A history of admitting to bogus transactions with a party justifies a disallowance of purchases from the same party in a later year if the taxpayer fails to provide sufficient new proof of genuineness.

A history of admitting to bogus transactions with a party justifies a disallowance of purchases from the same party in a later year if the taxpayer fails to provide sufficient new proof of genuineness.

Issue

Can a taxpayer’s past admission of entering into bogus transactions with a particular supplier be used to justify a disallowance of purchases from that same supplier in a subsequent year, especially when the taxpayer fails to provide robust evidence to prove the current transaction’s genuineness?

Facts

• The Commissioner (Appeals) sustained a 25% disallowance of purchases that the assessee claimed to have made from a party named ‘AL’.
• The revenue’s case was strengthened by two key facts:
  1. In a preceding year, the assessee had formally admitted under the Income Declaration Scheme (IDS) that their transactions with this very same party were 25% bogus.
  2. For the current year under review, the assessee failed to furnish sufficient documentary evidence (like proof of delivery or movement of goods) to prove that the purchase transaction was genuine, providing only basic documents like PAN and ledger confirmations.

Decision

The Tribunal ruled in favour of the revenue.

• It held that given the assessee’s admitted history of entering into bogus transactions with the same supplier and their failure to adequately discharge their onus of proof with credible evidence in the current year, the 25% disallowance of the purchases was justified.

Key Takeways

• Past Conduct is a Relevant Factor: While each assessment year is evaluated independently, a taxpayer’s past conduct, especially a formal admission of non-genuine transactions under a scheme like IDS, can be a relevant factor for tax authorities when assessing the credibility of similar transactions in later years.
• The Onus of Proof is on the Assessee: The primary burden to prove that a claimed expenditure is genuine always rests on the assessee. A history of bogus dealings can lead to a higher-than-usual level of scrutiny from the tax department.
• Estimation as a Practical Approach: Disallowing a percentage (like 25%) is a common method used by authorities and courts to deal with transactions that are not entirely verifiable but where the corresponding sales of goods have been made, implying that some underlying purchase must have occurred.

When a taxpayer submits evidence at the last minute, leaving the Assessing Officer no practical time to examine it, the matter should be remanded for proper verification.

Issue

Can an appellate authority delete an addition on the ground that the Assessing Officer made “no adverse comments” on evidence, when that very evidence was submitted by the taxpayer at the very last minute, leaving the AO with no real opportunity to examine it?

Facts

• The Assessing Officer (AO) was trying to verify the genuineness of purchases from 16 different parties.
• For several months, the assessee did not comply with the AO’s notices. Then, on December 26, 2019, just five days before the assessment was getting time-barred on December 31, 2019, the assessee submitted some documents.
• The AO, noting that the submissions were filed at the “fag end” and there was no time for verification, proceeded to disallow 25% of the purchases.
• The Commissioner (Appeals) deleted most of this addition. The primary reason given was that the AO had made “no adverse comments” against the evidence that the assessee had filed.

Decision

The Tribunal remanded the matter back to the Assessing Officer.

• It held that the reasoning of the Commissioner (Appeals) was fundamentally flawed. The AO had not made adverse comments on the evidence for the simple reason that, due to the last-minute filing by the assessee, they never had a chance to even consider or examine that evidence.
• Therefore, the issue was restored to the AO’s file with a clear direction to properly verify the evidence and then re-adjudicate the matter.

Key Takeways

• Timely Cooperation is Expected: Taxpayers are expected to cooperate with assessment proceedings in a timely manner. Submitting crucial evidence just days before the deadline, leaving the AO with no time for verification, is a practice that will not be looked upon favorably.
• Absence of Comment Does Not Equal Acceptance: The lack of an adverse finding by an AO on a piece of evidence does not automatically mean that the evidence has been accepted as genuine, especially if the circumstances clearly show that it was never actually examined.
• The Correct Remedy is Remand: When evidence has not been properly examined by the primary fact-finding authority (the AO) due to the taxpayer’s own delayed actions, the correct appellate remedy is to remand the case for a proper examination, not to grant relief to the taxpayer based on the non-examination.

