2016 (9) TMI 1197 - HC - Income Tax

Revision u/s 263 - Gross Profit ratio - disallowance of expenditure - additions on account of bogus purchases - Held that - Assessing Officer disallowed the entire expenditure and added back the full sum of ₹ 62.75 lacs shown to have been expended by the assessee for purchases from F.H. Rizvi concerns. There was no further material with the Assessing Officer or even possible avenue for inquiring whether remaining purchases of assessee were genuine or not. There was thereafter, no further scope of making addition in the guise of adjusting the Gross Profit ratio. The disallowance itself would automatically reflect in increasing the Gross Profit from one claimed by the assessee in the original return. Only on this ground, the order of assessment can be stated to be neither erroneous nor prejudicial to the Revenue. If the Commissioner had an angle of further inquiry to be made with respect to purchases from party unconnected to F.H. Rizvi, such angle has not come on record. The notice issued by the Commissioner does not suggest that since it was found that all purchases from F.H. Rizvi by the petitioner were bogus, the Assessing Officer could have inquired into the genuineness of the remaining purchases also. All that the Commissioner conveyed by way of reasons in the impugned notice was that the Assessing Officer did not bear in mind the Gross Profit ratio element. It is true that increasing the Gross Profit is one of the modes adopted by the assessing authority while adjusting the claim by the assessee. This can be so on the basis of materials on record suggesting that the current rate of Gross Profit does not reflect the true financial picture. Nevertheless, the same methodology cannot be applied arbitrarily without atleast some materials suggesting that the Gross Profit presented by an assessee was inaccurate. When the entire block of purchases made by the assessee is disallowed, the same would have automatic and direct impact on bringing up the Gross Profit ratio of the assessee during such year. Without there being any further material suggesting that other purchases were also not genuine, further increase of the Gross Profit ratio, was an option simply not available with the Assessing Officer.

Summary

Issues:
Reopening of assessment based on alleged bogus purchases from a supplier and subsequent notice under section 263 of the Income Tax Act.

Analysis:
The judgment revolves around the assessment year 1993-1994 of a limited company engaged in the manufacturing and marketing of bulk drugs and formulations. The Assessing Officer initially assessed a loss at ?22 lacs, which was later adjusted by the CIT(Appeals) to ?1.26 crores. Subsequently, based on search operations on a supplier engaged in bogus sales billing activities, the Assessing Officer issued a notice to reopen the assessment, suspecting the purchases made by the company from the supplier to be bogus. The Assessing Officer disallowed ?62.75 lacs of purchases from the supplier, increasing the loss to ?63.38 lacs. The Commissioner sought to revise this order under section 263, citing an increase in Gross Profit ratio due to the disallowed purchases.

The petitioner challenged the notice on the grounds that the Assessing Officer had already disallowed the purchases, leaving no scope for further additions. The petitioner argued that the order was not erroneous or prejudicial to revenue, hence section 263 should not apply. The Commissioner contended that the Assessing Officer did not consider the impact of fluctuating Gross Profit ratio due to the disallowed purchases, justifying the need for further investigation.

The High Court analyzed the situation and concluded that the Assessing Officer had disallowed all purchases from the supplier, leaving no room for additional adjustments to the Gross Profit ratio. The court found no basis for further increasing the Gross Profit ratio without evidence of other purchases being non-genuine. As a result, the impugned notice and the revision order were set aside, ruling in favor of the petitioner and disposing of the case accordingly.