Section 69C – Unexplained expenditure – Bogus purchases – Mere reliance by the A.O. on information obtained from the Sales Tax Department, or the statements of two persons made before the Sales Tax Department, would not be sufficient to treat the purchases as bogus

5. Pr. CIT-13 vs. Vaman International Pvt. Ltd. [Income tax Appeal No. 1940 of 2017]

Date of order: 29^th January, 2020

ACIT vs. Vaman International Pvt. Ltd. [ITA No. 794/Mum/2015; Date of order: 16^th November, 2016; A.Y.: 2010-11; Bench ‘F’]

Section 69C – Unexplained expenditure – Bogus purchases – Mere reliance by the A.O. on information obtained from the Sales Tax Department, or the statements of two persons made before the Sales Tax Department, would not be sufficient to treat the purchases as bogus

The assessee is a company engaged in the business of trading and sale of furniture and allied items on wholesale basis. The A.O. doubted the expenditure of Rs. 4,75,42,385 stated to be on account of purchases from two parties, viz., Impex Trading Co. (for an amount of Rs. 2,90,80,292) and Victor Intertrade Pvt. Ltd. (Rs. 1,84,62,093). The A.O. acted on the basis of information received from the office of the Director-General of Income Tax (Investigation), Mumbai and from the Sales Tax Department that in the list of bogus sales parties the names of the two aforesaid parties were included which rendered the purchase transaction doubtful.

The A.O. observed that the assessee did not produce lorry receipts and other related documents to reflect the movement of goods sold and purchased which were crucial for determining the genuineness of the purchase transaction. In the absence thereof, the A.O. added the said amounts to the total income of the assessee u/s 69C by treating the expenditure as bogus purchases.

The first appellate authority held that such addition by the A.O. could not be sustained. Accordingly, he deleted the addition of Rs. 4,75,42,385. The Tribunal, by an order dated 16^th November, 2016, upheld the order of the first appellate authority and dismissed the appeal of the Revenue.

On further appeal, the Hon. High Court observed that section 69C deals with unexplained expenditure. But it also contains a deeming provision which states that if an assessee incurs any expenditure in the relevant previous year but offers no explanation about the source of such expenditure or part thereof, or if the explanation provided is not satisfactory to the A.O., then the amount covered by such expenditure or part thereof shall be deemed to be the income of the assessee; and once it is so deemed, the same shall not be allowed as a deduction under any head of income.

The Court relied on the Gujarat High Court decision in Krishna Textiles vs. CIT, 310 ITR 227  wherein it has been held that u/s 69C the onus is on the Revenue to prove that the income really belongs to the assessee.

The Hon. Court observed that the A.O. did not doubt the sales and stock records maintained by the assessee. By submitting confirmation letters, copies of invoices, bank statements, payment orders, payment by account payee cheques, etc., the assessee had proved that the sales and purchases had taken place. By highlighting the fact that all the payments against the purchases were made through banking channels by way of account payee cheques, the first appellate authority held that the source of expenditure was fully established by the assessee beyond any doubt. He had further recorded that during the appellate proceedings the assessee had furnished complete quantitative details of the items of goods purchased during the year under consideration and their corresponding sales. Mere reliance by the A.O. on information obtained from the Sales Tax Department, or the statements of two persons made before the Sales Tax Department, would not be sufficient to treat the purchases as bogus and thereafter to make the addition u/s 69C.

The Tribunal also held that if the A.O. had doubted the genuineness of the purchases, it was incumbent upon him to have caused further inquiries in the matter to ascertain the genuineness or otherwise of the transactions and to have given an opportunity to the assessee to examine / cross-examine those two parties vis-a-vis the statements made by them before the Sales Tax Department. Without causing such further inquiries in respect of the purchases, it was not open to the A.O. to make the addition u/s 69C of the Act. 

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Errata

IN THE HIGH COURTS, March 2020 

We regret to point out a typographical error on Page 51 of the caption issue in respect of the following decision:

The Pr CIT -1 v/s M/s. Ami Industries (India) P Ltd [ Income tax Appeal no 1231 of 2017 dt : 29/01/2020 (Bombay HighCourt)].

where “Addition is not justified “ should be replaced in place of “Addition is justified” and be read accordingly.