2020 (2) TMI 777 - AT - Income Tax

Reopening of assessment u/s 147 - bogus purchases - CIT(A) restricting the addition @ 2% of alleged bogus purchase - HELD THAT - As relying on N.K. Industries Ltd. v. DCIT 2016 (6) TMI 1139 - GUJARAT HIGH COURT we set aside the order of the Ld. CIT(A) and direct the AO to restrict the additions in respect of purchases from Emkey Engineers and S.B.Industries, limited to the extent of bringing the G.P. rate on disputed purchases at the same rate of other genuine purchases. We direct the assessee to file the relevant documents/evidence before the AO. Needless to say, the AO would give reasonable opportunity of being heard to the assessee before finalizing the order. - Decided i favour of revenue partly for statistical purposes. Reopening of assessment u/s 147 - distinction between the acceptance of a return u/s 143(1) and an assessment which is framed u/s 143(3) - HELD THAT - AO has rightly issued notice u/s 148 for reopening the return of income processed u/s 143(1) of the Act. Accordingly, the cross objection filed by the assessee dismissed

Issues Involved:
1. Validity of relief granted by CIT(A) based on banking channel payments.
2. Legitimacy of restricting addition to 2% of alleged bogus purchases.
3. Validity of reassessment proceedings initiated under Section 147.
4. Retention of addition by CIT(A) and interest charged under Section 234B.

Detailed Analysis:

1. Validity of Relief Granted by CIT(A) Based on Banking Channel Payments:
The Revenue contended that the CIT(A) erred in allowing relief to the assessee merely because payments against alleged purchases were made through banking channels, despite the non-existence of the alleged parties. The assessee, a manufacturer of resins adhesives, had filed its return for AY 2009-10 declaring a total income of ?32,58,979/-. The AO reopened the assessment based on information from the Sales Tax Department that the assessee had obtained bogus purchase bills from Emkey Engineers and SB Industries. The AO's inquiry, including a report from the Income Tax Inspector, failed to locate these parties, leading to a conclusion that the purchases were not genuine. However, the CIT(A) deleted the addition for Emkey Engineers and restricted the addition for SB Industries to 2%, noting that the payments were made through banking channels and the purchases were used in trading activities.

2. Legitimacy of Restricting Addition to 2% of Alleged Bogus Purchases:
The CIT(A) restricted the addition to 2% of the purchases from SB Industries, amounting to ?5,54,420/-, based on the low gross profit (GP) margin in the assessee's trading activities. The AO had initially made an addition of 12.5%, but the CIT(A) found that the payments were made through banking channels and there was no evidence that these payments were not genuine. The Tribunal referenced the case of M/s Mohommad Haji Adam & Co., where it was held that if the department accepts the sales, the corresponding purchases cannot be entirely rejected. Therefore, the Tribunal directed the AO to restrict the additions to the extent of bringing the GP rate on disputed purchases at the same rate as other genuine purchases, and allowed the Revenue's appeal partly for statistical purposes.

3. Validity of Reassessment Proceedings Initiated Under Section 147:
The assessee challenged the validity of the reassessment proceedings initiated under Section 147, contending that the proceedings were invalid and bad in law. The AO had reopened the assessment based on information from the Sales Tax Department regarding bogus purchases. The Tribunal upheld the AO's action, referencing the Supreme Court's decision in ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd., which allows wider latitude for reopening assessments processed under Section 143(1). The Tribunal concluded that the AO had valid reasons to believe that income had escaped assessment, thus dismissing the assessee's cross-objection on this ground.

4. Retention of Addition by CIT(A) and Interest Charged Under Section 234B:
The assessee also contested the retention of an addition of ?5,54,420/- by the CIT(A) and the interest charged under Section 234B. The Tribunal addressed the issue of the retained addition in its earlier analysis, directing the AO to restrict the additions to the GP rate on disputed purchases. The interest charged under Section 234B was deemed consequential and dependent on the final assessment. The Tribunal's decision for AY 2009-10 was applied mutatis mutandis to AY 2010-11, and the appeals and cross-objections were partly allowed for statistical purposes.

Conclusion:
The Tribunal upheld the validity of the reassessment proceedings and directed the AO to restrict additions to the GP rate on disputed purchases while providing the assessee an opportunity to present relevant documents. The appeals filed by the Revenue and the cross-objections filed by the assessee were partly allowed for statistical purposes.

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