2024 (8) TMI 564 - HC - Income Tax

Estimation of income - addition u/s. 69C - addition of assessee had failed to prove the genuineness of purchase transaction in entirety - addition restricted @ 12.5% - HELD THAT - The bogus transactions are in the nature of a camouflage and/or a dishonest attempt on the part of the assessee to avoid tax, resulting in addition to the assessee s income. It is for such reason, the approach of the AO is required to be well considered approach and in making such additions, he is expected to adhere to the lawful norms and well settled principles. After such scrutiny, the transactions are found to be bogus as the law would understand, in that event, they are required to be discarded by making an appropriate permissible addition. The orders passed by the CIT (A) in the present case are partly interfered in favour of the revenue as discussed by us hereinabove. In doing so the tribunal has observed that the CIT (A) was not correct in reducing the gross profit already returned by the assessee at 4.74% from 12%, as the gross profit returned by the assessee in relation to the sales made by the assessee, did not have bearing on the purchases of the assessee, qua the bills procured by the assessee, by making savings in VAT etc. It is on such premise the revenue s appeal has been allowed, by making a direction to the AO to assess the income from such transaction at 12.5% in each of the assessment years, on the purchases so made by the assessee. The assessee has happily accepted such finding as this has benefited the assessee, looked from any angle. In a given case if the Income Tax Authorities are of the view that there are questionable and / or bogus purchases, in that event, it is the solemn obligation and duty of the Income Tax Authorities and more particularly of the AO to undertake all necessary enquiry including to procure all the information on such transactions from the other departments / authorities so as to ascertain the correct facts and bring such transactions to tax. If such approach is not adopted, it may also lead to assessee getting away with a bonanza of tax evasion and the real income would remain to be taxed on account of a defective approach being followed by the department.

Issues Involved:
1. Justification of restricting the addition under Section 69C of the I.T. Act to 12.5%.
2. Reliance on the decision of the Bombay High Court in CIT v/s. Hariram Bhambhani.
3. Validity of the reopening of assessment under Section 147 of the Income Tax Act.
4. Evaluation of evidence provided by the assessee to prove the genuineness of purchase transactions.
5. The approach of the Assessing Officer (AO) in treating purchases as bogus based on information from the Sales Tax Department.

Detailed Analysis:

1. Justification of Restricting the Addition under Section 69C to 12.5%:
The Tribunal's decision to restrict the addition to 12.5% was based on the CIT (A)'s estimation of profit on the disputed purchases. The CIT (A) had considered the gross profit margins declared by the assessee in previous years and reduced the addition accordingly. However, the Tribunal observed that the CIT (A) should not have reduced the gross profit already returned by the assessee from the estimated profit, as the gross profit related to sales and not to the disputed purchases. The Tribunal directed the AO to estimate the income at 12.5% for each assessment year on the purchases made by the assessee.

2. Reliance on the Decision of the Bombay High Court in CIT v/s. Hariram Bhambhani:
The revenue questioned the Tribunal's reliance on the decision in CIT v/s. Hariram Bhambhani, arguing that the issue of addition under Section 69C regarding bogus sales was not involved in the present case. The Tribunal, however, found the CIT (A)'s reliance on similar cases to be appropriate in estimating the profit on disputed purchases.

3. Validity of Reopening of Assessment under Section 147:
The AO reopened the completed assessment based on information from the DGIT (Investigation), Mumbai, regarding purchases from parties declared as ingenuine dealers by the Sales Tax Department. The assessee filed a revised return and provided documentary evidence to justify the genuineness of the purchases. The AO, however, doubted the purchases and made an addition under Section 69C for unexplained payments.

4. Evaluation of Evidence Provided by the Assessee:
The assessee submitted ledger accounts, confirmation of suppliers, purchase bills, delivery bank statements, and other documentary evidence during the assessment proceedings. The AO doubted these documents based on general information from the Sales Tax Department. The Tribunal and the High Court found that the AO's approach to reject these documents without strong evidence was improper. The AO should have provided specific information to the assessee and conducted a thorough enquiry before making additions.

5. The Approach of the AO in Treating Purchases as Bogus:
The High Court criticized the AO's approach of treating purchases as bogus based on general information from the Sales Tax Department without specific evidence. The Court emphasized the need for a well-considered approach and thorough enquiry by the AO, including consultation with the Sales Tax Department, to ascertain the genuineness of the transactions. The Court also highlighted the importance of a coordinated approach between the Income Tax and Sales Tax Authorities to avoid contradictory assessments.

Conclusion:
The High Court dismissed the revenue's appeals, finding no substantial question of law. The Court upheld the Tribunal's decision to estimate the income at 12.5% on the disputed purchases and criticized the AO's approach of making additions based on general information without specific evidence. The Court emphasized the need for a thorough and coordinated enquiry by the AO in cases of suspected bogus transactions.

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