2021 (9) TMI 1161 - AT - Income Tax

Estimation of income - Bogus purchases - GP rate determination - HELD THAT - Addition in respect of the purchases made by the assessee from the open/grey market is backed by the reason that the goods in question would have been procured at a discounted value as against that accounted for on the basis of bogus purchase bills in the books of accounts. We, thus, in terms of our aforesaid deliberations herein direct the A.O to restrict the addition insofar the bogus/unproved purchases aggregating to ₹ 93,93,627/- in the case before us are concerned by bringing the G.P. rate on the amount of such bogus purchases at the same rate as that of the other similarly placed genuine purchases. Validity of the reopening of the assessment u/s 147 - eligibility of reason to believe - bogus purchases - HELD THAT - A.O after referring to the material i.e the information that was received by him from the Investigation wing, Mumbai, had therein clearly applied his mind and had observed that as per the information as the assessee company was one of the beneficiary qua the purchases made from the hawala parties, therefore, he had a reason to believe that on account of claim of excessive expenses on account of purchases claimed by the assessee to have been made from the said hawala dealers, its income for the year under consideration had been under assessed. We are unable to persuade ourselves to subscribe to the claim of the ld. A.R that the concluded assessment of the assessee had been reopened on the basis of a borrowed satisfaction. As observed by us hereinabove, the A.O in the backdrop of the information that was received by him from the Investigation wing, Mumbai had after due application of mind validly reopened the case of the assessee. Accordingly, finding no infirmity in the validity of the reopening of the assessee s case u/s 147 - Decided against assessee.

Issues Involved:
1. Validity of the reopening of the assessment under Section 147/148 of the Income Tax Act.
2. Restriction of addition to 6% of the bogus purchases by the CIT(A) as opposed to 12.5% by the Assessing Officer.
3. Confirmation of disallowance of ?6,10,585/- being 6% of suspicious purchases amounting to ?93,93,627/-.

Detailed Analysis:

1. Validity of the Reopening of the Assessment under Section 147/148 of the Income Tax Act:

The assessee challenged the reopening of the assessment under Section 147/148, arguing that the material available with the Assessing Officer (A.O) had no nexus with the formation of a belief that the income had escaped assessment. The assessee contended that the reopening was based on borrowed satisfaction from information received from the DGIT(Inv.), Mumbai, without any independent application of mind by the A.O. The assessee further argued that the original assessment had already tested the authenticity of the purchases.

The revenue countered that the A.O had validly recorded his satisfaction for reopening the assessment and that the sufficiency of the reasons recorded by the A.O could not be questioned. The Tribunal found that the A.O had applied his mind to the information received and had a reason to believe that the income had been under-assessed due to bogus purchases. Therefore, the Tribunal upheld the validity of the reopening of the assessment under Section 147 of the Act and dismissed the assessee's cross-objection on this ground.

2. Restriction of Addition to 6% of the Bogus Purchases by the CIT(A) as Opposed to 12.5% by the Assessing Officer:

The A.O had made an addition of ?11,74,203/- (12.5% of the impugned purchases of ?93,93,627/-) based on the judgment of the Hon’ble High Court of Gujarat in the case of CIT vs. Simit P. Sheth. The CIT(A) restricted the addition to 6% of the value of the bogus purchases, following the Tribunal's order in the assessee's own case for A.Y. 2013-14.

The Tribunal concurred with the CIT(A) that the assessee had not made genuine purchases from the tainted parties but had procured the goods from the open/grey market at a discounted value. The Tribunal directed the A.O to restrict the addition by bringing the Gross Profit (G.P) rate on the amount of such bogus purchases at the same rate as that of other genuine purchases. This approach was fortified by the judgment of the Hon'ble High Court of Bombay in the case of Pr.CIT -17 Vs. M/s Mohammed Haji Adam & Smith Company Ltd., which held that the addition should be limited to bringing the G.P rate of such purchases at the same rate as other genuine purchases.

3. Confirmation of Disallowance of ?6,10,585/- Being 6% of Suspicious Purchases Amounting to ?93,93,627/-:

The assessee argued that the G.P rate for the year under consideration was 9.19% and that sustaining the addition at 6% would result in unrealistic trading results. The assessee also claimed that the entire purchases from one party, M/s Mayur Exports, remained unsold and formed part of the closing stock, and thus no addition should be made for these purchases.

The Tribunal rejected the claim that no addition should be made for purchases from M/s Mayur Exports, stating that the addition was justified as the goods were procured at a discounted value from the open/grey market. The Tribunal directed the A.O to restrict the addition by bringing the G.P rate on the amount of bogus purchases in line with other genuine purchases, following the principles laid down by the Hon'ble High Court of Bombay.

Conclusion:

The Tribunal dismissed the revenue's appeal and partly allowed the assessee's cross-objection for statistical purposes. The Tribunal upheld the validity of the reopening of the assessment under Section 147 and directed the A.O to restrict the addition by aligning the G.P rate of bogus purchases with that of genuine purchases. The Tribunal emphasized the need for the assessee to furnish requisite details during the set-aside proceedings for necessary verification by the A.O.

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