ITAT Dehradun Holds Only Profit Component Taxable When Disputed Purchases Cannot Be Independently Verified – Full Text Analysis

Case Overview

The Dehradun Bench of the Income Tax Appellate Tribunal delivered a significant ruling in the matter of Atul Kumar Agarwal Vs National e-Assessment Centre, providing relief to a proprietor operating a rice milling business for Assessment Year 2018-19. The Tribunal directed that when the Assessing Officer accepts sales figures, production records, and quantitative documentation, the entire quantum of allegedly fictitious purchases cannot be added to the assessee's income. Instead, only a reasonable profit margin embedded within such disputed transactions should be subjected to taxation.

Background Facts

The assessee, operating as a proprietor in the rice milling sector, initially filed his return on 15.08.2018 declaring total income of ₹5,81,560. The case underwent reassessment proceedings under Section 147 of the Income Tax Act, 1961. A notice under Section 148 was issued on 30.03.2022, to which the assessee responded by filing a return on 03.05.2022 maintaining the same income figure as originally declared under Section 139(1).

Following statutory notices under Section 143(2) and multiple questionnaires under Section 142(1), the Assessing Officer finalized the assessment on 15.03.2023 through an order passed under Section 147 read with Section 144B of the Income Tax Act, 1961, determining the total income at ₹54,23,320.

The enhancement in assessed income stemmed primarily from an addition of ₹48,41,760 made by the Assessing Officer under Section 69C of the Income Tax Act, 1961, treating certain purchases from M/s. Mahavir Prasad Suresh Kumar as accommodation entries without actual delivery of goods.

Revenue's Case and Lower Authorities' Findings

The Assessing Officer's primary basis for treating the transactions as fictitious rested on information received through the High-Risk CRU portal and statements recorded during survey operations conducted under Section 133A read with Section 131(1) of the Income Tax Act, 1961 on 30.11.2018. During this survey, two individuals—Shri Ashok Kumar Gupta and Shri Suresh Kumar—allegedly admitted on oath to being engaged in providing accommodation entries through various entities.

According to the department's case, M/s. Mahavir Prasad Suresh Kumar was identified as one of the conduit entities through which such fictitious purchase bills were generated, and the assessee was listed as a beneficiary of these arrangements.

The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, dismissed the assessee's appeal vide order dated 04.12.2024, thereby confirming the addition in its entirety.

Assessee's Contentions and Documentary Evidence

Before the Tribunal, the assessee's counsel presented comprehensive arguments challenging the addition. The rice milling proprietor operates a business involving conversion of paddy into rice, rice bran, and paddy husk through the hulling process. The business maintained audited books of accounts for the relevant assessment year.

Documentation Submitted

The assessee placed on record extensive documentation to establish the genuineness of the disputed transactions:

  • Original purchase invoices from M/s. Mahavir Prasad Suresh Kumar
  • Goods transport receipts (bilties) containing vehicle registration details
  • Bank account statements evidencing payments through RTGS/NEFT channels
  • Party ledger account maintained in regular books
  • Day-to-day stock register tracking raw material inward and finished goods outward
  • Tax audit report under Section 44AB of the Income Tax Act, 1961

Quantitative Analysis Presented

The assessee demonstrated that during the year under consideration:

  • Total paddy purchases amounted to 19,246.08 quintals
  • Purchases from the disputed supplier comprised only 2,200.80 quintals
  • This represented approximately 11% of total raw material procurement
  • The pricing paid was at arm's length and market rates, which remained uncontroverted
  • Complete quantitative reconciliation between opening stock, purchases, production, and closing stock was maintained
  • No shortage or excess in stock was detected by the revenue authorities

Tribunal's Detailed Analysis

Violation of Natural Justice Principles

The Tribunal noted critical procedural irregularities in the assessment proceedings. Despite relying heavily on third-party statements recorded during survey operations, the Assessing Officer:

  • Failed to provide copies of these statements to the assessee
  • Did not afford opportunity for cross-examination of persons whose statements formed the foundation of the addition
  • Did not issue summons under Section 133(6) of the Income Tax Act, 1961 to the suppliers for verification
  • Conducted no independent corroborative enquiry beyond the survey statements

The Tribunal emphasized that this approach violated fundamental principles of natural justice as established by various pronouncements of the Hon'ble Supreme Court.

Evidentiary Value of Survey Statements

The Tribunal observed that statements recorded during survey proceedings under Section 133A read with Section 131(1) of the Income Tax Act, 1961 possess limited evidentiary value. Unless corroborated by independent material or documentary evidence, such statements cannot form the sole basis for substantial additions to income.

In the present matter, no corroborative investigation was undertaken to verify the allegations contained in the survey statements.

Acceptance of Production and Sales

A critical finding by the Tribunal was that the revenue authorities never disputed: