2018 (6) TMI 229 - AT - Income Tax

Reopening of assessment - disallowance of bogus purchases - reasons to believe - Held that - Reopening was made on the basis of solid information from Sales Tax Department regarding the companies engaged in only issuing bogus bills - thus there was sufficient reason before the AO to reopen the assessment. Disallowance of bogus purchases - Held that - The materials so purchased were alleged to be used for manufacturing and sales - however assessee failed to produce the suppliers and the notices issued by the AO to such suppliers were also returned unserved - thus it is proved assessee has not made purchases from the respective parties but purchases were made from gray market - hence disallowance is restricted to 12.5% of such bogus purchase - partly allowed in favor of assessee.

Summary

Issues Involved:
1. Disallowance of bogus purchases.
2. Validity of notice under Section 148.
3. Merits of addition made by the Assessing Officer (AO).

Detailed Analysis:

1. Disallowance of Bogus Purchases:

The central issue pertains to the disallowance of bogus purchases made by the assessee. For the assessment year (A.Y.) 2009-10, the assessee declared a total income of ?3,26,49,230/-. The Department discovered that the assessee obtained bogus purchase bills from a party listed as a suspicious dealer by the Sales Tax (VAT) Department, State of Maharashtra. The case was reopened under Section 147 of the Income Tax Act, leading to an addition of ?8,58,707/- to the assessee's income on account of bogus purchases.

During the assessment proceedings, notices issued to the suppliers were returned unserved. The AO added the entire amount of such purchases to the assessee's income, as the assessee failed to produce the suppliers.

2. Validity of Notice under Section 148:

The CIT(A) confirmed the AO's action, referencing the Supreme Court judgment in ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd., which held that the AO can assess or reassess income if there is "reason to believe" that income has escaped assessment. The CIT(A) observed that the AO had relevant material to form a requisite belief, thus validating the notice under Section 148.

3. Merits of Addition Made by the AO:

The CIT(A) upheld the AO's addition, noting that the assessee's purchases from M/s Atul Traders, a declared Hawala Dealer, were not genuine. The AO's detailed investigation revealed that M/s Atul Traders made huge cash withdrawals from its bank account, supporting the AO's conclusion that it was a Hawala Dealer. Despite the assessee's submission of bills, delivery challans, and VAT returns, the CIT(A) found the purchases to be bogus due to the non-existence of the seller and the lack of transportation details.

The assessee argued that all documentary evidence supported the genuineness of the purchases, including stock registers, audited books of account, and payment by account payee cheques. The assessee contended that the purchases were used in manufacturing and that the VAT returns of M/s Atul Traders were accepted online. However, the AO's investigation and the inability to produce the suppliers led to the confirmation of the addition.

Conclusion:

The Tribunal observed that the reopening was based on solid information from the Sales Tax Department regarding companies issuing bogus bills, providing sufficient reason for the AO to reopen the assessment. On the merits, the Tribunal noted that while the materials purchased were used in manufacturing, the assessee failed to produce the suppliers, indicating purchases from the gray market. The Tribunal modified the lower authority's order, restricting the disallowance to 12.5% of the bogus purchases.

For the assessment years 2010-11 to 2012-13, the facts and circumstances were identical. The Tribunal directed for restricting the addition to 12.5% of the purchases in these years as well.

Result:

All appeals of the assessee were allowed in part, with the disallowance restricted to 12.5% of the bogus purchases. The order was pronounced in the open court on 30th May 2018.