2020 (8) TMI 947 - AT - Income Tax

Validity of reopening of the assessment - AO issued notice U/s. 148 of the Act after expiry of more than four years - assessee has received accommodation entries of bogus purchases and consequently the income assessable to tax has escaped assessment - HELD THAT - There is no dispute that in the case in hand, the assessee disclosed all necessary and primary facts during the scrutiny assessment which were duly examined and verified by the A.O. while passing the assessment order. The requirement of assessee to disclose fully and truly all material facts necessary for assessment does not extend beyond furnishing of the primary facts before the assessing authority. Hence, in absence of any failure on the part of the assessee to disclose fully and truly all relevant material facts for reopening of the assessment is not valid as the condition precedent for exercising the power of reopening of assessment as provided U/s. 147 of the Act was absent and consequently the A.O. acted beyond his power while issuing notice U/s. 148 of the Act. Accordingly, the reopening of the assessment for the A.Y. 2008-09 and 2010-11 are invalid and the same is quashed. Estimation of income - bogus purchases - HELD THAT - It is clear that the ld. CIT(A) has principally followed the decisions of this Tribunal for estimation of the income after rejection of books of account. However, the addition sustained by the ld. CIT(A) is not based on the average G.P. declared by the assessee in the preceding years. For the A.Y. 2005-06 to 2007-08, the average G.P. declared by the assessee is (-2.38%) where for the A.Y. 2008-09 the G.P. declared by the assessee is (-0.69%) which is better than the average of past history of the G.P. declared by the assessee. Similarly, for the A.Y. 2010-11, the assessee has declared G.P. of (-4.64%) which is less than the average of past history and therefore, the income of the assessee is required to be estimated by taking average of G.P. declared by the assessee in the preceding year at (-2.38%). However, since we have quashed the reopening of the assessment for the A.Y. 2008-09 and 2010-11, therefore, no consequential addition is called for. For the A.Y. 2011-12, the assessee has declared G.P. of (-1.38%) which is better than the average of past history of (-2.38%), accordingly, no addition is called for even after rejection of books of account U/s. 145(3) of the Act. It is settled proposition of law that the rejection of books of account would not ipso facto result to an addition if the G.P. declared by the assessee is better than the past history of the gross profit. Accordingly, in view of the above facts and circumstances of the case, the addition made by the A.O. for the A.Y. 2011-12 is deleted.

Summary

Issues Involved:
1. Validity of reopening of the assessment.
2. Addition on account of unverifiable purchases and rejection of books of account u/s 145(3).

Summary:

Issue 1: Validity of Reopening of the Assessment

The assessee challenged the validity of reopening the assessment u/s 148 of the Income Tax Act, 1961, for A.Ys. 2008-09 and 2010-11, arguing that the original assessments were completed u/s 143(3) and no failure to disclose fully and truly all material facts was established by the Assessing Officer (A.O.). The Tribunal noted that the A.O. issued notices u/s 148 after more than four years from the end of the relevant assessment years without alleging any failure on the part of the assessee to disclose all material facts. The A.O.'s reopening was based on information from the Investigation Wing regarding bogus purchases, but the assessee had already provided all necessary details during the original scrutiny assessments. The Tribunal held that the reopening was invalid as it violated the proviso to Section 147, which bars reopening after four years unless there is a failure to disclose fully and truly all material facts. Consequently, the reopening for A.Ys. 2008-09 and 2010-11 was quashed.

For A.Y. 2011-12, the return was processed u/s 143(1), and the Tribunal upheld the reopening as the proviso to Section 147 was not applicable.

Issue 2: Addition on Account of Unverifiable Purchases and Rejection of Books of Account u/s 145(3)

The A.O. rejected the books of account u/s 145(3) due to unverifiable purchases and made a trading addition by estimating 25% of the alleged bogus purchases. The CIT(A) restricted the addition to a lump sum amount. The Tribunal emphasized that after rejecting books of account, the income should be estimated based on the past history of the Gross Profit (G.P.) declared by the assessee. The Tribunal observed that the G.P. declared by the assessee for A.Y. 2008-09 and 2010-11 was better than the average G.P. of past years. Therefore, no addition was warranted after quashing the reopening for these years.

For A.Y. 2011-12, the Tribunal noted that the G.P. declared was better than the average of past years, and hence, no addition was warranted even after rejecting the books of account.

Conclusion:

- The appeals for A.Ys. 2008-09 and 2010-11 were allowed, quashing the reopening and the consequent additions.
- The appeal for A.Y. 2011-12 was partly allowed, deleting the addition made by the A.O.