Reassessment Based on Mechanical “Fit Case” Approval Under Section 151 and Uncorroborated Statement for Bogus Purchases Is Invalid and Ineffective

“With reference to the subject mentioned above, it is humbly submitted that we have already raised legal objections for reopening the concluded assessment for assessment year mentioned above. In the order disposing of our objections, your kind self has mentioned that Cotton Supplier; M/s. Vinayak Traders has been converting the un-accounted cash of various persons / company, through Banking Channel to provide the benefits by way of accommodation entries This facts was based upon the report sent by the ADIT, Investigation, Indore and on the basis of statement of the party recorded by him. It is humbly submitted that kindly provide us a copy of the statement given by the party wherein they have mentioned that they have not traded in any commodity i.e. cotton with the assessee company. You are also requested to call the party in your office for cross-examination. Also supply us documents, if any, given by the said party which is alleged to be against the assessee company for forming the opinion to reopen the assessment. The entire proceedings are based on the statement of the party recorded at our back. Thus, it is not admissible as evidence against us. Moreover, if the party’s statement is to be taken into account as your witness/evidence, it cannot be relied till the time, we are given the opportunity to cross examine the party. Thus entire proceedings being void ab initio may kindly be dropped much less any addition be made on account of such statement of the party recorded, without giving any opportunity of cross examination.”

“INCOME TAX SLP dismissed against High Court order that where in view of testimony of one of alleged supplier of assessee-company that he had not carried out any transactions with assessee which were appearing in the bank account a prima facie case of escapement of income was made out and a reopening notice u/s 148 was issued, such matter was to be proceeded further and Assessing Officer was to decide matter on merits.”

“Section 69C, read with sections 148 and 148A, the Income-tax Act, 1961 Unexplained expenditure (Bogus purchase) Assessment year 2013-14 Assessee-company had filed income and assessment was completed for same Thereafter assessment was reopened. issue a notice under section 148 Assessee sought revenue to reopen income-tax portal and allow three working days file reply However, reassessment order was passed under section 148A(d) Assessee filed petition seeking to quash impugned order and notice issued ground that said order was passed by relying on completely ineligible and unreadable documents and without granting sufficient time respond notice was violation principle natural justice It was noted that revenue had furnished legible copies documents based on which reopening was initiated to assessee initial stage itself, was further noted that one alleged supplier of assessee had made statement that had not carried out transactions with assessee which were appearing his bank account High Court impugned order held that view of testimony supplier prima facie case escapement income was made out and, thus, matter was be proceeded further and Assessing Officer was to decide matter its own merits Whether SLP filed assessee against impugned order High Court was be dismissed Held, yes”

55. The first argument on behalf of the assessee is that the copy of the investigation report was not furnished to them despite specific written request made on behalf of the assesses to furnish the copy of the report, the statements recorded and provide those persons from whom statements were recorded to be cross examined on behalf of the assessee. There is no dispute to the fact that the copy of the statement said to have been recorded during the course of investigation has not been furnished to the assessees and the request made by some of them for cross examining of those persons was not considered. The question would be as to whether the non-compliance of the above would render the assessments had in law. The argument of the revenue is that the assessments cannot be held to be illegal merely on the grounds that the copy of the report was not furnished as the respective assessing officers have clearly mentioned as to the nature of investigation done by the department and as the report itself states that the investigation commenced not from the assessees end but the individuals who dealt with these penny stocks who were targeted It is equally true invariably in all cases, the statement of the stock brokers, the entry operators or the Directors of the various penny stock companies does not directly implicate the assessee. If such being the situation, the assessee cannot be heard to say that the copy of the entire report should have been furnished to him, the person from whom the statements were recorded should have been produced for cross examination as admittedly there is nothing to implicate the assessee Smt. Swati Bajaj of insider trading or rigging of share prices. But the allegation against the assessee is that the claim for LTCG/LTCL is bogus. As pointed out by Mr. Rai, learned senior standing counsel, the investigation report is general in nature not assessee specific. Therefore, we are required to see as to whether non-furnishing of the report which according to the revenue is available in the public domain would vitiate the proceedings on the ground that the assessee was put to prejudice

