Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the common order dated 27.10.2020 passed by the Income Tax Appellate Tribunal for Assessment Year 2011–12. The Tribunal had upheld the order of the Commissioner of Income Tax (Appeals) deleting additions made by the Assessing Officer.

During assessment proceedings, the Assessing Officer made two major additions: ₹20,17,00,000/- under Section 68 on account of share application money and ₹20,24,39,341/- on account of alleged undisclosed income arising from bogus purchases and sales. The CIT(A) deleted both additions, and the ITAT affirmed the deletion. The present appeal before the High Court was confined to the deletion of ₹20,24,39,341/- relating to alleged bogus trading transactions.

The Assessing Officer relied on information received from the Investigation Wing pursuant to a search conducted in the premises of SEL Manufacturing Company Limited and a survey conducted at the assessee’s premises. It was alleged that the assessee had entered into bogus purchase and sale transactions of knitted cloth/fabric and had introduced undisclosed income equal to the difference between alleged bogus sales and purchases.

Issues Involved

Whether the Income Tax Appellate Tribunal erred in deleting the addition of ₹20,24,39,341/- made on account of alleged bogus purchases and sales, whether such addition resulted in double taxation of income already offered to tax, and whether the provisions of Section 145(3) were validly applied by the Assessing Officer.

Petitioner’s Arguments (Revenue)

The Revenue contended that the purchases and sales were found to be bogus based on search and survey material and that the Assessing Officer was justified in taxing the difference between alleged bogus sales and purchases as undisclosed income. It was argued that once the transactions were held to be bogus, the Assessing Officer was entitled to estimate profits and that rejection of books under Section 145(3) was implicit. Reliance was placed on judicial precedents to submit that the Tribunal erred in deleting the addition.

Respondent’s Arguments (Assessee)

The assessee argued that the entire sales revenue was already reflected in the books of accounts and offered to tax. It was submitted that the Assessing Officer merely computed the difference between sales and purchases and added the same again as undisclosed income, which resulted in double taxation of the same income. The assessee further contended that the Assessing Officer neither expressly rejected the books of accounts nor framed a best judgment assessment under Section 144, and therefore the addition was unsustainable.

Court Order / Findings

The Delhi High Court examined the assessment order in detail and observed that while the Assessing Officer alleged the purchases and sales to be bogus, he nevertheless relied on figures recorded in the books of accounts to compute the alleged undisclosed income. The Court noted that the net difference between sales and purchases, which was added as undisclosed income, was already embedded in the income declared by the assessee.

The Court held that even if the transactions were assumed to be bogus, the Assessing Officer failed to appreciate that the revenue from sales had already been offered to tax and taxing the same amount again would result in double taxation. At best, the Assessing Officer could have disallowed specific expenditure, but could not add the net trading surplus again as undisclosed income.

On the issue of Section 145(3), the Court observed that the Assessing Officer had not explicitly rejected the books of accounts nor passed a best judgment assessment under Section 144 after following due procedure. In the absence of proper invocation of Section 145(3), the addition could not be sustained.

Important Clarification

The Court clarified that where sales revenue is already included in the declared income, adding the difference between sales and purchases as undisclosed income amounts to taxing the same income twice. Further, rejection of books of accounts and estimation of income must strictly follow the statutory procedure under Sections 145(3) and 144, and cannot be presumed or implied.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the concurrent findings of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal and held that the addition of ₹20,24,39,341/- on account of alleged bogus purchases and sales was unsustainable in law and resulted in double taxation. All pending applications were disposed of accordingly.

Link to download the order  - https://www.mytaxexpert.co.in/uploads/1769677100_PR.COMMISSIONEROFINCOMETAXCENTRALLUDHIANAVsMS.GARGACRYLICSLTD.pdf

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