2024 (11) TMI 758 - AT - Income Tax

Reopening of assessment - Estimation of income - bogus purchases - HELD THAT - After completion of assessment u/s 143(3), this case is sought to be reopened after four years, and there is no mention in the recorded reasons that there has been any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment year for formation of belief that income has escaped assessment. On this aspect of the matter also the case is covered in favour of the assessee by the decision of Canara Bank 2023 (9) TMI 1043 - SC ORDER where the Hon ble High Court observed that where the AO had not even stated or alleged that there was failure on the part of the assessee to disclose fully and truly all material facts in respect of claim of deduction under section 36(1)(viia), Tribunal rightly held that reopening assessment initiated beyond four years was bad in law - Whether SLP filed by revenue against said impugned order was to be dismissed - Held YES. In favour of assessee. Similar views has been taken in the case of ACIT Vs Virbac Animal Health India (Pvt.) Ltd 2023 (5) TMI 554 - SC ORDER where special leave petition filed against the order of the High Court was dismissed, where the High court held that there was no failure on the part of the assessee to truly and fully disclose all material facts necessary for purpose of assessment which were carefully scrutinized by AO during original assessment and thus reopening notice issued after four years on account of change of opinion was to be set aside. Bogus purchases - The entire sales are considered as part of gross turnover and duly reflected in books of accounts and considered for determination of disclosed profits, and the entire turnover of sales has been subjected to taxation, which are also supported by VAT returns, and the output tax on such sales (after adjustment of input credit) has been deposited to credit of state revenue. Assessee has travelled a step further and explained with materials on record that the goods purchased from both the sellers, has been sold to M/s AVN Construction Company, who in turn sold the same to various contractors, the ultimate destination and utilization of the goods being the Thermal Plant, and the entire details of purchase and sales has been examined by the AO in course of original assessment, in course of proceedings u/s 143(3) and no defects has been found. The entire facts of the case both on merits as well as on legal aspects of the matter, we hold that the reassessment proceedings initiated by the AO are not legally valid being commenced on the basis of wrong reasons recorded which are factually incorrect flowing from non-application of mind by the concerned officer, that too after a period of four years without pointing out as to how the assessee has failed to disclose truly and fully material facts necessary for assessment and on merits also we are of the opinion that purchases and supply of construction materials made by the assessee are genuine in nature, because the ultimate destination and utilization of the goods are fully transparent apart from other facts already discussed in paragraphs above. Addition on account of bogus purchase as unjustified and uncalled for. Decided in favour of assessee.

Summary

Issues Involved:

1. Limitation of addition on bogus purchases.
2. Validity of notice under Section 148 for reassessment.
3. Allegation of bogus purchases and corresponding sales.
4. Application of Section 69C regarding unexplained expenditure.
5. Reopening of assessment beyond the limitation period.

Issue-wise Detailed Analysis:

1. Limitation of Addition on Bogus Purchases:

The revenue challenged the CIT(A)'s decision to limit the addition to 25% of the alleged bogus purchases instead of the 100% addition made by the AO under Section 69C. The CIT(A) justified the limitation by stating that since the corresponding sales were accepted, the entire purchases could not be disallowed. The CIT(A) relied on the judgment in the case of N.K. Proteins Ltd., where the Supreme Court upheld a similar limitation on additions. The tribunal upheld the CIT(A)'s decision, emphasizing that the purchases were indeed bogus, but the profit margin should be considered at 25% due to the acceptance of corresponding sales.

2. Validity of Notice under Section 148 for Reassessment:

The assessee contested the issuance of the notice under Section 148, arguing it was beyond the limitation period and based on a change of opinion without valid reasons. The tribunal examined whether the reasons recorded for reopening the assessment were factually correct and whether there was a failure on the part of the assessee to disclose all material facts. The tribunal found that the reasons recorded for reopening were factually incorrect and based on borrowed satisfaction without independent application of mind by the AO. It was held that the reassessment proceedings were invalid, as they were initiated beyond the four-year limitation period without any failure on the part of the assessee to disclose material facts.

3. Allegation of Bogus Purchases and Corresponding Sales:

The AO alleged that the purchases from two parties were bogus, based on statements recorded and the immediate cash withdrawal by the sellers. The assessee argued that all purchases were genuine, supported by invoices, bank transactions, and VAT returns. The tribunal noted that the sales corresponding to these purchases were accepted, and the entire turnover was subjected to taxation. The tribunal emphasized that the purchases were genuine as the goods were ultimately used in the construction of a thermal plant, and the entire transaction was transparent.

4. Application of Section 69C Regarding Unexplained Expenditure:

The AO applied Section 69C to add the entire amount of alleged bogus purchases as unexplained expenditure. However, the CIT(A) limited the addition to 25% of the purchases, considering the acceptance of corresponding sales. The tribunal supported the CIT(A)'s approach, highlighting that while the purchases were bogus, the profit margin should be considered for taxation, aligning with judicial precedents.

5. Reopening of Assessment Beyond Limitation Period:

The tribunal scrutinized the reopening of assessment after four years from the relevant assessment year. It was observed that the AO did not allege any failure by the assessee to disclose fully and truly all material facts necessary for assessment. The tribunal referred to various judicial precedents, including the Supreme Court's judgment in Canara Bank, to conclude that the reopening was invalid due to the absence of any such allegation in the recorded reasons.

Conclusion:

The tribunal dismissed the revenue's appeal and allowed the assessee's appeal, quashing the reassessment proceedings and deleting the addition of Rs. 4,29,39,587/- on account of bogus purchases. The tribunal emphasized the need for proper application of mind by the AO in recording reasons for reopening and underscored the importance of adhering to the limitation period for reassessment.