Facts of the Case

The assessee filed its return under Section 115JA declaring income for Assessment Year 1997-98. During assessment proceedings under Section 143(3), the Assessing Officer examined the assessee's claim of 100% depreciation on eight items of machinery allegedly purchased from Deepak Glycerides Process India (P) Ltd.

To verify the purchases, the Assessing Officer obtained an investigation report from DDI (Investigation), Kanpur along with a statement of Shri Deepak Chauhan, Managing Director of the supplier company. In his statement, Shri Chauhan denied supplying the machinery covered by several invoices relied upon by the assessee and asserted that only machinery covered under specific bill numbers had been supplied.

Relying upon this statement, the Assessing Officer:

  1. Disallowed depreciation amounting to Rs. 22,67,980 claimed on the machinery.
  2. Added Rs. 39,46,250 as unexplained expenditure on the ground that certain machinery purchases were outside the books of account and unsupported by genuine transactions.

The assessee challenged the additions before the Commissioner of Income Tax (Appeals), who deleted both additions. The Revenue's appeal before the Tribunal was dismissed, leading to the present appeal before the Delhi High Court.

Issues Involved

  1. Whether the Tribunal was justified in deleting the addition of Rs. 22,67,980 arising from disallowance of depreciation claimed on machinery purchased from Deepak Glycerides Process India (P) Ltd.
  2. Whether the Tribunal was justified in deleting the addition of Rs. 39,46,250 made as unexplained expenditure relating to machinery purchases allegedly outside the books of account.
  3. Whether findings recorded by the CIT(A) and the Tribunal were perverse so as to give rise to a substantial question of law under Section 260A of the Income-tax Act, 1961.

Petitioner’s (Revenue’s) Arguments

  • The Assessing Officer had relied upon the statement of Shri Deepak Chauhan, Managing Director of the supplier company, who denied supplying the machinery covered by the invoices produced by the assessee.
  • Since the supplier allegedly denied the transactions, the depreciation claim on the machinery was not genuine and deserved to be disallowed.
  • The machinery referred to in certain invoices was allegedly not reflected correctly in the books and therefore represented unexplained expenditure.
  • The Tribunal erred in deleting both additions despite the investigation material obtained by the Revenue.
  • The findings recorded by the appellate authorities were allegedly perverse and required interference by the High Court.

Respondent’s (Assessee’s) Arguments

  • The machinery purchases were genuine and supported by invoices, correspondence, banking records and other documentary evidence.
  • Payments for the machinery had been made through account payee cheques and drafts and were duly reflected in the books of account.
  • The Revenue had relied solely upon the statement of Shri Deepak Chauhan without granting the assessee an opportunity to cross-examine him.
  • The supplier’s statement contained contradictions and could not override the documentary evidence produced by the assessee.
  • The machinery alleged to be unexplained had already been accounted for and recorded in the books under different invoice references.
  • No evidence existed to establish that any money paid to the supplier had been returned to the assessee.

Court Findings

The Delhi High Court upheld the concurrent findings of the CIT(A) and the Tribunal and observed that:

  • The statement of Shri Deepak Chauhan was contradictory and unreliable.
  • The assessee was never granted an opportunity to cross-examine the supplier despite the statement being heavily relied upon by the Assessing Officer.
  • Documentary evidence produced by the assessee, including invoices, correspondence, bank records and accounting entries, supported the genuineness of the transactions.
  • The supplier admitted receipt of payments and never stated that the money had been returned to the assessee.
  • Mere withdrawal of funds in cash by the supplier after receipt of payment could not justify an inference that the money had flowed back to the assessee.
  • The alleged discrepancies in bill numbers did not disprove the actual supply of machinery, particularly when supporting evidence established the transactions.
  • Both the CIT(A) and the Tribunal had undertaken a detailed examination of the evidence and recorded pure findings of fact.

Court Order / Decision

The Delhi High Court dismissed the Revenue’s appeal and upheld the Tribunal’s order deleting:

  • Addition of Rs. 22,67,980 made on account of disallowance of depreciation; and
  • Addition of Rs. 39,46,250 made on account of alleged unexplained expenditure.

The Court held that no perversity existed in the factual findings recorded by the appellate authorities and that no substantial question of law arose for consideration under Section 260A of the Income-tax Act, 1961.

Important Clarifications

  1. A statement recorded during investigation cannot be blindly relied upon when it is contradictory and unsupported by corroborative evidence.
  2. Denial of the opportunity to cross-examine a witness whose statement forms the basis of an adverse assessment violates principles of natural justice.
  3. Documentary evidence such as invoices, bank payments, correspondence and accounting records can outweigh unsupported oral statements.
  4. Mere withdrawal of money by a supplier after receiving payment does not establish that funds were returned to the assessee.
  5. Concurrent findings of fact by the CIT(A) and the Tribunal generally do not give rise to a substantial question of law unless shown to be perverse.

Sections Involved

  • Section 32 – Depreciation
  • Section 115JA – Special Provision for Computation of Book Profit
  • Section 143(3) – Assessment
  • Section 260A – Appeal to High Court
  • Principles of Natural Justice (Right of Cross-Examination)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2008:DHC:2999-DB/RAS06112008ITA4282007.pdf

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