Failure to adhere to principles of natural justice, including cross-examination opportunities, vitiates tax assessments, emphasizing the reliance on proper accounting standards in revenue determination.

JUDGMENT

Navin Chawla, J. (Oral)

The appeal has been heard by way of video conferencing.

CM 45430/2021 (exemption)

Allowed, subject to all just exceptions.

ITA 176/2021

1. The present appeal has been filed challenging the order dated 08.02.2021 passed by the learned Income Tax Appellate Tribunal, New Delhi, Delhi Bench 'C' (hereinafter referred to as the 'ITAT') in ITA No. 3982/DEL/2015 dismissing the appeal of the Revenue against the order dated 25.032015 passed by the Commissioner of Income Tax (Appeals) [hereinafter referred to as the 'CIT(A)'].

2. It is the case of the appellant that a search and seizure operation under Section 132 of the Income Tax Act, 1961 (in short, the 'Act') was carried out in the case of the respondent-assessee along with other companies which were controlled by the respondent's Directors on 12.12.2006. On the basis of the said search and seizure operation conducted, the respondent-assessee's case was selected for scrutiny and a notice under Section 143(2) of the Act was issued for AY 2009- 10.

3. Vide assessment order dated 29.12.2011, the Assessing Officer made additions of Rs. 3,35,87,118/- (Rupees three crore thirty-five lakh eighty seven thousand one hundred eighteen only) on the ground that the same were bogus purchases made by the respondent-assessee from various sham entities. The Assessing Officer computed the total income of the respondent-assessee at Rs. 3,66,68,990/- (Rupees three crore sixty-six lakh sixty-eight thousand nine hundred ninety only) along with interest under Sections 234A, 234B and 234C of the Act.

4. The assessment order was challenged in appeal by the respondent-assessee, being Appeal No. 504/14-15. The same was allowed by the CIT(A) vide order dated 25.03.2015, on the ground that the respondent-assessee did not have an occasion to contravene the materials gathered by the Assessing Officer. The learned CIT(A) held that the Assessing Officer had failed to consider the fact that the respondent-assessee had been regularly recognizing revenue by adopting the `construction-linked percentage completion method' in accordance with the mandatory Accounting Standard AS-7 and in the event the purchases made by the respondent-assessee would be considered bogus, then even the revenue based thereupon will have to be reduced, affecting the profitability of the respondent-assessee.

5. Aggrieved by the above order, the appellant preferred an appeal before the learned ITAT, being ITA No. 3982/DEL/2015, which has been dismissed by the impugned order observing as under:

"6. We find that the AO has disallowed the purchases made from the four parties namely, M/s Meet Enterprises, M/s Suman Enterprises, M/s Durga Enterprises and M/s Bharat Trading. Primarily, we find that the AO has relied on the information collected by the Investigation Wing and no opportunity to cross examine the parties has been afforded which is a violation of principles of natural justice. The assessee has provided copies of purchase bills, weightage bills and architect certificates. The AO has not reasoned that the bills or the certificate of the architects are bogus and wrong on facts.

7. As per accounting standards AS-7, the purchases and working progress have to be reconciled along with architect report. The AO have not rejected the books of accounts and accepted the book profits while making the addition. The Assessing Officer's observation that none of the architects can find out the actual material steel bars used construction of any building of 2 to 3 years cannot be accepted as the consumption of the material can be well estimated from the drawings and the site books. In the case of M/s Suman Enterprises,