2019 (12) TMI 744 - AT - Income Tax

Reopening of assessment - AO Jurisdiction to frame the assessment against the assessee - Addition u/s 69C - unexplained purchases calculated on the basis of peak credit - payment received by purchase parties are returned to the applicant in cash after deducting small commission - HELD THAT - Primary onus was on assessee to produce the suppliers and substantiate the transactions, particularly in view of the fact that notices issued u/s 133(6) remained un-responded to and the revenue was in possession of specific information that the assessee procured bogus purchase bills from these suppliers, who admitted to have entered into bogus transactions without supplying any material. This onus, in our opinion, remained undischarged and the conduct of the assessee would not inspire us to subscribe to the pleadings made by Ld. AR, in this regard. AR has also submitted that Ld. AO had no jurisdiction to frame the assessment. However, the same are mere submissions without there being any material to support the same. Nothing has been demonstrated before us to establish that learned AO had no jurisdiction to frame the assessment against the assessee. Therefore, we do not find any force in the legal arguments raised by Ld. AR before us. We concur with the observations made by first appellate authority in the impugned order, in this regard. The submissions made by Ld. AR and case laws being relied upon, in this regard, would not come to the rescue of the assessee. The assessee was in possession of primary purchase documents. The payment to the suppliers was through banking channels and the assessee had furnished details of corresponding sales made against the impugned purchases. The sales turnover reflected by the assessee was not disturbed by the revenue. At the same time, the assessee failed to rebut the allegations levelled by revenue and could not produce even a single party to confirm the transactions particularly in the backdrop of the fact that these suppliers were major suppliers for the assessee and substantial purchases were sourced by assessee from these suppliers. Notices issued u/s 133(6) remained unresponded to in all the cases. Therefore, in such a situation, the addition, which could be made, was to account for profit element embedded in these purchase transactions to factorize for profit earned by assessee against possible purchase of material in the grey market and undue benefit of VAT against such bogus purchases, which lower authorities has rightly done so. Keeping in view the fact that the assessee was a trader and dealing in low-margin item like metal, which bears a lower VAT rate and also in view of the fact that the assessee had already reflected Gross Profit Rate of 1.71%, the estimation on peak basis as made by learned first appellate authority was on the higher side. We estimate the same @2% of alleged bogus purchases. The same would work out to be ₹ 4,93,589/-. The balance additions stand delete. AO is directed to recompute the income in terms of this order. Assessee pleaded that the impugned additions made u/s 69C would not be sustainable under law since the transactions were duly recorded in the books of accounts and the payments were through banking channels. However, as concluded by us in the preceding paras that the material would have been sourced by the assessee from undisclosed sources, the payment against those purchases would also be from undisclosed sources. The transactions reported by the assessee from the tainted supplier and the payment through banking channels could not be held to be more than paper transactions. Therefore, we concur with the conclusion of first appellate authority, in this regard, as made in the impugned order. This plea stands rejected.

Issues Involved:
1. Validity of reassessment proceedings under sections 147 and 148 of the Income Tax Act.
2. Addition under Section 69C of the Income Tax Act for unexplained purchases.
3. Confirmation of the observation that payments received by purchase parties were returned in cash.
4. Alleged violation of principles of natural justice and procedural fairness.
5. Charging of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act.
6. Jurisdiction and authority of the Income Tax Officer (ITO) to pass the assessment order.
7. Estimation of profit embedded in bogus purchases.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The assessee contested the reassessment proceedings initiated under sections 147 and 148, arguing that they were based on "reason to suspect" rather than "reason to believe" and lacked new tangible material. However, the Tribunal upheld the reassessment proceedings, citing the Hon’ble Supreme Court's decision in ACIT V/s Rajesh Jhaveri Stock Brokers Pvt. Ltd. and Raymond Woollen Mills Ltd. v. ITO, which clarified that the formation of belief that income had escaped assessment was sufficient to trigger reassessment.

2. Addition under Section 69C:
The assessee was assessed for alleged bogus purchases under Section 69C, with the Assessing Officer (AO) adding the amounts as unexplained expenditure. The Tribunal found that the purchases were not genuine and upheld the addition, but modified the quantum. The Tribunal estimated the profit element embedded in these purchases at 2% of the alleged bogus purchases, significantly reducing the addition from the AO's original computation.

3. Cash Payments Observation:
The AO observed that payments received by purchase parties were returned to the assessee in cash after deducting a small commission. The Tribunal noted that the assessee failed to produce any evidence to counter this observation and upheld the AO's findings.

4. Violation of Principles of Natural Justice:
The assessee argued that the assessment was framed in violation of principles of natural justice, as adverse material was not confronted, and no opportunity for cross-examination was provided. The Tribunal rejected this argument, noting that the assessee did not request cross-examination during the assessment proceedings and failed to discharge the primary onus of proving the genuineness of transactions.

5. Charging of Interest:
The Tribunal noted that the charging of interest under sections 234A, 234B, 234C, and 234D was consequential and did not require separate adjudication.

6. Jurisdiction of ITO:
The assessee challenged the jurisdiction of the ITO to pass the assessment order. The Tribunal found no merit in this argument, as the assessee failed to provide any material evidence to support the claim that the ITO lacked jurisdiction.

7. Estimation of Profit Embedded in Bogus Purchases:
The Tribunal considered the nature of the assessee's business and the low-margin items involved. It found the AO's peak credit basis estimation to be on the higher side and reduced the addition to 2% of the alleged bogus purchases. This estimation was consistent with recent decisions in similar cases, such as Sanjay Kumar Mehta V/s ACIT and Pr.CIT Vs. M/s Mohommad Haji Adam & Co.

Conclusion:
The Tribunal partly allowed the assessee's appeals and dismissed the revenue's appeals. The reassessment proceedings were upheld as valid, and the addition under Section 69C was modified to 2% of the alleged bogus purchases. The Tribunal rejected the arguments related to the violation of natural justice and jurisdiction of the ITO, and the charging of interest was deemed consequential. The final order was pronounced on 16th September 2019.

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