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2017 (9) TMI 641 - AT - Income TaxReopening of assessment - assessee was beneficiary of hawala accommodation entries from entry providers by way of bogus purchase - reasons to believe - non independent application of mind by AO - borrowed satisfaction - Held that - Tangible and cogent incriminating material were received by the AO which clearly showed that the assessee was beneficiary of bogus purchase entries from bogus entry providers which formed the reason to believe by the AO that income has escaped assessment. The information so received by the AO has live link with reason to believe that income has escaped assessment. On these incriminating tangible material information, assessment was reopened. At this stage there has to be prima facie belief based on some tangible and material information about escapement of income and the same is not required to be proved to the hilt. See CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. ltd 2007 (5) TMI 197 - SUPREME Court In this case the sales have not been doubted it is settled law that when sales are not doubted, hundred percent disallowance for bogus purchase cannot be done. This proposition is supported from honourable jurisdictional High Court decision in the case of Nikunj Eximp Enterprises 2013 (1) TMI 88 - BOMBAY HIGH COURT . However the facts of the present case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expenses of the exchequer. In such circumstances of the case a 12.5% disallowance out of the bogus purchases would meet the end of justice, following the Hon ble Gujarat High Court s decision in the case of Simit P. Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT . Accordingly, direct that the disallowance in this case should be restricted to 12.5% of the bogus purchases. - Decided partly in favour of assessee.
Issues Involved:
1. Validity of the reassessment proceedings under section 143 r.w.s. 147. 2. Confirmation of disallowance of 25% of alleged bogus purchases. Detailed Analysis: 1. Validity of the Reassessment Proceedings: The first issue concerns the validity of the reassessment proceedings initiated by the Assessing Officer (A.O.) under section 143 r.w.s. 147 of the Income Tax Act, 1961. The assessee contended that the reassessment was invalid as it was based on borrowed satisfaction and initiated after a gap of four years. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the reassessment, observing that the original return was processed under section 143(1), which does not amount to an assessment. The CIT(A) referenced the Supreme Court's ruling in Assistant Commissioner of Income-tax v Rajesh Jhaveri Stock Brokers (P.) Ltd, which clarified that an intimation under section 143(1) is not an assessment. Therefore, the A.O. is empowered to initiate reassessment proceedings under section 147 if there is reason to believe that income has escaped assessment. The CIT(A) also cited several judicial precedents, including the Supreme Court's decision in Deputy Commissioner of Income-tax v. Zuari Estate Development & Investment Co, Ltd, which affirmed that reassessment can be initiated even if the original return was processed under section 143(1). Additionally, it was noted that the A.O. only needs to have a prima facie view at the time of issuing a notice under section 148, as supported by cases like Raymood Woollen Mills Ltd. v. ITO and CIT v. Nova Promoters & Finlease (P) Ltd. The CIT(A) concluded that the A.O. had valid information from the Sales Tax Department and the DGIT(Inv) indicating that the assessee was a beneficiary of bogus purchase entries. This information provided a tangible basis for the A.O. to believe that income had escaped assessment, thereby justifying the reassessment proceedings. 2. Confirmation of Disallowance of 25% of Alleged Bogus Purchases: The second issue pertains to the CIT(A)'s confirmation of a 25% disallowance of alleged bogus purchases. The A.O. had received information from the Sales Tax Department and the DGIT(Inv) that the assessee had obtained accommodation entries from hawala dealers, who issued bogus purchase bills without actual delivery of goods. During the assessment proceedings, the A.O. conducted an enquiry and found discrepancies in the bills and delivery challans provided by the alleged hawala dealer, M/s. Arun Paper & Iron Traders. The A.O. noted that the books of accounts were claimed to be damaged, yet the dealer produced sale bills and delivery challans, raising doubts about their genuineness. The assessee failed to provide complete details regarding the transportation of goods, further supporting the conclusion that the purchases were not genuine. The CIT(A) held that since the sales were not doubted, the assessee must have made the purchases from other sources in the grey market. Following the Hon’ble Gujarat High Court’s decision, the CIT(A) directed that the disallowance be restricted to 25% of the bogus purchases. Upon appeal to the ITAT, the Tribunal upheld the validity of the reassessment proceedings, noting that the A.O. had tangible and cogent material indicating that the assessee was a beneficiary of bogus purchase entries. The ITAT referenced the Supreme Court's decision in CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, which emphasized that at the initiation stage, the A.O. only needs a reason to believe that income has escaped assessment, not conclusive proof. On the merits of the addition, the ITAT found overwhelming evidence indicating that the purchases were bogus. However, since the sales were not doubted, the ITAT held that a 100% disallowance was not appropriate. Instead, following the Hon’ble Gujarat High Court’s decision in the case of Simit P. Seth, the ITAT directed that the disallowance be restricted to 12.5% of the bogus purchases, considering the savings the assessee made by purchasing from the grey market. Conclusion: The appeals filed by the assessee were partly allowed. The ITAT upheld the validity of the reassessment proceedings and directed that the disallowance of bogus purchases be restricted to 12.5%, instead of the 25% confirmed by the CIT(A).
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