case and law, the Ld CIT(A) erred in confirming the action of Ld AO of estimating the commission income of Rs. 2,24,72,968/- (being 3% of the total loans and advances amounting to Rs. 74,90,98,930/-)
On the facts and circumstances of the case and law, the Ld CIT(A) erred in confirming separate addition of Rs. 2,08,186 being Interest on income tax refund credited in P&L account even though books of accounts has been rejected u/s 145(3) of the Income Tax Act, 1961. 6. On the facts and circumstances of the case and law, the Ld CIT(A) erred in confirming the action of Ld AO of rejecting the books of accounts u/s 145(3) of the Income Tax Act, 1961 even when the same were duly audited by the qualified Chartered Accountant.
On the facts and circumstances of the case and law, the Ld CIT(A) erred in confirming the action of Ld AO of treating the appellant as entry provider without considering the facts that the appellant is a genuine diamond trader.
On the facts and circumstances of the case and law, the Ld CIT(A) erred in confirming the action of Ld AO of estimating commission income by relying on the reports of the Investigation Wing and the statement recorded of the third-party without affording an opportunity of cross examination.
On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming charging of interest under section 234A and 234B of Income Tax Act, 1961. 10. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming the action of Ld.AO in initiating penalty proceedings u/s 270A of the Income Tax Act, 1961 for under reporting of Income.
On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming the action of Ld.AO in initiating penalty proceedings u/s 271AAD of the Income Tax Act, 1961 for false entries in the books of accounts.
P a g e | 3 A.Y. 2021-22 Aadinath Merchandise Pvt Ltd, Gujarat 3. Brief facts of the case are that the assessee company is engaged in the business of trading in rough and polished diamond. A search was conducted on ARC Group wherein it was alleged that they were taking accommodation entries through various entities including the assessee. Therefore, the case was centralized with the Ld. ACIT-CC- 5(2), Mumbai. The AO issued various notices in response thereof it was claimed that the assessee was doing a genuine business. However, the AO concluded that purchases and sales reflected in the books of accounts of the assessee were bogus, non-genuine and unproved. The assessee could not give any convincing or cogent explanation regarding purchase and sale of goods to these parties. Further, it was also found that huge amount of creditors for purchase transaction were not paid and they were outstanding and amount received against sales had been diverted as loan and advances. Therefore, the AO stated that the trading activity undertaken by the assessee was not genuine. The affairs of the entities were arranged in such a manner that loss was incurred from trading activities and the same was set off against interest income earned from providing bogus and non-genuine loans to various entities. He concluded that the assessee failed to discharge the burden of proving the genuineness of the transactions with the concerned parties. The AO further mentioned that as per market practice, commission rate for P a g e | 4 A.Y. 2021-22 Aadinath Merchandise Pvt Ltd, Gujarat providing accommodation entries was 2% to 3% of the loan entries provided and for the entry of sale and purchases, the commission was charged in the range of 0.1% to 0.5%. Thus, total sale and purchase were worked out at Rs. 22,45,79,110/- and commission income @0.5% of the transactions was worked out by the AO to Rs. 11,22,896/-. Further, total loan and advances outstanding during the year was Rs. 74,90,98,930/- and AO has computed disallowance @ 3% of these transactions which comes to Rs. 2,24,72,968/-. The AO also invoked provisions of section 145(3) of the Act and thus, he made addition of Rs. 2,35,95,863/-.
In the subsequent appeal before the ld.CIT(A), it was observed by him that during the course of appellate proceedings, the assessee had not furnished any submission. From the assessment order, it was found that during the course of search action in the case of Ramesh Chaurasia, Achal Chaurasia and various entities of ARC group on 15.02.2022, it was found that the ARC group had taken accommodation entries from various intermediaries and entry providers. Further, during the course of search action, Sameer Chaudhary who is the CA and tax auditor of ARC group had admitted in his statement recorded on 08.06.2022 that the assessee has provided unsecured loan which was in the nature of accommodation loans to various entries of the ARC group. The assessee before the AO had merely mentioned that all the transactions were done
P a g e | 5 A.Y. 2021-22 Aadinath Merchandise Pvt Ltd, Gujarat through banking channels and duly accounted in the books of account. However, the assessee had not produced any documentary evidences in respect of purchase and sales transactions as well as unsecured loans arranged by it. Onus lay on the assessee to prove the genuineness of the transaction entered into by it from the various parties. Since the assessee had failed to furnish any details or proof of the transactions regarding purchase, sales and loans undertaken during the year, the same were considered as bogus and in the nature of accommodation entries. Therefore, books of the account of the assessee had been rightly rejected by the AO u/s 145(3) of the Act. Since, nothing has brought on record contrary to the findings of the AO, addition of Rs. 2,35,95,863/- made by the AO as commission income in the hands of the assessee was confirmed.
Before us, at the outset, ld. AR submitted that the principle of natural justice had not been followed in its case. The ld. CIT(A) has passed the impugned order without providing sufficient opportunity of hearing to it. The ld AR submitted that another opportunity may be provided to the assessee so that it could be able to represent its case before the ld. CIT(A). It is stated that earlier CA Sri Manish Pipapar could not attend the proceedings on account of personal difficulties.The case was subsequently assigned by the assessee to the ld.AR sometime in P a g e | 6 A.Y. 2021-22 Aadinath Merchandise Pvt Ltd, Gujarat March. However, meanwhile the ld.CIT(A) passed ex parte order without adjudicating grounds of appeal. On the other hand, ld.DR submitted that in the impugned order ld.CIT(A) makes a categorical remark that there were no documentary evidences furnished before him. Thus, he submitted that the order of the ld. CIT(A) deserves to be upheld.
We have heard the rival parties and perused the material available on records. It is observed that the ld.CIT(A) failed to adjudicate the issues raised in the grounds of appeal and did not examine the material available on record. Such dismissal without deciding the appeal on merits is contrary to the principles of natural justice. It is settled law that it is the duty of the appellate authority to dispose of an appeal on merits after considering the material on record, even if the appellant fails to appear.
However, it is equally true that it is the fundamental duty of the assessee to diligently pursue the appeal and comply with the notices and proceedings initiated by the Revenue authorities. The framework of the Act and the proceedings rely heavily on the co-operation and active participation of the taxpayer. Despite the notices under section 250 of the Act by the CIT(A), no substantive explanation was submitted. As the ld. AR has requested before us that the assessee may be given one more
P a g e | 7 A.Y. 2021-22 Aadinath Merchandise Pvt Ltd, Gujarat opportunity and this request was not vehemently objected by the ld.DR, we are of the opinion that the scales of justice demand that the matter should be verified and revisited at the level of ld. CIT(A). Accordingly, we are of the considered view that the matter should be remanded back to the file of ld. CIT(A) for de novo adjudication by him while applying the principles of natural justice after affording sufficient opportunity of being heard to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 16.06.2025. SANDEEP GOSAIN PRABHASH SHANKAR (न्याययक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)
Place: म ुंबई/Mumbai ददनाुंक /Date 16.06.2025 Lubhna Shaikh / Steno
आदेश की प्रयियलयि अग्रेयिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. आयकर आयुक्त / CIT 3. 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT,
P a g e | 8 A.Y. 2021-22 Aadinath Merchandise Pvt Ltd, Gujarat Mumbai 5. गार्ड फाईल / Guard file.
सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt.