ACIT 4(3)(1), MUMBAI vs. PANACHE EXPORTS P.LTD, MUMBAI

This is an appeal filed by the Revenue and Cross Objection by the assessee against the order of CIT(A)-9, Mumbai dated 06/02/2017 in the matter of order passed u/s.143(3) r.w.s. 147 of the IT Act.

In this appeal, revenue is aggrieved for deleting addition made by AO on account of bogus purchases amounting to Rs.33,76,271/-. In the Cross CO No.211/Mum/2017 M/s. Panache Exports Pvt.Ltd., Objection, assessee is aggrieved by the order of CIT(A) upholding reopening of assessment.

Rival contentions have been heard and record perused.

During the course of reassessment proceedings, AO found that assessee has purchased goods from the parties who have been declared as bogus by the Sales Tax Department, accordingly same was added in assessee’s income. AO observed that from a perusal of the Profit & Loss A/c, it is noticed that during the year, the assessee has claimed expenses of Rs.17,43,80,469/- under the head Purchases of Diamond'. During the course of the reassessment proceedings, the assessee was asked to file documentary evidences to justify the genuineness of the purchases made from aforesaid parties. In reply, the assessee filed certain details and also asked the AO to give copies of all materials and evidences on the basis of which AO formed his opinion to make the addition in respect of such purchases. However, nothing was furnished to the assessee.

In view of above observation, the AO estimated profit of 6% on such purchases of Rs.5,62,71,184/- and made addition of Rs.33,76,271/-.

By the impugned order, CIT(A) deleted the addition after observing as under:- 6.3.7. On the above facts, it is obvious that the AO while supposedly acting on a report of the Investigation Wing and some alleged third party evidence, never made the said report and evidence available to the appellant. Thus, the appellant was denied a chance to rebut the evidence by cross examining those, who had allegedly given statements that could incriminate the appellant. All this is a clear violation of the principles of CO No.211/Mum/2017 M/s. Panache Exports Pvt.Ltd., natural justice, a fundamental point to the validity of the proceedings before the AO. 6.3,8. The facts of the appellant's case are identical to those of in the case of H.R.Mehta decided but the Bombay High Court through an order dated 30/06/2016 in ITA No.580/2001. In that case, the assessee had adduced evidence by way of bank record to show that loan had been received from a creditor through banking channels. The creditor was not physically traceable, as much time had elapsed and his address had changed. The assessment had been reopened on the basis of third party evidence collected in a search action in the case of a charitable trust. Despite specific request in this regard, the AO concerned did not provide to H R Mehta a copy of the appraisal report and third party statement etc. and proceeded to treat the loan as unexplained. The Hon'ble High Court struck down the order of reassessment by observing that revenue was justified in making the addition without having first given the assessee an opportunity to cross examine the deponents on the statements relied upon by the ACIT. The relevant discussion, contained in parahraphs 16 & 17 of the High Court's order, is reproduced below: "16. In the instant case although the appellant assessee has called upon us to drawn inference that the burden shifted to the revenue in the present case once it was established that the payments were made and repaid by cheque we need not hasten and adopt that view after having given our thought to various issued raised and the decisions cited by Mr.Tralshawalla and finding that on a very fundamental aspect, the revenue was not justified in making addition at the time of reassessment without having first given the assessee an opportunity to cross examine the deponent on the statements relied upon by the ACIT. Quite apart from denial of an opportunity of cross examination, the revenue did not even provide the material on the basis of which the department sought to conclude that the loan was a bogus transaction.

