Bombay High Court Upholds Restriction on Bogus Purchase Additions in Ramelex Pvt Ltd Case

The court affirms CIT(A) and ITAT's decision to restrict additions to 15% for alleged hawala purchases, citing violation of natural justice principles.

The Bombay High Court has delivered a significant judgment in the case of PR. Commissioner of Income Tax-3 versus Ramelex Private Ltd., affirming the decisions of the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) regarding the restriction of additions related to alleged bogus purchases. The court upheld the findings of CIT(A) and ITAT that limited the additions to 15% on the alleged hawala purchases, emphasizing the importance of adherence to natural justice principles and thorough examination of facts.

The case revolved around the alleged bogus purchases amounting to Rs. 2,05,74,750/- by Ramelex Pvt Ltd, which were purportedly based on information from the Sales Tax Department indicating hawala transactions. The Assessing Officer initially made a full addition of the said amount to the company's income, rejecting the company's submissions and documents that aimed to prove the genuineness of the transactions. 

Ramelex Pvt Ltd contended that the purchases were genuine, supported by documents such as purchase bills, ledger accounts, and proof of bank payments. It argued that the reliance on the Sales Tax Department’s information without furnishing it to the company or allowing cross-examination of the alleged hawala dealers was a violation of natural justice principles.

CIT(A) and ITAT found merit in Ramelex Pvt Ltd's arguments, particularly in light of the pending VAT assessments and the absence of an opportunity for the company to cross-examine the alleged suppliers. They determined that the Assessing Officer’s approach was inappropriate and restricted the additions to 15% of the alleged bogus purchases, amounting to Rs. 15,12,713/-.

The Bombay High Court, in its judgment, noted that the addition of Rs. 2,05,74,750/- was solely based on unsubstantiated information from the Sales Tax Department, which was never furnished to Ramelex Pvt Ltd. The court emphasized that making additions without providing the assessee an opportunity to challenge the evidence violates principles of fairness and natural justice. It underscored the necessity of a cohesive approach between the Income Tax and Sales Tax Departments to ensure fair adjudication of such cases.

The court also referenced its earlier decision in the case of Principal Commissioner of Income Tax v. SVD Resins and Plastics Pvt. Ltd., reiterating that reliance on general information without specific evidence or verification violates the principles of natural justice and leads to unfair assessments.

This judgment reinforces the importance of procedural fairness and thorough examination of evidence in tax assessments, particularly in cases involving allegations of bogus transactions. It serves as a reminder to tax authorities to adhere to established legal norms and ensure that taxpayers are afforded their right to a fair hearing.

Bottom Line:

Income Tax - Restriction of additions related to bogus purchases - Concurrent findings by CIT(A) and ITAT restricting additions to 15% of alleged hawala purchases upheld - Findings based on appreciation of facts and material on record - Mere reliance on sales tax department's information without furnishing the same to assessee or granting opportunity to cross-examine hawala purchasers violates principles of natural justice.

Statutory provision(s): Income Tax Act, 1961, Section 260A, Section 143(3) read with Section 147.

This decision is expected to have far-reaching implications for similar cases, ensuring that taxpayers are not unjustly burdened based on unverified and unsubstantiated claims of bogus transactions.

PR. Commissioner of Income Tax-3 v. Ramelex Private Ltd., (Bombay)(DB) : Law Finder Doc Id # 2793729