2015 (12) TMI 1538 - AT - Income Tax

Reopening of assessment - assessment was reopened on an information received from the ACIT, Central Circle 10, Jhandelwalan Extn., on the allegation that the assessee had made bogus purchases - 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 and going through the order of the Tribunal in Shree Radheshyam Company 2015 (11) TMI 1537 - ITAT DELHI deleted similar addition having held that 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:
1. Validity of reassessment proceedings.
2. Rejection of books of accounts.
3. Addition on account of bogus purchases.
4. Confirmation of addition to the extent of 20% of such purchases.
5. Business activity of firms providing accommodation entries.
6. Allegations of purchases not being genuine.
7. Use of material collected at the back of the assessee.
8. Opportunity to cross-examine the person whose statement was used against the assessee.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings:
The assessee challenged the reassessment proceedings initiated by the Assessing Officer (AO) on grounds of being bad in law due to non-compliance with statutory conditions and procedures. The Tribunal found that the reassessment was based on information received from the ACIT, Central Circle 10, regarding alleged bogus purchases. The Tribunal referred to similar cases, such as Unique Metal Industries vs. ITO and Radheshyam & Company vs. ITO, where the reassessment was quashed due to similar reasons recorded by the AO. Consequently, the Tribunal quashed the reassessment proceedings in the present case as well.

2. Rejection of Books of Accounts:
The assessee argued that the AO erred in rejecting its books of accounts despite maintaining proper records as per law. The Tribunal did not specifically address this issue in detail but focused on the broader context of reassessment and additions made.

3. Addition on Account of Bogus Purchases:
The AO made an addition of Rs. 5,54,226/- treating the entire purchases from certain firms as accommodation entries. The CIT(A) reduced this addition to 20% of the purchases, amounting to Rs. 1,10,845/-. The Tribunal found that similar additions were deleted in the cases of Unique Metal Industries and Radheshyam & Company, where the purchases were not deemed bogus. Following these precedents, the Tribunal deleted the addition of Rs. 1,10,845/-.

4. Confirmation of Addition to the Extent of 20% of Such Purchases:
The CIT(A) had confirmed the addition to the extent of 20% of the purchases. The Tribunal noted that in similar cases, the addition was deleted as the purchases were not bogus. The Tribunal emphasized that estimating profit at 20% was too high and not reflective of real income. Consequently, the Tribunal deleted the 20% addition.

5. Business Activity of Firms Providing Accommodation Entries:
The assessee contended that the firms (M/s Om Agencies, M/s Shree Shyam Trading Company, and M/s Shree Bankey Bihari Trading Co.) were engaged in actual business, as evidenced by substantial inventory found during the search. The Tribunal did not specifically address this issue but relied on the broader context of reassessment and addition deletion.

6. Allegations of Purchases Not Being Genuine:
The assessee argued that there was a complete tally of quantity purchased and sold, and the allegation of non-genuine purchases could not be sustained. The Tribunal, following the precedents, found that the purchases were not bogus and deleted the addition.

7. Use of Material Collected at the Back of the Assessee:
The assessee contended that the addition was made based on material collected at the back of the assessee, which was bad in law. The Tribunal did not specifically address this issue but quashed the reassessment proceedings and deleted the addition.

8. Opportunity to Cross-examine the Person Whose Statement was Used Against the Assessee:
The assessee argued that the addition was made without providing an opportunity to cross-examine the person whose statement was used against it, violating the principle of natural justice. The Tribunal did not specifically address this issue but quashed the reassessment proceedings and deleted the addition.

Conclusion:
The Tribunal quashed the reassessment proceedings and deleted the addition of Rs. 1,10,845/- sustained by the CIT(A), following the decisions in similar cases. The appeal filed by the assessee was allowed.