2018 (10) TMI 1936 - AT - Income Tax

Reopening of assessment u/s 147 - Estimation of income - Bogus purchases - HELD THAT - We find that tangible and cogent incriminating material were received by the AO which clearly showed that the assessee was beneficiary of bogus purchase entries from bogus entry providers which formed the reason to believe by the AO that income has escaped assessment. The information so received by the AO has live link with reason to believe that income has escaped assessment. On these incriminating tangible material information, assessment was reopened. At this stage there has to be prima facie belief based on some tangible and material information about escapement of income and the same is not required to be proved to the guilt. See Rajesh Jhaveri Stock Brokers P. Ltd 2007 (5) TMI 197 - SUPREME COURT Addition of the bogus purchases - CIT(A) sustaining 12.5% disallowance - It will not be appropriate to consider and take away the relief already granted by the Assessing Officer and ld. Commissioner of Income Tax (Appeals) to the assessee. Hence, we confirm the order of ld. CIT(A).

Summary

Issues Involved:
1. Validity of reopening the assessment.
2. Sustaining of 12.5% disallowance on account of bogus purchases.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment:

The assessee challenged the reopening of the assessment, arguing that the Assessing Officer (AO) had not applied his mind and formed an opinion based on credible information. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's action, noting that the AO had received credible information from the Investigation Wing and Sales Tax Department regarding parties issuing bogus bills without supplying any material. The CIT(A) emphasized that for reopening an assessment, there must be a prima facie basis for forming a reason to believe that income has escaped assessment, and the actual escapement need not be proven at this stage. The AO's reasons recorded showed the application of mind, and since the original return was processed under section 143(1) without an order under section 143(3), the reopening was held valid.

The Income Tax Appellate Tribunal (ITAT) affirmed the CIT(A)'s decision, citing the Hon'ble Apex Court's decision in CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, which stated that at the initiation stage, what is required is "reason to believe," not the established fact of escapement of income. The ITAT found that tangible and cogent incriminating material received by the AO justified the reopening. The information had a live link with the reason to believe that income had escaped assessment, and the reopening was based on prima facie belief supported by tangible material information.

2. Sustaining of 12.5% Disallowance on Account of Bogus Purchases:

The AO made a 12.5% disallowance on the impugned purchases, citing that the parties involved were not produced, and essential records like the Inward Register and Stock Register were not provided. The AO relied on various case laws, rejected the books of accounts, and disallowed 12.5% of the purchases as bogus.

The CIT(A) upheld this disallowance, noting that the AO had identified the parties based on credible information and conducted inquiries, including sending notices under section 133(6). The appellant provided purchase invoices, ledger accounts, and bank statements, but failed to produce the parties or provide substantial evidence to support the genuineness of the transactions. The CIT(A) referred to the Hon'ble Gujarat High Court's decisions in CIT vs. Bholanath PolyFab Pvt Ltd. and CIT vs. Simit P. Sheth, which held that only the profit element embedded in such purchases could be added, not the entire purchase price.

The ITAT agreed with the CIT(A)'s findings, noting that credible and cogent information indicated the assessee obtained bogus purchase bills. The AO's inquiries revealed that notices to the parties returned unserved, and the assessee could not provide confirmations or produce the parties. The ITAT emphasized that mere preparation of documents for purchases could not counter the overwhelming evidence of bogus transactions. The ITAT also referred to the Hon'ble Apex Court decisions in Sumati Dayal vs. CIT and CIT vs. Durga Prasad More, which supported the rejection of such bogus claims.

The ITAT acknowledged the Hon'ble jurisdictional High Court's decision in Nikunj Eximp Enterprises, which allowed 100% of purchases when sales were not doubted, but distinguished it based on different facts. The ITAT also noted the Hon'ble Gujarat High Court's decision in N K Industries vs. Dy. CIT, which upheld 100% disallowance of bogus purchases, but refrained from taking away the relief already granted by the AO and CIT(A) as this was not an appeal by the Revenue.

Conclusion:

The ITAT upheld the CIT(A)'s order, confirming both the validity of reopening the assessment and the 12.5% disallowance on account of bogus purchases. The appeal filed by the assessee was dismissed.