2021 (5) TMI 56 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) applied 3% on bogus purchase and deleted the addition made u/s 69C of the Act on account of peak credit of the transaction of bogus purchases - HELD THAT - We notice from the record that Ld. CIT(A) has appreciated the whole facts in this case and given clear cut findings. It is finding on record by the AO that the purchases made by the assessee are unverified and falls under the category of bogus purchases and AO proceeded to make disallowance on the basis of presumed cash transaction and applied the peak credit in the case of purchase transaction. We notice that Ld. CIT(A) has correctly came to the conclusion that the correct way of dealing with bogus purchase issue is to estimate the profit margin on such purchases and not adding the entire amount of such purchases when the AO came to the conclusion that it is bogus purchases and by considering the decision of the various courts, AO can only disallow the estimated margin which assessee would have enjoyed in such practices of taking accommodation entries. We are in agreement with Ld. CIT(A) that AO cannot proceed to disallow the whole purchases or applied peak credit in cash transaction. However, we notice that Ld. CIT(A) appreciated to estimate the disallowance @ 3% instead of 2.5% proposed by AO and we observe that the revenue is in appeal objecting the findings of Ld. CIT(A). Therefore, we dismissed the Ground No. 1 raised by the revenue that AO cannot apply any other method other than estimating the disallowance on alleged purchases. CIT(A) has disallowed @ 3% whereas AO has disallowed @ 2.5% alonwith disallowing peak credit on cash transaction. Therefore, in our view, Ld. CIT(A) has proposed 3% is higher than the estimation made by AO. Accordingly, all the grounds raised by the revenue are dismissed. Validity of reopening of assessment u/s 147 - AO has taken sanction only from the then Addl. Commissioner instead of taking permission from Commissioner as per the provision of section 151(1) - HELD THAT - In our considered view, the violation of section 151(1) of the Act is apparent on record and there is no necessity for this issue to go back to Ld. CIT(A) as submitted by Ld. DR. Respectfully following the decision in the case of Dhadda Exports 2015 (4) TMI 304 - RAJASTHAN HIGH COURT and Ghanshyam K. Khabrani vrs. ACIT 2012 (3) TMI 266 - BOMBAY HIGH COURT the AO has no jurisdiction to reopen the assessment, when there is violation to the statutory direction contained in section 151 of the Act. Accordingly, we allow ground no. 1 raised by the assessee

Issues Involved:
1. Validity of reopening the assessment under section 147 of the Income Tax Act.
2. Addition of ?2,73,26,775 under section 69C of the Income Tax Act based on peak credit of bogus purchases.
3. Disallowance of ?11,50,433 as 2.5% of alleged bogus purchases.
4. Estimation of profit margin on alleged bogus purchases.
5. Jurisdictional issue concerning the sanction for reopening the assessment.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment:
The assessee contested the reopening of the assessment, asserting that the sanction for reopening was obtained from the Additional Commissioner of Income Tax (ACIT) instead of the Commissioner/Chief Commissioner as required under section 151 of the Income Tax Act. The Tribunal noted that the Commissioner of Income Tax (Appeals) [CIT(A)] had sought a report from the Assessing Officer (AO), who confirmed that the permission for reopening was granted by the ACIT. The Tribunal, referencing the decisions in Dhadda Exports vrs. ITO and Ghanshyam K. Khabrani vrs. ACIT, found that the AO lacked jurisdiction to reopen the assessment due to non-compliance with section 151 of the Act. Consequently, the Tribunal allowed the assessee's ground on jurisdiction and set aside the assessment order.

2. Addition of ?2,73,26,775 under Section 69C:
The AO had made an addition of ?2,73,26,775 under section 69C of the Act, based on the peak credit of transactions identified as bogus purchases. The CIT(A) deleted this addition, reasoning that the AO solely relied on third-party statements without corroborative evidence and failed to conduct independent inquiries. The Tribunal agreed with the CIT(A) that the correct approach was to estimate the profit margin on such purchases rather than adding the entire amount of the purchases. The Tribunal upheld the CIT(A)'s decision to delete the addition based on peak credit.

3. Disallowance of ?11,50,433 as 2.5% of Alleged Bogus Purchases:
The AO had disallowed ?11,50,433, being 2.5% of the alleged bogus purchases of ?4,60,17,324, considering it as suppressed revenue. The CIT(A) instead estimated the gross profit at 3% of the purchases. The Tribunal upheld the CIT(A)'s approach, noting that the estimation of profit margin on such purchases was appropriate and in line with judicial precedents. The Tribunal dismissed the revenue's appeal on this ground, agreeing with the CIT(A)'s decision to apply a 3% profit margin.

4. Estimation of Profit Margin on Alleged Bogus Purchases:
The CIT(A) had estimated the profit margin at 3% on the alleged bogus purchases, considering various judicial decisions and industry practices. The Tribunal found this estimation reasonable, noting that the correct method to address bogus purchases was to estimate the profit margin rather than disallowing the entire purchase amount. The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s estimation of a 3% profit margin.

5. Jurisdictional Issue Concerning the Sanction for Reopening the Assessment:
The Tribunal addressed the jurisdictional issue raised by the assessee, confirming that the sanction for reopening the assessment was obtained from the ACIT instead of the Commissioner/Chief Commissioner as required under section 151. The Tribunal found this to be a violation of statutory provisions, which rendered the reopening of the assessment invalid. Consequently, the Tribunal set aside the assessment order on jurisdictional grounds, allowing the assessee's cross-objection on this issue.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's cross-objection, primarily on jurisdictional grounds concerning the reopening of the assessment. The Tribunal upheld the CIT(A)'s approach of estimating a 3% profit margin on alleged bogus purchases and rejected the addition based on peak credit. The Tribunal's decision emphasized the importance of adhering to statutory provisions and the necessity of corroborative evidence in assessments involving alleged bogus transactions.

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