2015 (11) TMI 1537 - AT - Income Tax

Validity of the reassessment - sustenance of the addition to the extent of 20% of the purchases - Held that - Reassessment quashed as barred by limitation. Now coming to the merit about the sustenance of the addition by the CIT(A) @ 20% of the purchases made by the assessee from Shri Bankey Bihari Trading Co., after hearing the rival submissions it is held tax has to be levied on real income and the profit cannot be ascertained without deducting the cost of purchases from the sales as otherwise it amount to levy of tax on gross receipt, she ought to have applied profit rate in this nature of trade. Estimating profit at the rate of 20% by taking into consideration the or visions of section 40A(3) will not lead to determination of correct real income. Section 40A(3) is meant for a different purpose when the assessee has made purchases in cash. This provision cannot be applied in such cases. Once the purchases are held to be bogus then the trading results declared by the assessee cannot be accepted and right course in such case is to reject books of accounts and profit has to be estimated by applying a comparative profit rate in the same trade. Though there can be a little guess work in estimating profit rate but such profit rate cannot be punitive.

Summary

Issues involved:
Validity of reassessment and sustenance of addition to the extent of 20%

Validity of reassessment:
The appeal was against the CIT(A)'s order upholding the reassessment under section 147 of the Income-tax Act, 1961, where the addition was reduced to Rs. 94,771 from Rs. 47,73,855 made by the AO. The reassessment was based on alleged bogus purchases from M/s Shree Bankey Bihari Trading Company. The AO reopened the assessment based on information received from the Chief Commissioner of Income Tax, Delhi, regarding accommodation entries provided by certain individuals, leading to the belief that income had escaped assessment. The Tribunal noted that a similar reassessment in another case was quashed, as the reasons recorded were identical. Consequently, the reassessment in the present case was also quashed.

Sustenance of addition at 20%:
Regarding the sustenance of the addition at 20% by the CIT(A), the Tribunal referenced a previous decision where a similar addition was deleted. The Tribunal emphasized that since the purchases were not bogus, the addition could not be sustained. It was noted that estimating profit at 20% without considering the specific circumstances of the case was inappropriate. The Tribunal highlighted that the CIT(A) should have applied a profit rate based on the nature of the trade rather than a blanket percentage. The Tribunal, after considering the arguments, deleted the addition sustained by the CIT(A) amounting to Rs. 94,771. The decision was based on the lack of compelling evidence to deviate from the previous Tribunal decision.

In conclusion, the Tribunal allowed the appeal filed by the assessee, quashing the reassessment and deleting the addition sustained by the CIT(A). The judgment was pronounced on 30/11/2015.