2017 (8) TMI 1633 - AT - Income Tax

Validity of reopening of assessment u/s 147 - Estimation of income on bogus purchases - CIT(A) sustained the estimate of 10% made by the AO - as assessee submitted that there is a mistake in the quantum of alleged bogus purchases in both the years, the Ld CIT(A) directed the AO to verify the same and allow relief accordingly - HELD THAT - Even though the quantum of purchases made from M/s Manish Enterprises and M/s J P Enterprises matched with the quantum of purchases made from M/s Crescent Chemical Trading Co and M/s Pharma Trading House respectively, yet the fact remains that they are altogether different parties. It is a settled proposition of law that the provisions of income tax should be construed strictly. In the case of reopening of already completed assessment, the relevant provisions shall be subjected to more strict interpretation. Accordingly we are of the view that there is merit in the contentions of the assessee that the AO did not make any addition in respect of the alleged escaped income for which the assessment was reopened. Whether the AO is entitled to make addition in respect of any other escaped income, if he did not make any addition in respect of items for which the assessment was reopened? - This question came to the consideration of Hon ble jurisdictional Bombay High Court in the case of Jet Airways Ltd 2010 (4) TMI 431 - BOMBAY HIGH COURT and it was held that the assessing officer is not entitled to make addition of any other escaped income, if he does not make addition of any income for which the assessment was reopened. Since the facts available in the instant case are identical in nature, by following the decision of Jurisdictional High Court, we hold that the AO is not entitled to make the impugned additions when he did not make any addition in respect of items for which the assessment was reopened. Accordingly we set aside the order passed by Ld CIT(A) and quash the assessment order passed by the AO in the reassessment proceedings. AY 2010-11 - AO has made the impugned addition only on the basis of information received from Sales tax authorities. We also notice that the AO did not make any independent enquiry to disprove the factum of purchases. At the same time, we notice that the assessee has also failed to furnish evidences to prove the transportation of materials. We notice that the assessee has reconciled the purchases with sales. There should not be any doubt that the sales could not be made without making corresponding purchases. The AO has also accepted the purchases as well as sales. However, since the assessee did not furnish evidences for transportation of goods, the AO presumed that the assessee would have made extra profit and accordingly estimated the same at 10% of the value of purchases. We have noticed that the AO has made the addition without making any independent enquiries. Assessee has also failed to prove the transportation of goods. During the course of arguments, the Ld A.R submitted that the materials might have been directly transported from the suppliers place to the customers place, but no evidence in that regard was furnished. Under these set of facts, we are of the view that the AO was justified in estimating extra profit, if any, made in the purchases. However, we are of the view that the estimation @ 10% appears to be on the higher side. The assessee also contends that it has already declared 4.16% on the above said transactions. We also notice that the co-ordinate bench has estimated the profit in the range of 3.50% to 4% in the case of Kamal P Agarwal others 2017 (7) TMI 1083 - ITAT MUMBAI Thus disallowance of purchases may be made @ 4% to meet the anomalies, if any, and in our view, the same would meet the ends of justice. We order accordingly. The order of Ld CIT(A) stands modified accordingly and the AO is directed to restricted the addition to 4% of the value of alleged bogus purchases.

Summary

Issues:
1. Validity of reopening of assessment for AY 2009-10.
2. Whether AO can make additions for items not included in the reason for reopening.
3. Assessment of additional income for AY 2010-11 based on alleged bogus purchases.

Issue 1: Validity of reopening of assessment for AY 2009-10:
- The AO reopened the assessment based on information about alleged bogus purchases from certain dealers.
- Assessee argued that no addition was made for purchases from the mentioned parties.
- AO considered different parties for additions, leading to a dispute.
- Tribunal held that AO cannot add income for items not included in the reason for reopening.
- Cited the decision of the Bombay High Court in Jet Airways Ltd case.
- Set aside the order and quashed the reassessment proceedings.

Issue 2: AO's authority to make additions beyond reopened items:
- Assessee challenged the addition of 10% profit on alleged bogus purchases for AY 2010-11.
- AO estimated profit without verifying transportation and sales details.
- Assessee contended that purchases were reconciled with sales and no proper enquiry was conducted.
- Tribunal noted AO's reliance on sales tax info and lack of independent inquiry.
- Referred to similar cases where additions were deleted due to lack of proper enquiry.
- Tribunal found 10% estimation on the higher side and reduced it to 4% to meet justice.
- Modified the CIT(A) order and directed AO to restrict the addition accordingly.

Issue 3: Assessment of additional income for AY 2010-11 based on alleged bogus purchases:
- AO added 10% profit on purchases from a listed hawala dealer without proper verification.
- Assessee argued for deletion of the entire addition based on reconciled transactions.
- CIT(A) partially agreed with AO's estimation, leading to the assessee's appeal.
- Tribunal found AO's estimation without proper enquiry unjustified.
- Balanced the decision by reducing the addition to 4% to address anomalies.
- Partly allowed the appeal for AY 2010-11.

This comprehensive analysis covers the validity of reopening assessments, the scope of AO's authority in making additions, and the assessment of additional income based on alleged bogus purchases for the relevant assessment years. The Tribunal's detailed reasoning and application of legal principles are highlighted for each issue, leading to a balanced and justified outcome in the judgment.