Additions Based on Third-Party Statements Not Sustainable: ITAT

The ITAT Ahmedabad allowed the assessee’s appeal, holding the reassessment invalid for lack of proper procedure and nexus, and deleted the Rs 94.50 lakh additions as unsustainable in law and on facts.

The present appeal has been filed by Crystal Quinone Private Limited against DCIT, challenging the order passed by the CIT(A) under section 250 of the Income-tax Act 1961 for AY 2009-10.

Background of the case

Crystal Quinone Pvt. Ltd (assessee), engaged in the manufacturing of chemicals, had originally filed its return declaring an income of Rs. 1,58,94,385 on a turnover of Rs. 31,27,35,054. However, the assessment was reopened under Section 147 of the Income Tax Act based on information from the Investigation Wing. The department alleged that Reynolds Petro Chem Ltd was providing accommodation entries and facilitating inflated purchase transactions.

During reassessment, the Assessing Officer made two key additions: Rs. 4,50,000 towards commission allegedly paid to Reynolds Petro Chem Ltd and Rs. 90,00,000 on account of alleged inflated purchases. The total addition amounted to Rs. 94,50,000.

Being aggrieved by the above additions, the assessee filed an appeal before the CIT(A). However, the CIT(A) confirmed the additions.

The assessee then approached the ITAT Ahmedabad. During the hearing, the assessee argued that the reassessment was invalid because no proper opportunity was given to file objections against the recorded reasons and no separate speaking order was passed disposing of those objections. The company also contended that the reasons for reopening were vague and did not establish any clear link between the material gathered during the investigation and any income escaping assessment in its case.

The assessee further submitted documentary evidence such as ledger accounts, confirmations, TDS certificates, invoices, and stock records. It was also submitted that the assessee has not made any purchases from Reynolds Petro Chem Ltd, but from Ipca Laboratories Ltd.

Tribunal’s Decision

After examining all the facts, the Tribunal observed that the reasons recorded for reopening were based mainly on general information received from the Investigation Wing and did not show independent application of mind by the Assessing Officer. It found no clear nexus between the alleged material and any specific escapement of income by the assessee.

The Tribunal further observed that no proper opportunity was given to the company to file objections, and no speaking order was passed before proceeding with the reassessment. On merits as well, it held that the company had produced sufficient documentary evidence to support the commission payment and its purchase transactions. The additions were found to be based largely on third-party statements that did not specifically refer to the assessee.

After considering all the above facts, the Tribunal held that the reassessment proceedings were invalid and the additions were not sustainable either in law or on the facts. As a result, the tribunal set aside the order of the CIT(A) and directed the deletion of the entire addition. Lastly, it allowed the assessee’s appeal.