2018 (12) TMI 695 - HC - Income Tax

Reopening of assessment u/s 147 - assumption of jurisdiction for reassessment under Section 147 - Held that - Non-consideration of the question of jurisdiction is erroneous. In these circumstances, the first question is answered in favour of the assessee by holding that the Tribunal was not justified in ignoring the grounds urged by the appellant with regard to jurisdiction for re-assessment under Section 147 of the Income Tax Act. Addition of bogus creditors - As a consequence to the additions, gross profit ratio would amount to 58.29% - Held that - The contentions of the assessee required to be accepted. If the amounts are added on then the gross profit ratio would amount to almost 58.29% which is erroneous. It does not arise in the said type of business of the assessee; that there cannot be such a huge profit ratio of 58.29%. Moreover certain material placed by the assessee have not been considered. Therefore, we are of the view that the matter requires to be reconsidered by the Tribunal. Under these circumstances, the second substantial question is answered in favour of the assessee by holding that the authorities committed an error in adding a sum as bogus creditors with respect to credit purchase made by the assessee. As a consequence to answering both the substantial questions of law, the appeal is allowed.

Summary

Issues:
1. Jurisdiction for reassessment under Section 147
2. Addition of sum as bogus creditors leading to high gross profit ratio

Jurisdiction for Reassessment under Section 147:
The appellant, an individual assessee, filed a return of income for the assessment year 1998-99. The assessing officer passed an assessment order determining the total income. Subsequently, the assessments were reopened based on statements recorded during a survey under section 133A of the Income Tax Act. The assessing office proposed to add a significant sum as bogus creditors from specific trading companies. The appellant appealed the assessment, which was dismissed by the CIT (Appeals) and the Tribunal. The appellant raised substantial questions of law regarding the jurisdiction for reassessment under Section 147. The High Court held that the Tribunal erred in not considering the appellant's contention regarding the jurisdiction for reassessment. The Court found that non-consideration of the jurisdictional issue was erroneous, ruling in favor of the appellant on this ground.

Addition of Sum as Bogus Creditors Leading to High Gross Profit Ratio:
The second substantial question of law revolved around the addition of a substantial amount as bogus creditors, resulting in a high gross profit ratio. The appellant argued that such an addition would lead to an unrealistic gross profit ratio of 58.29%, which was disputed by the Revenue. The High Court analyzed the contentions and material presented by both parties. It was observed that adding the disputed amount would indeed result in an erroneous gross profit ratio, not reflective of the nature of the business. The Court concluded that the authorities erred in adding the sum as bogus creditors, leading to an inflated profit ratio. Consequently, the Court allowed the appeal, setting aside the Tribunal's order and directing a fresh consideration of the matter by the Tribunal, leaving all contentions open for further review.