56. In State Bank of Patiala v. SK. Sharma AIR 1996 SC 1669, the Hon’ble Supreme Court pointed out that violation of any and very procedural provision cannot be said to automatically vitiate the domestic enquiry held against the delinquent employee or the order passed by the disciplinary authority except in cases falling under no notice, no opportunity and no hearing categories. Further it was held that if no prejudice is established to have resulted from such violation of procedural provisions no interference is called for, against the ultimate orders. The test laid down was whether the person has received a fair hearing considering all things as the ultimate test is always the test of prejudice or the test of fair hearing as. Further the Hon’ble Supreme Court pointed out a distinction between a case of no opportunity and a case of no adequate opportunity and while examining the latter case, it was held that the violation has to be examined from the stand point of prejudice, in other words the Court or the tribunal has to see whether in the totality of the circumstances, the delinquent officer/employee did or did not have a fair hearing and the orders to be made shall depend upon the answers to the said query. Further it was held that there may be a situation where interest of the state or public interest may call for curtailing of rule of audi alteram partem and in such a situation the Court may have to balance public/state interest with the requirements of natural justice and arrive at an appropriate decision.

57. In a very recent decision of the Hon’ble Supreme Court in MJ James (supra) after referring to a catena of decisions on the point the Hon’ble Supreme Court pointed out that natural justice is a flexible tool in the hands of the judiciary to reach out in fit cases to remedy injustice. The breach of the audi alteram partem rule cannot by itself, without more lead to the conclusion that prejudice is thereby caused. Where procedural and/or substantive provisions of law embodied the principles of natural justice, their infraction per-se doe not lead to invalidity of the order passed. The prejudice must be caused to the litigant, except in the case of a mandatory provision of law which is conceived not only in individual interest but also in public interest. Further by referring to the decision in State of Uttar Pradesh v. Sudhir Kumar Singh (2020) SCC Online SC 847, it was held that the “prejudice” exception must be more than a mere apprehension or even a reasonable suspicion of a litigant, it should exist as a matter of fact or to be cast upon a definite inference of likelihood of prejudice flowing from the non-observance of natural justice.

58. Therefore, the assessees have to specifically point out as to how they were prejudiced on account of non-furnishing of the investigation report in its entirety, failure to produce the persons from whom the statements were recorded for being cross examined would cause prejudice to the assessee as nowhere in the report the names of the assessees feature. The investigation report states that the investigation has not commenced from the individuals but it has commenced who had dealt with the penny stacks, concept of working backwards. This is a very significant factor to be remembered. Therefore, there has been absolute anonymity of the assessee in the process of investigation. The endeavour of the department is to examine the “modus operandi” adopted and in that process now seek to identify the assessees who have benefited on account of such “modus operandi”. Therefore, considering the factual scenario no prejudice has been established to the assessee by not furnishing the investigation report in its entirety nor making the persons available for cross examination as admitted by the department in substantial number of cases the assessees have not been specifically indicted by those persons from whom statements have been recorded

59. We are conscious of the fact that there may be exceptions however nothing has been brought before us to show that there was an exception in any of these appeals heard by us. In a few cases the assessee has been made known of the statement of the Director of the penny stock company or the stock broker, entry operator despite which those assessees could not make any headway. While on this issue, we need to consider as to whether and under what circumstances the right of cross examination can be demanded as a vested right. In Kishanlal Agarwalla (supra), the Hon’ble Division Bench of this Court pointed out that no natural justice requires that there should be a kind of formal cross examination as it is a procedural justice, governed by the rules and regulations. Further it was held that so long as the party charged has a fair and reasonable opportunity would receive, comment and criticize the evidence, statements or records on which the charges is being against him, the demand and tests of natural justice are satisfied.

60. In Bakshi Ghulam Mohammad (supra) the Hon’ble Supreme Court held that the right of hearing cannot include the right of cross examination and the right must depend upon the circumstances of each case and must also depend on the statute under which the allegations are being enquired into

61. Having noted the above legal position, it goes without saying there is no vested right for the assessee to cross examine the persons who have not deposed anything against the assessee. The investigation report proceeds on a different perspective commencing from a different point and this has led to the enquiry being conducted by the assessing officer calling upon the assessee to prove the genuineness of the claim of LTCG.

65. Thus, the report submitted by the investigation department cannot be thrown out on the grounds urged on behalf of the assesses. The assessee have not been shown to be prejudiced on account of non-furnishing of the investigation report or non-production of the persons for cross examination as the assessee has not specifically indicated as to how he was prejudiced.

