2019 (6) TMI 596 - AT - Income Tax

Reopening of assessment u/s 147 - bogus purchases - HELD THAT - After obtaining the information AO perused the assessment record and also has also gone through the various details filed by the Assessee during the course of original assessment proceedings. When the investigation wing has received specific information from another government department that assessee has indulged in hawala transaction by availing bogus purchases bills to inflate its purchases, therefore, it cannot be said that the AO had no information or that there was no fresh material before the Assessing Officer for reopening of the assessment. So far as the observation of the CIT(A) that the AO in the original assessment has considered these parties as genuine is concerned, the same is incorrect, in view of the extensive enquiries conducted by the MVAT and passing of the information to DGIT (Investigation) who in turn has passed the information to the AO. Therefore, these things came to light only after such enquiries were conducted after the completion of the original assessment. Therefore, the reassessment proceeding in the instant case in our opinion is valid. Therefore, the order of the CIT(A) treating the reopening of the assessment u/s 147 as ab-nitio void is not correct. We accordingly set aside the order of the CIT(A) on this issue and allow the ground No.1 filed by the revenue. Bogus purchases - We find during the course of assessment proceedings the AO had specifically asked the assessee to produce the above parties for his examination. Assessee stated that it is not possible for it to produce the suppliers since they are not the regular suppliers of the assessee company and further the project at Mumbai had already been completed. Further the assessee could not furnish evidence of supply of these materials i.e. transportation bilty or any evidence to prove the movement of goods. Therefore deletion of the entire amount of the bogus purchases so made by the AO is not proper. Since in the instant case the AO has not disturbed the sales and has not rejected the books of accounts, therefore, the entire amount of bogus purchases as alleged cannot be added to the total income of the assessee and the addition has to be restricted to the extent of the G. P. Rate on purchases at the same rate of other genuine purchases. The assessee in the paper book has given the calculations of such GP rate at 9.96%. We, therefore, set aside the order of the CIT(A) and direct the AO to restrict the addition to the extent the G. P. rate on purchases at the same rate of other genuine purchases. AO is accordingly directed to restrict the addition to 9.96% of alleged bogus purchases as against ₹ 1,58,47,973 added by him subject to verification of the GP so computed by the assessee in the paper book. The appeal filed by the revenue is accordingly partly allowed.

Summary

Issues Involved:
1. Validity of reassessment proceedings under section 147 of the Income Tax Act.
2. Merits of the addition of ?1,58,47,973/- as bogus purchases.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147 of the Income Tax Act:

The case involved the reassessment of a private limited company engaged in the business of supply and installation of Central Air Conditioning Plant. The reassessment was based on information received from the VAT Department, Mumbai, indicating that the assessee had availed bogus bills from five parties. The Assessing Officer (AO) reopened the assessment under section 147 of the IT Act, believing that income had escaped assessment due to these bogus purchases.

The assessee challenged the validity of the reassessment proceedings, arguing that the reasons recorded by the AO were based on third-party information without independent verification. The CIT(A) held the reassessment proceedings to be void, stating that the AO acted on suspect information without applying his own mind and that there was no failure on the part of the assessee to disclose material facts fully and truly.

However, the Tribunal found that the AO had acted on specific information from the investigation wing, which had received details from the MVAT department. The Tribunal held that the reassessment was valid as the AO had fresh material to believe that income had escaped assessment. The Tribunal set aside the CIT(A)'s order on this issue, allowing the revenue's appeal on the validity of the reassessment proceedings.

2. Merits of the Addition of ?1,58,47,973/- as Bogus Purchases:

The AO had added ?1,58,47,973/- to the total income of the assessee, treating the purchases from five parties as bogus. The assessee argued that the purchases were genuine, supported by purchase bills, delivery challans, material receipt notes, and payments made through banking channels. The assessee also contended that the material was used in specific projects, and it was not feasible to complete these projects without the material.

The CIT(A) deleted the addition, stating that third-party information could not be accepted as evidence without giving the assessee an opportunity for cross-examination. The CIT(A) noted that the AO had not rejected the assessee's books of account and that the purchases were necessary for the completion of the Central Air Conditioning system in the hotel.

The Tribunal, however, found that the AO had specifically asked the assessee to produce the suppliers and evidence of the supply of materials, which the assessee failed to do. The Tribunal held that while the entire amount of bogus purchases could not be added, the gross profit (GP) element embedded in such bogus purchases should be considered. Citing the decision of the Hon'ble Bombay High Court in the case of PCIT Vs. Mohd. Hazi Adam, the Tribunal directed the AO to restrict the addition to the extent of the GP rate on purchases at the same rate as other genuine purchases.

The Tribunal set aside the CIT(A)'s order on this issue and directed the AO to restrict the addition to 9.96% of the alleged bogus purchases, subject to verification of the GP rate computed by the assessee.

Conclusion:

The Tribunal allowed the revenue's appeal partly, upholding the validity of the reassessment proceedings under section 147 and directing the AO to restrict the addition to the GP rate on the alleged bogus purchases. The appeal filed by the revenue was accordingly partly allowed.