2021 (10) TMI 726 - AT - Income Tax

Estimation of income of bogus purchases - purchases from grey market - information received by the A.O from the office of the DGIT(Inv.), Mumbai, that the assessee during the year under consideration as a beneficiary had obtained accommodation purchase bills from 15 parties - HELD THAT - We are of a strong conviction that in case the impugned purchases formed part of the sales and/or closing stock of the assessee for the year under consideration, then, the addition in the hands of the assessee would be liable to be restricted only to the extent of the profit which the assessee would had made by procuring the goods at a discounted value from the open/grey market. Insofar the quantification of the aforesaid profit element is concerned, the same in our considered view in all fairness can safely be taken @ 12.5% of the value of the impugned purchases. Our aforesaid view qua the quantification of the profit element embedded in bogus/unverified purchases made by an assessee at 12.5% of the value of such purchases is fortified by the judgment of Simit P. Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT . Accordingly, in all fairness, we herein set-aside the order of the CIT(A) and restore the matter to the file of the A.O. In the course of the set-aside proceedings, if the assessee is able to demonstrate before the A.O that the impugned bogus/unverified purchases in question formed part of its sales and/or closing stock for the year under consideration, then, the A.O shall restrict the addition in the hands of the assessee to the extent of 12.5% of the aggregate value of the impugned purchases - Appeal of the assessee is partly allowed for statistical purposes

Summary

Issues Involved:
1. Validity of reopening proceedings under Section 147 of the Income Tax Act, 1961.
2. Disallowance of alleged bogus purchases.

Detailed Analysis:

Issue 1: Validity of Reopening Proceedings under Section 147

The assessee challenged the reopening of assessments for the Assessment Years (A.Y.) 2010-11 and 2011-12 under Section 147 of the Income Tax Act, 1961. The grounds for this challenge included:
- The Assessing Officer (A.O) initiated reopening solely based on information from the Directorate General of Income Tax (Investigation) [DGIT(Inv.)], Mumbai, without independent application of mind.
- The reopening was based on suspicion and surmises without any tangible material indicating escapement of income.

The Tribunal noted that the A.O had received specific information from the DGIT(Inv.), Mumbai, about the assessee obtaining accommodation purchase bills from tainted parties. This information provided a reasonable basis for the A.O to believe that income had escaped assessment, justifying the reopening of assessments under Section 147.

Issue 2: Disallowance of Alleged Bogus Purchases

A.Y. 2010-11:

The assessee declared a total income of ?11,50,184/-. The A.O reopened the case based on information that the assessee obtained accommodation purchase bills worth ?7,11,82,340/- from 15 parties. Notices under Sections 143(2)/142(1) were issued, but the assessee failed to comply. The A.O issued notices under Section 133(6) to the supplier parties, but no confirmations were received. Consequently, the A.O disallowed the entire amount of ?7,11,82,340/- as unexplained business expenditure and assessed the income at ?7,23,32,520/-.

The CIT(A) upheld the A.O's decision, but the Tribunal found that the A.O had admitted the possibility of purchases being made from the grey market. The Tribunal held that the addition should be restricted to the profit element embedded in such purchases, estimating it at 12.5% of the purchase value. The case was remanded to the A.O to verify if the impugned purchases formed part of the sales or closing stock, and if so, to restrict the addition to 12.5% of ?7,11,82,340/-.

A.Y. 2011-12:

The assessee declared a total income of ?32,21,680/-. The A.O reopened the case based on information that the assessee obtained bogus purchase bills worth ?9,97,40,017/- from 11 parties. Similar to the previous year, the assessee failed to comply with notices, and no confirmations were received from the supplier parties. The A.O disallowed ?4,97,40,017/- as unexplained business expenditure and assessed the income at ?5,29,61,700/-.

The CIT(A) upheld the A.O's decision. However, the Tribunal applied the same rationale as for A.Y. 2010-11, directing the A.O to restrict the addition to 12.5% of ?4,97,40,017/- after verifying if the purchases formed part of the sales or closing stock.

Conclusion:

Both appeals were partly allowed for statistical purposes. The Tribunal directed the A.O to restrict the addition to 12.5% of the aggregate value of the impugned purchases for both assessment years, subject to verification of whether the purchases formed part of the sales or closing stock.