When an assessee fails to participate in the assessment proceedings and furnishes evidence only at the last minute, the matter should be restored to the Assessing Officer for proper verification.

Issue

What is the proper course of action when an assessee does not participate in the assessment proceedings and only furnishes evidence at the very end, leading to a disallowance by the Assessing Officer?

Facts

The Assessing Officer (AO) made a 100% disallowance of purchases from 29 creditors because the assessee had failed to provide basic details like PAN, current addresses, or any supporting documentation throughout the course of the assessment. The Commissioner (Appeals) granted significant relief to the assessee. However, the Tribunal noted from the record that the assessee had not participated in the entire assessment proceedings, except for submitting some evidence at the very fag end, leaving no time for the AO to examine it.

Decision

Consistent with its decision on a similar issue in the same case, the Tribunal remanded the matter back to the Assessing Officer.

• It held that since the assessee had not cooperated during the proceedings and the evidence was filed too late for any meaningful verification, the correct course of action was to restore the issue to the AO’s file.
• The AO was directed to verify the evidence that was submitted and re-adjudicate the issue after giving the assessee a proper opportunity of being heard.

Key Takeways

• Participation is Not Optional: A taxpayer cannot simply ignore the entire assessment process and then expect to get full relief at the appellate stage based on evidence that the Assessing Officer never had a fair chance to examine.
• Remand Ensures Proper Fact-Finding: Remanding the case back to the AO is the standard and fair procedure when evidence has been introduced very late in the process. This ensures that the primary fact-finding authority gets to properly scrutinize the documents and make an informed decision.
• Appeals are Not a Substitute for Assessment: The appellate process is meant to review the order of the AO. It is not intended to be a forum for a fresh investigation that should have happened at the assessment stage.

An unsecured loan is proven to be genuine if the taxpayer provides evidence of the transaction and its subsequent repayment, all through proper banking channels.

Issue

Has a taxpayer discharged their onus under Section 68 of the Income-tax Act, 1961, to prove the genuineness of an unsecured loan if they provide evidence of not only the receipt but also the subsequent repayment of the loan through verifiable banking channels?

Facts

• The Assessing Officer (AO) made an addition for an unsecured loan received from a party named ‘SS’, treating the loan as non-genuine.
• The assessee provided a comprehensive set of documents to prove the loan’s genuineness, which included:
  • The ledger confirmation and PAN of the lender.
  • Copies of ledger accounts from succeeding years that showed the full repayment of the loan.
  • Bank statements that demonstrated that both the initial receipt of the loan and its subsequent repayment were made through regular banking channels.
• It was noted that neither the AO nor the Commissioner (Appeals) had found any specific defect or infirmity in the evidence that the assessee had submitted.

Decision

The Tribunal ruled in favour of the assessee.

• It held that the assessee had sufficiently demonstrated the genuineness of the loan transaction with credible and comprehensive documentary evidence. The evidence of repayment in a subsequent year through banking channels is particularly strong proof that a loan was genuine.
• Since the tax authorities had not pointed out any specific flaw in this evidence, the Tribunal concluded that the assessee had duly discharged their onus, and the addition was directed to be deleted.

Key Takeways

• The Three Tests Plus Repayment: The standard test for a genuine loan under Section 68 is to prove the lender’s identity, their creditworthiness, and the genuineness of the transaction. Providing clear proof of the loan’s repayment is one of the strongest possible ways to establish the genuineness of the transaction.
• Bank Transactions Add Credibility: Routing all transactions related to a loan, including both the initial receipt and the final repayment, through banking channels adds a significant layer of credibility and makes the transaction much easier to verify.
• Authorities Must Rebut the Evidence: If an assessee provides a complete and plausible set of evidence, the onus shifts to the tax department to find a specific flaw in that evidence or to bring their own contrary material on record. An addition cannot be sustained if the department simply ignores or fails to rebut the evidence that has been provided by the taxpayer.