2022 (9) TMI 1651 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - Since the issue is squarely covered by the decision of Pankaj K. Choudhary 2021 (10) TMI 653 - ITAT SURAT wherein held disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage As there is no change in facts and law and Revenue is unable to produce any material to controvert the aforesaid findings of the Co-ordinate Bench (supra). We find no reason to interfere in the above said order - we dismiss the appeals of the assessees and we allow the appeals of the Revenue partly.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment primarily revolves around the following core issues:

1. Whether the reassessment orders for the Assessment Years 2013-14 to 2015-16 were valid, considering alleged procedural irregularities and violations of principles of natural justice.

2. Whether the additions made by the Assessing Officer (AO) concerning alleged bogus purchases from Rajendra Jain Group were justified, and if so, to what extent.

3. Whether the Income Tax Appellate Tribunal (ITAT) should uphold the 5% disallowance of purchases confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] or revert to the 100% disallowance made by the AO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reassessment Orders

• Relevant Legal Framework and Precedents: The reassessment was conducted under Section 143(3) of the Income Tax Act, 1961. The principles of natural justice require that the assessee be provided with all relevant documents and an opportunity for cross-examination.
• Court's Interpretation and Reasoning: The court noted procedural lapses, such as the failure to provide the assessee with copies of documents relied upon by the AO and the denial of cross-examination opportunities. However, the court did not find these lapses sufficient to invalidate the reassessment entirely.
• Key Evidence and Findings: The AO relied on information from a search and seizure operation on the Rajendra Jain Group, which was alleged to provide accommodation entries, including bogus purchase bills.
• Application of Law to Facts: Despite procedural irregularities, the court found that the AO had sufficient grounds to initiate reassessment based on credible information from the investigation wing.
• Treatment of Competing Arguments: The assessee argued for the quashing of the reassessment due to procedural violations, while the Revenue emphasized the substantial evidence of bogus transactions.
• Conclusions: The court upheld the validity of the reassessment, emphasizing the importance of substantive evidence over procedural lapses.

Issue 2: Justification of Additions for Bogus Purchases

• Relevant Legal Framework and Precedents: The AO made additions based on alleged bogus purchases from entities associated with the Rajendra Jain Group, known for issuing non-genuine purchase bills.
• Court's Interpretation and Reasoning: The court considered precedents where similar cases resulted in partial disallowances rather than complete additions, recognizing the possibility of genuine transactions amidst alleged bogus entries.
• Key Evidence and Findings: The AO identified purchases totaling over Rs. 40 crores as bogus, based on evidence from the investigation wing and the absence of physical stock or genuine business operations by the Rajendra Jain Group.
• Application of Law to Facts: The court analyzed the evidence and past judgments, concluding that a complete disallowance was excessive and not reflective of actual business practices.
• Treatment of Competing Arguments: The assessee provided documentation to support the genuineness of transactions, while the Revenue relied on the investigation's findings.
• Conclusions: The court favored a partial disallowance, aligning with similar cases where a percentage of purchases was considered non-genuine.

Issue 3: Determination of Appropriate Disallowance Percentage

• Relevant Legal Framework and Precedents: The CIT(A) reduced the AO's 100% disallowance to 5%, citing precedents where lower percentages were applied to similar cases.
• Court's Interpretation and Reasoning: The court reviewed judgments from similar cases, particularly the Pankaj K. Choudhary case, where a 6% disallowance was deemed appropriate.
• Key Evidence and Findings: The court examined the financial records, gross profit margins, and the nature of transactions to determine a reasonable disallowance rate.
• Application of Law to Facts: Based on industry norms and past judgments, the court concluded that a 6% disallowance was more appropriate than the 5% confirmed by the CIT(A).
• Treatment of Competing Arguments: The assessee argued for complete deletion of the disallowance, while the Revenue sought to uphold the AO's 100% addition.
• Conclusions: The court adjusted the disallowance to 6%, balancing the need to address potential revenue leakage with fairness to the assessee.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The court finds no reason to interfere in the above said order of Co-ordinate Bench, therefore respectfully following the binding judgment of Co-ordinate Bench in the case of Pankaj K. Choudhary (supra), we dismiss the appeals of the assessees and we allow the appeals of the Revenue partly."
• Core Principles Established: The judgment reinforces the principle that procedural lapses do not necessarily invalidate reassessment if substantive evidence of tax evasion exists. It also highlights the importance of proportional disallowances in cases of alleged bogus transactions.
• Final Determinations on Each Issue: The reassessment orders were upheld as valid. The court adjusted the disallowance of purchases to 6%, modifying the CIT(A)'s decision of 5% and rejecting the AO's 100% addition.