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2015 (10) TMI 2753 - AT - Income TaxInitiation of the reassessment proceedings u/s 147 - addition u/s 68 - non application of mind by AO - HELD THAT - At the time of recording of the reasons the Assessing Officer apparently was not having any idea about the nature of the transactions entered into by the assessee. In the reasons recorded there is no mention about the nature of the transactions. As per provision of section 147 an assessment can be reopened if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment. The reasons to believe has to be that of the AO and further there have to be application of mind by the Assessing Officer though the reasons to believe does not mean that the Assessing Officer should have finally ascertained the fact that income has escaped assessment but at the same time it also means that the Assessing Officer is required to examine the facts on the basis of the information and Satisfy himself that the taxable income has escaped assessment. In the Present case on going through the reasons it is quite evident that AO was also not aware of the nature of the accommodation entries. In the reasons recorded he has simply mentioned the name of the party and the amount and nowhere has stated the nature of such entry. This also shows that the Assessing Officer has made no effort to look into the return of the assessee which was available with him. From sheet appended to the reasons and quoted on page 4 of the assessment order whereby against Item no. 7; whether the assessment is proposed to be made for the first time the Assessing Officer has stated Yes and in Column no. 7(a) whether any voluntary return had already been filed and in Column no. 8 (b) date of filing the said return NA has been stated. Thus this is clear case of non-application of mind by the Assessing Officer. The reopening of the assessment is without application of mind and examination of the facts and accordingly the reopening is held to be invalid and accordingly the same is quashed. Bogus purchases - addition to 20% of the purchases as profit earned by the assessee on these purchases by CIT-A - HELD THAT - The purchases and sales were within the walled city of Delhi where the transportation is by manual driven cans and the charges for the same are debited under the head cartage. Further when sales are accepted as genuine then definitely the transactions have occurred and movements of goods have taken place. It is also not the case of the CIT(A) that transactions has not happened. Thus transportation on such facts cannot be a basis to draw adverse inference against the assessee. CIT(A) has upheld the allegation of the Assessing officer of the bogus purchases by making an observation that the appellant s dealing with these parties is not free from any doubt. It is a settled law that doubt cannot be a basis for sustaining the allegation. On the contrary the assessee had lead sufficient evidences in support of its purchases which the Assessing Officer in my view has not been able to rebut. Accordingly in the facts and circumstances of the case it cannot be said that the purchases made by the assessee are bogus. As regards the addition of sustained by the CIT(A)since purchases are not bogus the addition on this account cannot be sustained. Even otherwise the addition of 20% on the facts and circumstances is apparently too high. Once the purchases are held to be bogus then the trading result 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. - Decided in favour of assessee.
Issues Involved:
1. Reopening of assessment under Section 148. 2. Validity of the addition of Rs. 13,85,309/- as bogus purchases. 3. Rejection of books of accounts. 4. Confirmation of addition to the extent of 20% of the purchases. 5. Opportunity to cross-examine witnesses. 6. Application of Section 40A(3). Issue-wise Detailed Analysis: 1. Reopening of Assessment under Section 148: The learned CIT(A) upheld the reopening of the assessment based on information received from the Commissioner of Income Tax, Central - 2, New Delhi, indicating that the assessee had received accommodation entries. The reasons recorded by the Assessing Officer (AO) were challenged by the assessee on the grounds of non-application of mind and lack of independent verification. The Tribunal found that the AO had reopened the assessment without having the necessary statements or material at the time of recording the reasons, relying solely on a letter from the CIT. This was deemed a case of non-application of mind, and the reopening was held to be invalid, citing judgments such as Sarthak Securities Company Pvt. Ltd. vs ITO and Signature Hotels (P) Ltd. vs ITO. 2. Validity of the Addition of Rs. 13,85,309/- as Bogus Purchases: The AO made an addition of Rs. 13,85,309/- by holding that the purchases made by the assessee were bogus. The learned CIT(A) reduced this addition to 20% of the total purchases, considering that the sales were genuine and payments were made from disclosed sources. The Tribunal noted that the AO and CIT(A) relied on statements from third parties without allowing the assessee an opportunity for cross-examination. The Tribunal found that these third parties were indeed in the scrap trade, and substantial stock was found during a survey, contradicting the allegation of bogus purchases. 3. Rejection of Books of Accounts: The AO rejected the books of accounts on the basis that the purchases were bogus. The Tribunal found that the assessee maintained proper books of accounts, and the AO did not point out any specific defects. The Tribunal held that the rejection of books was not justified, especially since the sales were accepted as genuine. 4. Confirmation of Addition to the Extent of 20% of the Purchases: The learned CIT(A) confirmed the addition to the extent of 20% of the purchases, assuming that the assessee might have obtained some benefit from VAT and cash transactions. The Tribunal found this estimation to be arbitrary and without basis, noting that the VAT on scrap was 4% and all payments were made by account payee cheques. The Tribunal held that the addition of 20% was too high and not justified. 5. Opportunity to Cross-examine Witnesses: The Tribunal emphasized that the statements of third parties, which were used against the assessee, were recorded at the back of the assessee without providing an opportunity for cross-examination. The non-appearance of these parties despite summons supported the assessee's stand that the purchases were genuine. The Tribunal held that adverse inference could not be drawn without cross-examination. 6. Application of Section 40A(3): The learned CIT(A) applied Section 40A(3), which disallows 20% of expenditure in case of cash purchases, to estimate the profit. The Tribunal found this application inappropriate as all payments were made by account payee cheques, and there was no evidence of cash purchases. The Tribunal held that Section 40A(3) could not be invoked in this case. Conclusion: The Tribunal quashed the reopening of the assessment and deleted the addition of 20% of the purchases, allowing the appeal in favor of the assessee. The Tribunal held that the purchases were not bogus, the rejection of books was unjustified, and the estimation of profit at 20% was arbitrary and without basis. The Tribunal emphasized the importance of providing an opportunity for cross-examination and found the application of Section 40A(3) inappropriate.
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