“Section 69C of the Income-tax Act, 1961- Unexplained expenditure (Purchases) Assessment year 2010-11-Assessee-company was engaged in business of trading in job work of dying of fabrics-Information was received by Assessing Officer to effect that eight parties from whom purchases were made by assessee wore hawala dealers who had issued bogus bills and he treated aforesaid purchase as bogus purchases and, accordingly. addition was made to total income of assessee-Commissioner (Appeals) noted that without purchase of materials, it was not possible for assessee to complete job work of dying and, thus, entire purchases could not be added as bogus and profit element embedded in such transaction had to be added to total income of assessee and since profit estimation ranged from 12.5 per cent to 25 per cent, Commissioner (Appeals) took view that 17.5 per cent as profit element would meet ends of justice and accordingly, Assessing Office was directed to estimate profit of 17.5 per cent on total alleged bogus purchases and, thereafter, to delete balance addition Tribunal concurred with said view Whether, on facts, there was no infirmity in said order – Held, yes.”

“Section 69C of the Income Tax Act, 1961 unexplained expenditure (Bogus Purchases) -Assessment year 2011-12-Assessing Officer treated purchases made by assessee as bogus purchases and disallowed a totality Commissioner(Appeals) directed Assessing officer to disallow 12.5 per cent of bogus purchase and to add 12.5 percent of amount of purchases to income of assessee- Tribunal upheld view of Commissioner (Appeals) – Revenue contended before High Court than bogus purchases out to have been disallowed in totality it was noted that if factum of sales had been accepted by department then even if it was established that there were bogus purchases, it was not necessary that entire amount of purchases should be added to income of assessee as there could not be a sale without purchase In instant case sales effected by assessee had been accepted by department -whether Tribunal was right in upholding view of Commissioner (Appeals) – Held, yes.”

“Section 69C of the Income Tax Act, 1961 Unexplained expenditure (Bogus purchases) -Assessment year 2012-13 – Whether where assessee’s sales figures were not doubted, 100 percent disallowance for bogus purchases was not justified by drawing adverse inference on his inability to produce suppliers -Held, yes Purchases were made by assessee from grey market – making purchases through grey market gave assesee savings on account of nonpayment of tax at expenses of exchequer Whether in said circumstances, Commissioner (Appeals) was justified in deleting 100 percent disallowance of purchases by Assessing officer and limiting disallowance to 12.5 per cent out of bogus purchases – Held, yes.”

INCOME TAX: Where there was no discrepancy between purchases shown by assessee and sales declared, no question of law or on form Tribunals order restricting addition made by AO on account of bogus purchase by bringing gross profit rate on purchases at same rate as applied in other genuine purchases

INCOME-TAX APPEAL NOS 1004, 1012, 1013, 1059, 1064, 1075, 1095 AND 1204 OF 2016 FEBRUARY 11, 2019

Section 69C of the Income-tax Act, 1961 Unexplained expenditure (Bogus purchases) -Assessee was a trader of fabrics – In course of assessment, Assessing Officer noted that certain purchases made by assessee were bogus He thus added said amount to assessee’s taxable income Tribunal noted that there was no discrepancy between purchases shown by assessee and sales declared Accordingly, Tribunal restricted. addition limited to extent of bringing gross profit rate on purchases at same rate as applied in other genuine purchases – Whether, on facts, no substantial question of law arose from Tribunal’s order – Held, yes [Paras 8 and 9][In favour of assessee)

“3. However, on going through the judgments of the CIT, ITAT and the High Court, we find that on merits a disallowance of Rs. 19,39,60,866/- was based solely on third party information, which was not subjected to any further scrutiny. Thus, the CIT (Appeals) allowed the appeal of the assessee stating:

“Thus, the entire disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO who has not provided the copy of such statements to the appellant, thus denying opportunity of cross examination to the appellant, who has prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques, & VAT Registration of the sellers & their Income Tax Return. In view of the above discussion in totality, the purchases made by the appellant from M/s Padmesh Realtors Pvt. Ltd. is found to be acceptable and the consequent disallowance resulting in addition to income made for Rs. 19,39,60,866/-, is directed to be deleted”