2020 (3) TMI 686 - AT - Income Tax

Reopening of assessment u/s 147 - Bogus purchases u/s 69C - addition on account of peak credit - HELD THAT - At the time of formation of belief, the only requirement would be that there must be certain prima-facie material before Ld. AO which would suggest possible escapement of income. Nothing more would be required at that stage to reopen the case. Of course, after going through the factual matrix, it would be open for Ld. AO to make additions by invoking any particular statutory provisions which would best apply to given factual matrix. Therefore, we are not convinced with legal grounds raised by Ld. AR and hence, decline to accept the same. The additional ground raised by the assessee stands. No discrepancies have been found in quantitative details as well as stock register maintained by the assessee for assessment year under consideration as well as for subsequent AY 2011-12. The same is evident from financial statements as well as quantum assessment order for AY 2011-12, as placed on record. From the perusal of these documents, it is quite discernible that the figures of opening stock as well as sales in AY 2011-12 has been accepted while framing assessment order and these figures have not been disturbed. The aforesaid position of circular transactions has also been accepted by Ld.AO in para 6.6 of quantum assessment order wherein it has been accepted that the assessee has made circular transactions to the extent of ₹ 1163.89 Lacs. The said factual matrix has also been elaborated by us in preceding para 2.11. These facts would lead us to inevitable conclusion that the transactions, to that extent, were to be considered as mere paper entries and the same were to be disregarded while making the additions in the hands of the assessee. If these transactions were removed from assessee s financials, there would be no impact on the profit for this year as well as subsequent year. AR s plea, to that extent, were to be accepted and no such additions against these purchases would be sustainable in the hands of the assessee. So far as the balance purchase for the year under consideration is concerned, it is noted that the assessee has made cheque payment of ₹ 382.72 Lacs to one of the stated entities during the year and as per the statement of the director, cash was generated and the material was purchased in cash from the open market. To regularize the cash purchases, bills were procured from stated entities. We are of the considered opinion that the additions, which were to be sustained in the hands of the assessee against these purchases, would be to account for profit element embedded in such purchase transactions to factorize for profit earned by assessee by procuring goods from grey / unorganized market. The method of peak credit as adopted by Ld. AO would not be a suitable method under the circumstances rather an adhoc estimated addition would meet the cause of justice. Keeping in view the assessee s nature of business, we estimate the additions at 5% of balance purchases of ₹ 3,84,03,652/- which comes to ₹ 19,20,183/-. The balance addition stands deleted. The method of estimation would be in line with the recent decision in Pr.CIT V/s Rishabhdev Tachnocable Ltd. 2020 (2) TMI 662 - BOMBAY HIGH COURT wherein Hon ble Court has approved the estimated additions on similar lines, as sustained by Tribunal. To summarize, the addition to the extent of ₹ 19,20,183/- stand confirmed and the balance additions stands deleted

Issues Involved:
1. Confirmation of addition of ?13,02,88,386/- on alleged bogus purchases under Section 69C.
2. Validity of the reassessment proceedings.
3. Retraction of statements made during survey proceedings.
4. Determination of the appropriate method for calculating additions (peak credit vs. profit element).

Detailed Analysis:

Issue 1: Confirmation of Addition on Alleged Bogus Purchases under Section 69C

The assessee contested the confirmation of addition of ?13,02,88,386/- on the grounds of alleged bogus purchases. The Revenue received information from the Sales Tax Department indicating that the assessee inflated expenses through bogus purchases. During the survey under Section 133A, it was found that the assessee did not follow the standard operating procedure for purchases from certain parties, which were identified as providers of accommodation bills by the Sales Tax Department. The assessee's director admitted to purchasing bullion from some entities and packing material from others, but later retracted the statement, claiming the transactions were mere book entries. The Assessing Officer (AO) disallowed the purchases under Section 69C, concluding that the assessee made purchases in cash from the open market using undisclosed income and procured accommodation bills to regularize these purchases.

Issue 2: Validity of the Reassessment Proceedings

The assessee argued that the reassessment proceedings were beyond the scope of the original reasons for reopening the assessment. The reassessment was initiated based on the belief that the assessee booked bogus purchases, inflating expenses and showing less income. The AO made additions on account of unexplained expenditure under Section 69C, which the assessee claimed was beyond the scope of the reassessment. However, the Tribunal found that the sole subject matter of the reassessment was the booking of bogus purchases, and the additions made were related to this issue. The Tribunal held that the reassessment proceedings were valid as the additions did not travel beyond the recorded reasons.

Issue 3: Retraction of Statements Made During Survey Proceedings

The Tribunal held that the retraction of a statement made by one person by another person was not valid. The retraction should be made by the same person who made the statement. Therefore, the retraction by another director was disregarded. However, the Tribunal also noted that additions based solely on statements made during survey proceedings under Section 133A would not hold much evidentiary value unless corroborated by other material evidence. The Tribunal found that the additions were primarily based on the director's statement and information from the Sales Tax Department.

Issue 4: Determination of the Appropriate Method for Calculating Additions

The AO adopted the peak credit method to calculate the additions, assuming cash payments were made on the date of bogus purchase bills and cash was received back on the date of cheque payments. The Tribunal, however, found that the purchases to the extent of ?11,63,89,354/- were reversed in subsequent years and were mere paper entries. The Tribunal concluded that these transactions should be disregarded, and no additions should be made for these purchases. For the remaining purchases of ?3,84,03,652/-, the Tribunal noted that the assessee made cheque payments and purchased material in cash from the open market. The Tribunal held that an adhoc estimated addition of 5% of the remaining purchases would be appropriate, amounting to ?19,20,183/-. The rest of the additions were deleted.

Conclusion:

The appeal was partly allowed. The Tribunal confirmed the addition to the extent of ?19,20,183/- and deleted the balance additions. The reassessment proceedings were held valid, and the retraction of statements by another person was disregarded. The Tribunal adopted an adhoc estimated addition method instead of the peak credit method for calculating the additions.

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