In our view in the light of the fact that the monies were advanced apparently by the account payee cheque and was repaid vide account payee cheque the least that the revenue should have done was to grant an opportunity to The assessee to meet the case against him by providing the material ought to be used against assessee in arriving before passing the order of assessment. This not having been done, the denial of such opportunity goes to root of the matter and strikes at the very foundation of the reassessment and therefore renders the orders passed by the • CIT(A) and the Tribunal vulnerable. In our view the assessee was bound to be provided with the material used against him apart from being permitting him to cross examine the deponents. Despite the request dt. 15lh February, 1996 seeking an opportunity to cross examine the deponent and furnish the assessee with copies of statement and disclose material, these were denied to him. In this view of the matter we are inclined to allow the appeal on this very issue." 6.3.9. Opportunity of cross examination of witnesses is an essential ingredient of the principle of natural justice. This has been affirmed by the Hon'ble Supreme Court in the case of Andaman Timber Industries [Civil Appeal No.4228 of 2006, Date of Pronouncement - September 02, 2015]. In that case, the Hon'ble Supreme Court held that not allowing assessee the opportunity to cross-examine witnesses, whose statements were made the CO No.211/Mum/2017 M/s. Panache Exports Pvt.Ltd., basis of a demand, is a serious flaw which makes order a nullity, as it amounts to violation of principles of natural justice. 6.3.10. In the case of Kishinch and Chellaram vs. CIT, Bombay City II [1980] 125 ITR 713 (SC), it has been held by the Apex Court that in income tax proceedings when an evidence is to be used against the assessee and if it is not shown to the assessee and if no opportunity to controvert is given to the assessee, that evidence is not admissible. It further held-the department ought to have called upon the manager to produce the documents and papers on the basis of which he made the statements and confronted the assessee with those documents and papers. Before the income tax authorities could rely upon the evidence, they were bound to produce it before the assessee so that the assessee could controvert the statements contained in it by asking for an opportunity to cross examine the manager of the bank with reference to the statements made by him. 6.3.11. On principles of Natural Justice, it has been held by the Apex Court in the case of Swadesh Cotton Mills vs Union of bulin in 1981 AIR 818 that phrase "Natural justice" is not capable of a static and precise definition," "Two fundamental maxims of natural justice have now become deeply and indelibly ingrained in the common consciousness of mankind as preeminently necessary to ensure that law is applied impartially objectively and fairly. These twin principles are (i) audialtermpartem and (ii) nemojudex in re sua. Audi altermpartem is a highly effective rule devised by the Courts to ensure that a statutory authority arrives at a just decision and it is calculated to act as a healthy check on-the abuse or misuse of power." "The maxim audialtermpartem has many facets. Two of there are (a) notice of case to be met and (b) opportunity to explain. "In facts and circumstances of a particular case when non-compliance with the implied requirements of the audialtermpartem, rule of natural justice at the pre decisional stage, the impugned order can be struck down as invalid on that score alone." 6.3.12. It has been also held by the Apex Court in the case of Delhi Transport Corporation vs DTC Mazdoor Congress, in 1991. AIR 101 that the audialtermpartem, rule which is essence enforces the equality clause of Article 14 of the Constitution and is applicable not only to quasi-judicial orders but to administrative orders affecting prejudicially the party in question. 6.3.13. A similar matter came up before the Hon'ble Supreme Court in the case of M/s. Gira Enterprises & Another (Civil Appeal Nos. 433-434 0/2006) Dated 21/08/2014. In that case, it was alleged that prices declared for import purposes had been suppressed. The case was based on evidence contained in a computer printout, reportedly prepared on the basis of import data, allegedly collected from Mumbai Port. This print out showed import prices, higher than those declared by the assessee. This printout was not made available to the assessee in the course of adjudication proceedings. After hearing the matter, the Hon'ble Supreme Court went on to set aside the order with below extracted observations: "22. ...the respondent (revenue) did not supply the information (alleged computer printout) which formed the basis of the conclusion that the appellants herein under- CO No.211/Mum/2017 M/s. Panache Exports Pvt.Ltd., valued the goods imported. In such a situation, the appellants obviously cannot and did not have any opportunity of establishing that the claim of the revenue is unsustainable in law. If the information, which formed the basis for the revenue to reject the appellant's valuation is supplied to the appellants,the appellants perhaps will have the opportunity to dispute the comparability of the import transactions allegedly contained in the computer printout on various counts may not be possible to catalogue. - .

In the absence of any material produced by the revenue in proof of the alleged comparable imports at a higher value, the impugned order which eventually confirmed the original order of assessment..... cannot be sustained for two reasons - (1) the mere existence of an alleged computer printout is not proof of the existence of comparable imports; (2) assuming such a printout exists and the contents thereof are true, the question still remains whether the transaction of the appellant. The appellant will have to be given reasonable opportunity to establish (if he can) that the transactions are not comparable." 6.3.14 Going by the discussion contained above, it is obvious that the inference drawn by the AO against the appellant is not sustainable for the simple reason that the principles of natural justice have not been followed. First and foremost, the appellant has not been given any access to the material (reports, intimations, statements etc.) used against it. Secondly, by withholding the said material, the AO has denied of the appellant an opportunity to rebut the evidence" by cross examining the witnesses, statements, if any made by whom, incriminated the appellant. On both counts the impugned assessment order fails squarely. The following table provides details of the average value addition made by the appellant on its raw materials. It will be seen from the same that in fact the value addition is higher in the case of jewellery manufactured from raw materials purchased from the allegedly bogus parties.