2017 (11) TMI 180 - AT - Income Tax

Bogus purchases - estimating extra G.P. on bogus purchases - Held that - No opportunity to cross examination was provided by the lower authorities inspite of asking by assessee. As the facts and circumstances in the instant case are parametria to the decision of Tribunal in case of Tristar Jewellery Exports Pvt. Ltd., (2015 (12) TMI 1366 - ITAT MUMBAI ), we do not find any merit for upholding addition of 3% G.P. on such purchases. It is also pertinent to mention here that entire profit of the assessee was eligible for exemption u/s. 10A in respect of unit situated at the SEZ, therefore, assessee was not going to have any gain by showing lower profit.

Issues Involved:
1. Validity of the reassessment under Section 147.
2. Justification for the addition of 3% on bogus purchases instead of 25%.
3. Legitimacy of the purchases from M/s. Zalak Impex.

Issue-wise Detailed Analysis:

1. Validity of the Reassessment under Section 147:
The assessee contested the reassessment under Section 147, arguing that all details of purchases, including those from M/s. Zalak Impex, were furnished during the original assessment proceedings under Section 143(3). The assessee claimed that the reopening was based on a change of opinion and extraneous information not connected with their case, thus rendering the reassessment null and void. Despite these objections, the CIT(A) upheld the reopening, stating that the reassessment was justified based on new information from a survey conducted on M/s. Zalak Impex, which revealed bogus purchase bills.

2. Justification for the Addition of 3% on Bogus Purchases Instead of 25%:
The revenue was aggrieved by the CIT(A)'s decision to uphold only a 3% addition on bogus purchases instead of the 25% made by the AO. The CIT(A) reasoned that while the purchases were deemed fake, the sales were genuine and verified by independent authorities like SEEPZ and Customs. The CIT(A) noted that the entire transaction cycle, from purchase to export, was documented and verified. Consequently, the CIT(A) concluded that disallowing the total purchases would result in taxing 100% profit, which was inappropriate. Instead, a Gross Profit (G.P.) rate of 3% was applied, considering the historical G.P. rates and the extent of manipulation in purchase values.

3. Legitimacy of the Purchases from M/s. Zalak Impex:
The assessee argued that the purchases from M/s. Zalak Impex were legitimate and supported by customs-approved invoices and bank statements confirming remittances. The AO, however, added the entire purchase amount to the assessee’s income based on the statement from Shri Hiten L. Rawal, proprietor of M/s. Zalak Impex, who admitted to issuing bogus purchase bills. The CIT(A) reduced this addition to 3%, acknowledging the genuineness of the sales and the inward remittance of foreign exchange. The Tribunal further supported the assessee, noting that the assessee’s unit was in an SEZ, making it unlikely that they would inflate purchase prices since their profits were exempt under Section 10A. The Tribunal also highlighted the lack of opportunity for the assessee to cross-examine Shri Rawal, which violated the principle of natural justice. Citing a similar case (Tristar Jewellery), the Tribunal found no merit in upholding the 3% G.P. addition and emphasized that the entire profit was eligible for exemption, negating any benefit from showing lower profit.

Conclusion:
The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection in part, concluding that the reassessment was unjustified and the addition of 3% G.P. on purchases was unwarranted. The decision underscored the importance of adhering to principles of natural justice and the necessity of providing cross-examination opportunities when statements are used against a party. The Tribunal's decision was pronounced in open court on 26/10/2017.

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