2022 (7) TMI 1296 - AT - Income Tax

Reopening of assessment u/s 147 - Bogus purchases - accommodation entries - failure to explain the consumption by way of production register or stock register - whether there is a live link between the material coming to the notice and formation of the belief regarding escapement of income? - HELD THAT - in the instant case assessment year involved is 2010-11 and the assessment has been reopened on 19/03/2015, which is within four years from the end of the relevant assessment year. Thus, the reliance placed by the Ld. counsel of the assessee on the decision of the Hon ble Bombay High Court in the case of Hindustan Lever Ltd 2004 (2) TMI 41 - BOMBAY HIGH COURT is of no assistance being distinguishable on facts. Bogus purchase - accommodation entries - HELD THAT - AO issued notice under 133(6) of the Act for verification of the purchase parties however those notices were returned un-served with the remark by the postal authorities as parties left or not known . The Assessing Officer made effort to serve notice on those purchase parties through inspector of his office, however those parties could not be located at the given address. AO asked the assessee to provide the current address of those parties, however the assessee failed to provide the address from where an independent verification of existence of those parties could have been done and also asked the assessee to produce those parties, however the assessee also failed in compliance. AO then ask the assessee to substantiate the purchases from those parties by way of evidence in support of the delivery or payment for transport of the goods, but the assessee failed on this account also and no evidence were filed by the assessee in this regard. In view of failure on the part of the assessee in substantiating the purchases from those two parties, the Assessing Officer in background of the information in investigation report, interalia, those parties were engaged in providing accommodation entries, without physical delivery of goods, held the purchases from those two parties as bogus purchases. Finding of the Ld. CIT(A) on the issue in dispute are justified, according to which first category of cases, where a percentage of profit could be added in cases where sales corresponding to the bogus purchases are verifiable from the day-to-day inventory tally or from the stock register and sales have been made to government bodies or export sales , then in such cases an assumption can be drawn that actual purchases were made from unknown parties whereas only bills were taken from bogus billers. In such case, unexplained investment made for purchases made from the unknown parties may also be considered. But in second category of cases, where purchases have been claimed as consumed in manufacturing or non-trading activity and the assessee fails to explain the consumption by way of production register or stock register, then in those cases purchases clearly goes to reduce the profit earned by the assessee and therefore in such cases 100% percent purchases are liable for disallowance. The case of the assessee falls under second category of the cases and therefore, we uphold the finding of the Ld. CIT(A) on the issue in dispute and dismiss the ground of the appeal of the assessee.

Summary

Issues Involved:
1. Validity of reopening proceedings under Section 147 of the Income Tax Act.
2. Legitimacy of the addition of ?8,74,835 as bogus purchases.

Detailed Analysis:

1. Validity of Reopening Proceedings under Section 147 of the Income Tax Act:
The assessee challenged the reopening proceedings initiated under Section 147 of the IT Act, asserting that they were invalid and bad in law. The Tribunal noted that the assessee had not objected to the reassessment before the Assessing Officer (AO) or the Commissioner of Income Tax (Appeals) [CIT(A)], raising this issue for the first time before the Tribunal. The Tribunal referenced the Hon'ble Bombay High Court's decisions in Hindustan Lever Ltd. vs. ACIT and others and PCIT vs. Shodiman Investment Private Limited, which emphasize that the reasons recorded by the AO must clearly state the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.

However, the Tribunal distinguished the present case from these precedents, noting that the reopening was done within four years from the end of the relevant assessment year. The Tribunal found that the information received from the Director-General of Income Tax (Investigation), Mumbai, indicating that the assessee had taken accommodation entries from two parties, was sufficient to form a requisite belief of income escapement. The Tribunal cited the Supreme Court's decision in ACIT v. Rajesh Jhaveri Stock Broker P. Ltd., which held that at the initiation stage, what is required is a reason to believe, not the established fact of escapement of income. Consequently, the Tribunal upheld the validity of the reassessment proceedings and dismissed the additional grounds raised by the assessee.

2. Legitimacy of the Addition of ?8,74,835 as Bogus Purchases:
The AO held that the purchases from two parties amounting to ?8,74,835 were non-genuine, based on several factors, including the failure of the assessee to provide delivery challans, acknowledgment of receipt of goods, and the inability to produce the purchase parties for verification. The AO also noted that the payments made by cheque were not sufficient to establish the genuineness of the purchases, as it was common practice for cash to be returned after the cheque was realized.

On appeal, the CIT(A) upheld the AO's findings, emphasizing the lack of daily stock and production registers and the absence of supporting evidence from transporters. The CIT(A) justified the 100% disallowance of the bogus purchases, referencing the ITAT's decision in M/s. Shoreline Hotel Pvt. Ltd vs. CIT Central-1, where it was held that if bogus purchases are unproved and declared consumed by the assessee without any evidence, the entire addition can be made.

The Tribunal reviewed the assessee's reliance on various judicial precedents, including CIT Vs Nikunj Eximp Enterprises Private Limited and PCIT Vs Vaman International Private Limited, which held that merely because suppliers did not appear before the AO, it could not be concluded that purchases were not made. However, the Tribunal distinguished these cases on the facts, noting that in the present case, the AO had made due inquiries, and it was the assessee who failed to substantiate the purchases.

The Tribunal also considered the decision in Mohommad Haji Adam & Co, where it was held that only the profit element in bogus purchases should be disallowed. However, the Tribunal noted that the assessee in the present case was a manufacturer, and the bogus purchases were claimed to be consumed in manufacturing without any supporting evidence. Thus, the Tribunal upheld the CIT(A)'s decision to disallow 100% of the bogus purchases, dismissing the assessee's appeal.

Conclusion:
The Tribunal upheld the validity of the reopening proceedings under Section 147 of the IT Act and confirmed the addition of ?8,74,835 as bogus purchases, dismissing the appeal of the assessee in its entirety.