2019 (3) TMI 1652 - AT - Income Tax

Bogus purchases - Reopening the assessment made u/s. 143 r.w.s 147 - addition to the extent of 8% of the purchases treated as non-genuine - HELD THAT - The parties have confirmed by filing replies to notices u/s. 133(6) along with the ledger account of the assessee in their Books of Accounts, copies of sales invoices issued by them to the assessee, thereby statements reflecting payments made by the assessee to them, copy of acknowledgment of Income Tax Returns filed by them to show that the transaction of sales made to the assessee are genuine. Gross Profit margin shown by the assessee is ranging in between 7.02% to 7.62% consistently. Disallowance / estimation of profit of purchases by treating them as bogus cannot be made only on the statements recorded from third parties, especially when the suppliers have responded to the notice u/s. 133(6) of the Act and filed all the necessary documents to prove the genuineness of the purchases made by the assessee. Thus the grounds raised by the assessee on merits are allowed. Disallowance towards non-genuine purchases for all the Assessment years in appeal and direct the Assessing Officer to delete the addition/disallowance made towards non-genuine purchases. As deleted the disallowance/addition on merits the grounds raised challenging the reopening of assessment is not adjudicated. - Decided in favour of assessee.

Issues Involved
1. Reopening of assessment under section 148.
2. Addition towards non-genuine purchases.

Detailed Analysis

1. Reopening of Assessment under Section 148

The assessee challenged the reopening of assessment by the Assessing Officer (AO) under section 148 of the Income Tax Act. The AO reopened the assessment based on information from the Directorate of Income Tax (Investigation) [DIT(Inv.)] following a search and seizure action against the Bhanwarlal Jain Group, which revealed that the group provided accommodation entries through benami concerns. The AO believed that the assessee was a beneficiary of such entries, leading to the belief that income chargeable to tax had escaped assessment.

The assessee argued that there was no independent recording of satisfaction by the AO and that the reopening was solely based on the investigation report and statements from the Bhanwarlal Jain Group, without any independent inquiry or satisfaction of the AO. The assessee cited several judicial decisions to support the claim that reopening based on borrowed satisfaction is bad in law.

The tribunal found merit in the assessee's argument, noting that the AO did not conduct any independent investigation or provide the assessee with the statements of the Bhanwarlal Jain Group for cross-examination. This lack of opportunity to cross-examine the statements violated the principles of natural justice, making the assessment bad in law.

2. Addition Towards Non-Genuine Purchases

The AO treated certain purchases made by the assessee as non-genuine, estimating an income element of 8% from such purchases. The assessee contended that during the reassessment proceedings, notices issued under section 133(6) were responded to by suppliers, who confirmed the supply of materials through affidavits, proper invoices, and payments made via account payee cheques. Despite this, the AO concluded that the purchases were merely accommodation entries without any actual supply of materials, relying heavily on the investigation report and statements from the Bhanwarlal Jain Group.

The tribunal observed that the AO did not consider the evidence provided by the suppliers, such as account confirmations and affidavits. Furthermore, the AO did not conduct any further investigation to verify the veracity of these documents. The tribunal emphasized that the statements from the Bhanwarlal Jain Group were not provided to the assessee, and no opportunity for cross-examination was given, rendering the assessment invalid due to the violation of natural justice principles.

The tribunal also referenced several judicial precedents, including the Hon'ble Supreme Court's decision in Andaman Timber Industries v. CCE, which held that assessments based on third-party statements, without providing those statements for cross-examination, are bad in law. Additionally, the tribunal cited similar cases where the addition for non-genuine purchases was deleted due to the lack of independent verification by the AO and the failure to provide cross-examination opportunities.

In conclusion, the tribunal held that the purchases made by the assessee could not be treated as non-genuine solely based on the investigation report and third-party statements. The evidence provided by the suppliers was sufficient to prove the genuineness of the transactions. Consequently, the tribunal directed the AO to delete the addition/disallowance made towards non-genuine purchases for all the assessment years under appeal.

Conclusion

The tribunal allowed the appeals of the assessee, deleting the disallowance/addition towards non-genuine purchases and holding that the reopening of the assessment was invalid due to the lack of independent satisfaction and violation of natural justice principles. The Revenue's appeals were dismissed. The order was pronounced in the open court on March 13, 2019.

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