2016 (7) TMI 909 - AT - Income Tax

Reopening of assessment - Additions made on account of bogus purchases - Held that - AO had specific information that the assessee had obtained accommodation bills from Hawala dealers to the extent of ₹ 10,69,87,060/- for three AYs i.e. AY 2009-10, 2010-11 and 2011-12. A survey was carried out at the premises of the assessee. The AO on the basis of the statement of the Director of the assessee company wherein he had declared additional income for the year under consideration reopened the assessment. Thus, the AO was having sufficient reason to believe that there was escapement of income. Accordingly we do not find any infirmity in the order of AO for reopening the assessment. Coming to the disallowance of alleged bogus purchases,we found that these suppliers were found to be non-genuine by the sales tax department, even though it was the contention of ld. AR that suppliers were registered with VAT where stringent process is followed for issuing VAT registration like photo, verification of address (residential and office), ration card and proof of residence. However, at the very same time, we cannot ignore the actual purchases made by the assessee, which was utilised for its construction purpose and sales.AO recorded a finding to the effect that the rate of items supplied by hawala dealers was higher as well as lower also but the ultimate effect of the purchases from all such hawalas dealers has resulted in the higher profit margin shown by the assessee. It means there is no adverse effect of the purchase so made even from the hawala dealers, insofar as purchase so made have actually been consumed and similar profit has been shown by the assessee in respect of these purchases when utilized in construction and/or sold. As carefully gone through the particulars of the alleged bogus bills, nature of goods supplied, products supplied and payments details. We had also verified the confirmation of accounts for purchase of goods, bank statement showing payments made for alleged purchase bills. The purchase so made were consumed by the assessee in the business of its civil and interior work which includes external and internal glazing of glass work and providing & fixing aluminum windows. We had also verified the comparative GP and NP rate shown by the assessee which appears to be reasonable as compared to the other business house engaged in the similar line of civil and interior work. The net profit rate shown by the assessee ranged between 3.04% to 3.61%. From the record we found that assessee had shown GP rate of 16.39% and 23.49% in the assessment year 2009-10 and 2010-11, which is much better than the gross profit rate shown in the assessment year 2008-09 at 11.41%. Moreover the GP rate shown by the assessee is comparable to the GP rate shown by other assessee engaged in similar trade. However, to safeguard the interest of revenue and to cover the leakage of revenue, if anyone, and also totality of facts and circumstances of the case before us, we direct the AO to restrict the addition to the extent of 2% of alleged bogus purchases so made. - Decided partly in favour of assessee

Issues Involved:
1. Validity of reopening the assessment under section 147/148 of the Income Tax Act, 1961.
2. Legitimacy of additions made on account of alleged bogus purchases.
3. Evidentiary value of statements made by the directors of the assessee company during the survey.
4. Determination of the appropriate percentage of purchases to be added to the income of the assessee.

Detailed Analysis:

1. Validity of Reopening the Assessment:
The assessee challenged the reopening of the assessment under section 147/148 of the Income Tax Act, 1961. The tribunal found that the Assessing Officer (AO) had specific information that the assessee had obtained accommodation bills from hawala dealers amounting to ?10,69,87,060/- for three assessment years (AYs 2009-10, 2010-11, and 2011-12). A survey was conducted at the assessee’s premises, and based on the statement of the Director of the assessee company, the AO reopened the assessment. The tribunal concluded that the AO had sufficient reason to believe that there was an escapement of income, thereby justifying the reopening of the assessment.

2. Legitimacy of Additions on Account of Alleged Bogus Purchases:
The assessee contended that all purchases were genuine and supported by account payee cheques, invoices, and supporting vouchers. The AO, however, did not find the assessee’s explanations convincing and framed the assessment, adding ?3.40 crore to the income. The CIT(A) upheld the AO’s decision. The tribunal noted that the AO relied on the statement of the Director and the information from the Sales Tax Department but did not provide the assessee an opportunity to cross-examine the hawala operators. The tribunal emphasized that no addition can be made solely based on third-party statements without corroborating evidence.

3. Evidentiary Value of Statements Made During Survey:
The tribunal discussed the evidentiary value of statements made during surveys, citing several judicial precedents that indicate statements made during surveys under section 133A have limited evidentiary value unless corroborated by other evidence. The tribunal noted that the Director’s statement was later retracted, and no incriminating evidence was found during the survey to support the claim of bogus purchases. The tribunal referenced various cases, including CIT vs. S. Kahder Khan & Sons and CIT vs. Dhingra Metal Works, which supported the view that survey statements alone cannot justify additions without corroborative evidence.

4. Determination of Appropriate Percentage of Purchases to be Added:
The tribunal acknowledged that while the purchases from hawala dealers were suspect, the materials were actually used in the assessee’s business. It was noted that the assessee’s net profit remained consistent, and the purchases were reflected in the business’s operational results. The tribunal decided that instead of disallowing the entire amount of alleged bogus purchases, a reasonable percentage of gross profit should be added to safeguard revenue interests. Citing similar cases, the tribunal directed the AO to restrict the addition to 2% of the alleged bogus purchases, considering the facts and circumstances of the case.

Conclusion:
The tribunal upheld the reopening of the assessment but modified the additions made on account of alleged bogus purchases. It directed the AO to restrict the addition to 2% of the alleged bogus purchases, acknowledging that the purchases were used in the business and the net profit rates were consistent. The appeals were allowed in part, reflecting a balanced approach to safeguard revenue interests while acknowledging the genuine business operations of the assessee.

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