2025 (3) TMI 407 - AT - Income Tax

Bogus purchases - estimation of income @ 10% of entire purchases and sales - HELD THAT - Once the assessee is considered as beneficiary of accommodation entry the addition should have been made to the extent of profit element embedded in availing such entry that to only on the amount of alleged/ impugned/ bogus entry and not on the substantial part of transaction. We find that the AO while making additions/ disallowance taken all the transactions of sales and purchases which is not justified. Such addition is made without making further investigation in respect of other sales and purchases bills. AO solely relied on the report of Verification Unit without providing copy of such report to the assessee. It is settled law under Income Tax that only real income or profit after allowing set off of expenditure can be brought to tax and not the substantial part of transaction. Thus the addition made by AO @ 10% of total sales and purchases are not justified. Quantum of the disallowance - We find that assessee is engaged in the business of diamonds the assessee in his own reply has accepted that he has shown purchase and sales which is not disputed by the lower authorities. Thus considering the nature of transaction and keeping in view of the facts that Surat Bench of Tribunal in cases of purchases from entry provider (beneficiary) has estimated addition @ 6.00% of the purchases therefore 6.00% of purchase amount Rs. 3, 11, 75, 748/- is added (restricted) to the income. Additions on the sales - We find that the AOs of various well known entry provider namely Rajendra Sohan Lal Jain and in Sanjay Chaudhary made addition @0.20% of amount of entry and allowed deduction of expenses @25%. On appeal before this Tribunal the addition made by AO were sustained 2021 (12) TMI 867 - ITAT SURAT and 2021 (12) TMI 1414 - ITAT SURAT respectively. Thus considering overall facts and circumstances of the present case and keeping in view of possibility of revenue leakage 0.50% of Rs. 6, 20, 94, 701/- of sales is restricted/added to the income of assessee. In the result ground No. 3 is allowed and ground No. 4 5 are partly allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the reassessment order under Section 147 is valid given the procedural irregularities alleged by the assessee.
Whether the notice under Section 148 was issued following the prescribed procedure under Section 148A.
The validity of the rejection of the assessee's books of account under Section 145(3).
The appropriateness of the income estimation at 10% of the entire purchase and sales turnover.
The consideration of documentary evidence provided by the assessee against the alleged non-genuine transactions.
The admissibility and implications of additional grounds of appeal raised by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reassessment Order and Notice under Section 148

Legal Framework and Precedents: The reassessment proceedings were initiated under Section 147, and the notice was issued under Section 148, which requires compliance with the procedure outlined in Section 148A.
Court's Interpretation and Reasoning: The Tribunal found that the procedural requirements under Section 148A were not fully adhered to, as the assessee's reply was not considered before issuing the order under Section 148A(d).
Key Evidence and Findings: The assessee's reply was filed beyond the statutory period, and thus, the Tribunal found no merit in the objection raised in the additional ground of appeal.
Application of Law to Facts: The Tribunal dismissed the additional ground of appeal, noting that the procedural lapse did not invalidate the reassessment proceedings.
Conclusion: The reassessment order and notice under Section 148 were upheld as valid, dismissing the related grounds of appeal.

Rejection of Books of Account and Estimation of Income

Legal Framework and Precedents: Section 145(3) allows the rejection of books of account if they are not reliable, and income estimation can be made based on best judgment.
Court's Interpretation and Reasoning: The Tribunal found that the AO's rejection of the books was not adequately justified, as the AO did not point out specific defects in the books.
Key Evidence and Findings: The AO relied on the Verification Unit's report, which was not provided to the assessee, leading to a lack of transparency.
Application of Law to Facts: The Tribunal determined that the estimation of income at 10% of the total turnover was excessive and not supported by the evidence.
Conclusion: The Tribunal reduced the addition to 6% of the disputed purchases and 0.50% of the disputed sales, aligning with industry standards and previous case law.

Consideration of Documentary Evidence

Legal Framework and Precedents: The burden of proof lies with the assessee to substantiate the genuineness of transactions.
Court's Interpretation and Reasoning: The Tribunal noted that the assessee provided comprehensive documentation, including purchase and sales bills, confirmations, and bank statements.
Key Evidence and Findings: The AO did not provide contrary evidence or allow cross-examination of third-party statements, which weakened the case for treating transactions as non-genuine.
Application of Law to Facts: The Tribunal found that the documentary evidence supported the genuineness of the transactions, warranting a lower estimation of income.
Conclusion: The Tribunal's decision to reduce the income estimation reflects the strength of the documentary evidence provided by the assessee.

3. SIGNIFICANT HOLDINGS

Core Principles Established: The Tribunal emphasized the necessity of adhering to procedural requirements under Section 148A and the importance of considering all evidence before rejecting books of account or making income estimations.
Final Determinations on Each Issue: The reassessment order and notice under Section 148 were upheld as valid. The rejection of books was found unjustified, and the income estimation was reduced to 6% of disputed purchases and 0.50% of disputed sales.
Verbatim Quotes of Crucial Legal Reasoning: The Tribunal stated, "It is settled law under Income Tax that only real income or profit after allowing set off of expenditure, can be brought to tax and not the substantial part of transaction."

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