2012 (11) TMI 808 - AT - Income Tax

Reopening of assessment u/s 147 - bogus purchases - Held that - The contention of the appellant that the AO had no definite material or information before invoking provisions of section 147 is not tenable - It is an admitted fact that the original return of the appellant was processed u/s 143(1)(a) only at ministerial staff level and no finding had been or even can be recorded, by the AO during such processing, about the genuineness of purchase constituting the reasons for issue of notice u/s 148. The AO was therefore, fully justified in invoking provisions of section 147 considering the case of ACIT v Rajesh Jhaveri Stock Brokers P Ltd.(2007 (5) TMI 197 - SUPREME COURT) mentioning that failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) - against assessee. Estimation of profit at 6% of purchase price - Held that - As decided in System India Castings Versus Commissioner Of Income-Tax 1996 (9) TMI 37 - MADHYA PRADESH HIGH COURT that if the transaction of purchase was found to be sham the AO would be justified in disallowing not only the purchase price but also related transaction charges and it was held that such was a finding of fact and no question of law arose against such. Accordingly AO s action making disallowance of 6% of purchase price at Rs.14,49,190/- being justified and reasonable is hereby confirmed - against assessee. Addition made for unexplained peak investment - set off allowed by the CIT(A) in respect of 6 % of addition of profit out of peak credit - Held that - Addition on account of disallowance of 6 % on purchases made from Kothari Group which was allowed as set off by CIT(A) against the addition of peak investment made in respect of alternative purchases made by the assessee, it is found that the AO has disallowed 6% of total purchases made during the entire year from Kothari group, whereas addition has been made with respect to peak unexplained investment worked out as on a particular date in respect of alternative purchases made by the assessee, and not in respect of entire alternate purchases made by assessee - Under these facts and circumstances & agreeing with the contention of DR that the order of CIT(A) is not correct to the extent of allowing setting off entire 6% of profit which was added in respect of entire purchases made from Kothari Group against peak unexplained investment worked out on a particular date, therefore the order of the CIT(A) is needed to be modified and direct the AO to recompute the addition made on account of purchases up till the date of working out unexplained investment on such purchases - partly in favour of revenue.

Summary

Issues Involved:
1. Reopening of Assessment under Section 147
2. Rejection of Books of Account under Section 145
3. Disallowance under Section 40A(3)
4. Estimation of Profit at 6% of Purchase Price
5. Addition on Account of Unexplained Investment in Purchases
6. Set-off of 6% Profit against Addition for Unexplained Investment

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The reopening of assessment was justified based on the decision of the Hon'ble Supreme Court in the case of Rajesh Jhaveri, which held that processing a return under Section 143(1) does not amount to an assessment order. Since the returns were processed under Section 143(1) and no assessments were made under Section 143(3), the reopening was valid. The CIT(A) upheld the reopening, noting that the Assessing Officer had sufficient reason to believe that there was escapement of income based on material collected during the search at Bharat Kothari Group.

2. Rejection of Books of Account under Section 145:
The Assessing Officer rejected the books of account under Section 145 due to the non-genuine nature of purchases made from Bharat Kothari Group. The CIT(A) upheld this rejection, noting that substantial purchases were supported by bogus bills and the assessee failed to provide evidence of transportation or payment details. The rejection was deemed justified due to the lack of trustworthiness and reliability of the books of account.

3. Disallowance under Section 40A(3):
The Assessing Officer disallowed 20% of the purchase price alleged to be paid in cash for alternative purchases. The CIT(A) deleted this disallowance, referencing judicial pronouncements that Section 40A(3) is not applicable when a net profit rate is applied. The CIT(A) concluded that extending Section 40A(3) to deemed purchases not recorded in the books was not justified, especially since the profit was already estimated at 6%.

4. Estimation of Profit at 6% of Purchase Price:
The Assessing Officer disallowed 6% of the purchase price shown on accommodation bills from Kothari Group. The CIT(A) upheld this disallowance, noting that the assessee failed to provide evidence of transportation or payment for the purchases. The estimation of 6% profit was considered justified based on the nature of the commodity and the lack of reliable purchase bills.

5. Addition on Account of Unexplained Investment in Purchases:
The Assessing Officer added the peak investment in unrecorded purchases as unexplained investment. The CIT(A) upheld this addition, noting that the assessee failed to provide details or evidence of the source of investment in alternative purchases. The addition was justified due to the lack of transparency and evidence from the assessee.

6. Set-off of 6% Profit against Addition for Unexplained Investment:
The CIT(A) allowed the set-off of 6% profit against the addition for unexplained investment. However, the Tribunal modified this order, directing the Assessing Officer to recompute the addition/disallowance made on purchases up to the date of working out unexplained investment. The set-off was to be allowed only for the profit on purchases up to the date of peak unexplained investment.

Conclusion:
The appeals filed by the Revenue were allowed in part, while the cross objections filed by the assessee were dismissed. The Tribunal upheld the reopening of assessment, rejection of books of account, and disallowance of 6% profit. The disallowance under Section 40A(3) was deleted, and the addition for unexplained investment was upheld with a modification to the set-off calculation.