2024 (12) TMI 249 - AT - Income Tax

Reopening of assessment u/s 147 - estimation of income on bogus purchases - HELD THAT - Last part of the proviso i.e. assessee fails to disclose fully and truly all material facts necessary for his assessment is important and the same is applicable on the facts of the assessee because the sundry creditors appearing in the books were examined by the AO in the assessment proceedings for A.Y. 2008-09 and the assessee did not furnish the requisite information asked by the AO about the addresses of the vendors. AO deputed Inspector to make the verification and then it was revealed that 7 out of 8 vendors/sundry creditors refused to have any transaction with the assessee. This information indicated that purchases of the assessee are prima-facie not genuine to the extent it has been claimed in the income-tax return. This information in my considered view was sufficient for the AO to have initiated the reassessment proceedings for the year which has already been assessed u/s. 143(3) of the Act since the material information was not disclosed correctly and truly by the assessee. Therefore no interference is called for in the findings of the ld. CIT(A) dismissing the assessee s legal ground challenging the validity of reopening proceedings u/s. 147. Disallowances made by the AO @10% of the total purchases - Net Profit rate declared by the assessee for A.Y.2007-08 and A.Y. 2009-10 is 1.98% and 2.28% respectively. However in order to end the litigation we deem it proper to estimate the net profit rate of 3.5% on the gross sales declared by the assessee for the year under consideration and the amount calculated over and above the net profit declared in the audited profit and loss account would be sustained as an addition in the hands of assessee. To bring clarity for A.Y. 2007-08 on the gross sales of Rs. 2, 71, 55, 215/- net profit @3.5% would amount to Rs. 9, 40, 432/- and the net profit declared by the assessee in the profit and loss account is Rs. 5, 37, 096/-. So the difference of the amount i.e. Rs. 4, 12, 336/- is sustained as an addition for A.Y. 2007-08. So far as A.Y. 2009-10 3.5% of gross sales of Rs. 4, 12, 60, 323/- comes to Rs. 14, 44, 111/- and the net profit declared by the assessee in the profit and loss account is Rs. 9, 41, 225/- and therefore difference of Rs. 5, 02, 886/- is the addition sustained in the hands of assessee for A.Y.2009- 10. Appeals of the assessee are partly allowed.

Summary

Issues Involved:

1. Condonation of delay in filing the appeals.
2. Validity of reopening of assessment under Section 147 of the Income Tax Act, 1961.
3. Justification of disallowance of purchases at 10% by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeals:

The appeals filed by the assessee for the Assessment Years 2007-08 and 2009-10 involved a delay, similar to a previous case for A.Y. 2008-09, where a delay of 1052 days was condoned. The delay in the present appeals was attributed to the death of the individual managing the business, and subsequent challenges in accessing necessary documents. The Tribunal, following precedents, emphasized that substantial justice should prevail over technicalities. The Tribunal condoned the delay after considering the reasons provided and the absence of any mala fide intentions, allowing the appeals to be heard on merits.

2. Validity of Reopening of Assessment under Section 147:

The assessee challenged the reopening of assessment for A.Y. 2007-08, arguing it was based on a change of opinion since the case had already undergone scrutiny assessment under Section 143(3). The Department contended that the reopening was based on new information regarding bogus sundry creditors discovered during assessment proceedings for A.Y. 2008-09. The Tribunal upheld the reopening, noting that the Assessing Officer had adequate reason to believe income had escaped assessment due to the assessee's failure to disclose fully and truly all material facts. The Tribunal cited that the proviso to Section 147 allows reopening if new material facts come to light, justifying the action taken by the Assessing Officer.

3. Justification of Disallowance of Purchases at 10%:

The Assessing Officer disallowed 10% of the purchases, suspecting inflation of purchases to reduce VAT liability. The disallowance was based on differences in VAT rates applied to purchases and sales. The Tribunal found the basis for disallowance speculative and lacking conclusive evidence. It noted that the assessee failed to furnish complete details requested by the Assessing Officer, contributing to the issue. However, the Tribunal deemed a flat 10% disallowance excessive and instead opted to estimate the net profit rate at 3.5% on gross sales for both assessment years. This approach resulted in a reduced addition to the assessee's income, partially allowing the appeals on merits.

Conclusion:

The Tribunal condoned the delay in filing the appeals, upheld the reopening of assessment under Section 147 due to new information, and modified the disallowance of purchases by estimating a reasonable net profit rate, thus partly allowing the appeals.