2019 (9) TMI 1402 - AT - Income Tax

Reopening of assessment u/s 147 - bogus purchases - HELD THAT - Recorded reasons state that the assessee had availed accommodation entries on bogus bills from M/s.Nice Diamonds and M/s. Nice Diamonds is belongs to group of Shri Bhanwarlal Jain where they have admitted in the course of the search that M/s. Nice Diamonds is managed by them and they are bogus hawala dealers. AO has reason to believe that income had escaped assessment based on the above information and formed an opinion by himself and there is no borrowed satisfaction. Thus respectfully following the case of CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. 2007 (5) TMI 197 - SUPREME COURT we uphold the reopening made by the Assessing Officer u/s. 147. Bogus purchases - estimation of profit element at 8% - CIT(A) held that only the profit element embedded in such purchases shown to have been made from the non-existing parties are to be brought to tax - HELD THAT - We find that what advantage the assessee could have got on purchasing the diamonds in gray market was only 1% being the VAT as the assessee made purchases in the grey market without paying VAT but obtained only the accommodation entries. Further as per the report of the task group constituted by the Department of Commerce the margin in trading in the diamond industry was only 1 to 3%. Taking the average of the industry average i.e. 2% and the advantage which the assessee got from purchases from the gray market i.e. 1% towards VAT in our view at best the disallowance can be made only at 3%. Therefore, profit element margin embedded in these purchase transactions should be taken @3% for these Assessment years i.e. A.Y.2011-12 2012-13. Accordingly we direct the Assessing Officer to estimate the profit element @3% of the purchases treated as non-genuine and re-compute the income of the assessee for all these Assessment years.

Summary

Issues Involved:
1. Reopening of assessment under section 147 of the Income Tax Act.
2. Validity of additions made by the Assessing Officer based on alleged bogus purchases.
3. Charging of interest under sections 234B, 234C, and 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:

A.Y. 2010-11:
The assessee challenged the reopening of the assessment and the order passed under section 143(3) read with section 147 of the Income Tax Act as bad in law and void ab initio. The assessee argued that the original assessment was completed under section 143(3) and the reopening was beyond four years from the end of the relevant assessment year. The proviso to section 147 applies, which requires a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The assessee had furnished all necessary details during the original assessment proceedings, and there was no failure to disclose material facts. The Tribunal held that since there was no failure on the part of the assessee in disclosing all material facts necessary for completion of assessment, the reassessment made under section 143(3) read with section 147 for A.Y. 2010-11 was bad in law and void ab initio. The reassessment order was quashed.

A.Ys. 2011-12 & 2012-13:
For these years, the returns were processed only under section 143(1) and there was no scrutiny assessment under section 143(3). The reopening was based on information received from the DGIT(Inv.), Mumbai, and the assessee was not provided with the information or given an opportunity to cross-examine the parties. The Tribunal upheld the reopening, stating that the Assessing Officer had tangible materials and formed a reasonable belief that income had escaped assessment. The Tribunal relied on the Supreme Court's decision in CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd., which held that intimation under section 143(1) is not an assessment, and the reopening was valid.

2. Validity of Additions Based on Alleged Bogus Purchases:

A.Ys. 2011-12, 2012-13 & 2013-14:
The Assessing Officer required the assessee to prove the genuineness of the purchases made from various parties. The assessee provided copies of bank statements, sales invoices, shipping bills, and other documents. The Tribunal agreed with the CIT(A) that only the profit element embedded in the purchases should be brought to tax. The CIT(A) had sustained the estimation of profit element at 8%, considering the nature of the business and the CBDT's instruction for diamond traders. However, the Tribunal noted that the margin in the diamond industry is between 1 to 4.5% and the advantage from purchasing in the gray market was 1% for VAT. The Tribunal directed the Assessing Officer to estimate the profit element at 3% of the purchases treated as non-genuine and recompute the income for these assessment years.

3. Charging of Interest under Sections 234B, 234C, and 234D:
The Tribunal did not specifically address the issue of charging interest under sections 234B, 234C, and 234D, as the primary focus was on the validity of the reopening of assessments and the additions made based on alleged bogus purchases.

Conclusion:
The appeal for A.Y. 2010-11 was allowed, and the reassessment order was quashed. The appeals for A.Ys. 2011-12, 2012-13, and 2013-14 were partly allowed, with the profit element in the purchases being estimated at 3%. The Tribunal's decision was pronounced in the open court on 30th September 2019.