2024 (4) TMI 1226 - AT - Income Tax

Estimation of income - bogus purchases - as per AO original addition made by the Assessing Officer @ 100% of bogus purchases should be sustained - HELD THAT - As relying on Pankaj K. Choudhary others 2021 (10) TMI 653 - ITAT SURAT disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary legal issues considered in this judgment were:

• Whether the National Faceless Appeal Centre (NFAC) erred in restricting the addition of bogus purchases to 6% instead of 100% as initially determined by the Assessing Officer (AO) and directed by the Principal Commissioner of Income Tax (PCIT).
• Whether the transactions recorded as purchases by the assessee were genuine or constituted sham transactions intended to inflate expenses and reduce taxable income.
• The validity of reopening the assessment under section 147 of the Income Tax Act, based on information from the Investigation Wing regarding accommodation entries provided by the Bhanwarlal Jain Group.
• The applicability of precedents, particularly the decisions of the Gujarat High Court and the Supreme Court, regarding the treatment of bogus purchases.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Restriction of Addition to 6% of Bogus Purchases

• Relevant Legal Framework and Precedents: The Tribunal considered the precedent set by the Gujarat High Court in N.K. Industries Ltd. and N.K. Proteins Ltd., which upheld 100% disallowance of bogus purchases. However, the Tribunal also referenced the decision in Surya Impex and the Tribunal's own decision in Pankaj K. Choudhary, which supported a reduced disallowance.
• Court's Interpretation and Reasoning: The Tribunal found that the NFAC's decision to restrict the addition to 6% was consistent with the reasoning in similar cases, where it was determined that the entire transaction should not be disallowed, but rather the income component should be adjusted to prevent revenue leakage.
• Key Evidence and Findings: The evidence included statements from Bhanwarlal Jain and others admitting to providing accommodation entries, as well as the lack of independent investigation by the AO into the assessee's actual transactions.
• Application of Law to Facts: The Tribunal applied the principle that only the profit element of the disputed transactions should be taxed, aligning with the industry's average profit margin.
• Treatment of Competing Arguments: The Revenue argued for 100% disallowance based on the precedent, while the assessee contended that the transactions were genuine and supported by documentation. The Tribunal balanced these arguments by referencing past judgments that supported partial disallowance.
• Conclusions: The Tribunal upheld the NFAC's decision to restrict the addition to 6% of the bogus purchases, finding it consistent with applicable legal principles and past decisions.

Issue 2: Validity of Reopening Assessment

• Relevant Legal Framework and Precedents: The reopening of assessment was based on Section 147 of the Income Tax Act, supported by precedents such as Peass Industrial Engineers (P) Ltd. and Pushpak Bullion (P) Ltd., which allowed reopening based on credible information from the Investigation Wing.
• Court's Interpretation and Reasoning: The Tribunal found that the AO had valid grounds to reopen the assessment based on the information received about the assessee being a beneficiary of accommodation entries.
• Key Evidence and Findings: The Tribunal noted that the AO had credible information from the Investigation Wing, which justified the reopening of the assessment.
• Application of Law to Facts: The Tribunal applied the principle that credible information from a reliable source is sufficient to justify reopening under Section 147.
• Treatment of Competing Arguments: The assessee argued against the reopening on the grounds of lack of specific information and preliminary investigation, which the Tribunal found unpersuasive given the information available to the AO.
• Conclusions: The Tribunal upheld the validity of the reopening of the assessment.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: The Tribunal reaffirmed the principle that in cases of alleged bogus purchases, only the profit element should be adjusted to prevent revenue leakage, rather than disallowing the entire transaction amount.
• Final Determinations on Each Issue: The Tribunal dismissed the Revenue's appeals, upholding the NFAC's decision to restrict the addition to 6% of the bogus purchases, and confirmed the validity of the reopening of the assessment.
• Verbatim Quotes of Crucial Legal Reasoning: "The Tribunal has disallowed @ 6% of bogus purchases, therefore, grounds of appeal raised by the Revenue are covered by the Decision of the Co-ordinate Bench of this Tribunal, in the case of Pankaj K. Choudhary & others."