2020 (10) TMI 1008 - AT - Income Tax

Reopening of assessment u/s 147 - validity of reasons recorded for issuing notice u/s 148 - Additions on the basis of fishing and roving enquiry - bogus purchases - whether AO made fishing enquiries about matters not related to the reasons recorded for issuing notice u/s 148 - HELD THAT - Since, the Ld. CIT (A) has held in principle that the AO has made fishing enquiry in the course of reassessment proceedings and allowed the legal ground raised by the assessee for statistical purposes and since the department has not challenged the findings of the Ld. CIT (A), in our considered view, the addition made by the AO except the addition made on account of bogus purchases which was the subject matter of reassessment, are not sustainable. Once, it is established that the AO has made fishing and roving enquiry, the additions made as a result of such enquiry cannot be confirmed. Hence, we allow the legal ground raised by the assessee and delete all the additions sustained by the Ld. CIT (A) except the addition made on account of bogus purchases. Bogus purchases - assessee had purchased the material from grey market and evaded the applicable taxes. Therefore, addition to the extent of profit earned from such transaction and the applicable taxes evaded by the assessee is required to be made. In CIT vs. Simit P. Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT has upheld the decision of the Tribunal and sustained the addition 12.5% of the total bogus purchases shown by the assessee holding that only profit element embedded in such purchases can be added to income of the assessee. - Decided partly in favour of assessee.

Issues Involved:
1. Jurisdiction of AO to make additions on issues not related to the reasons recorded for issuing notice u/s 148.
2. Addition on account of bogus purchases.
3. Disallowance of various expenses debited to Profit & Loss A/c.
4. Addition of borrowed funds as unexplained cash credits u/s 68.
5. Disallowance of interest expense u/s 40(a)(ia).

Issue-wise Detailed Analysis:

1. Jurisdiction of AO to Make Additions on Issues Not Related to Reasons Recorded for Issuing Notice u/s 148:
The assessee argued that the AO erred in making additions on matters not related to the reasons recorded for issuing notice u/s 148, thus traveling beyond the scope of reassessment. The CIT(A) agreed with this contention, citing the Hon’ble Delhi High Court in Ranbaxy Laboratories Ltd. vs. CIT, which states that Explanation 3 to section 147 does not empower the AO to make roving enquiries in respect of other matters. The Tribunal upheld this view, noting that the department did not appeal against the CIT(A)’s findings, thus the legal principle that the AO cannot make fishing enquiries during reassessment proceedings was confirmed.

2. Addition on Account of Bogus Purchases:
The AO added ?17,19,214/- as bogus purchases from M/s Prayan Trading Co. and M/s Sampark Steels, citing lack of supporting documents like VAT receipts, transport bills, etc. The CIT(A) upheld this addition. The Tribunal, however, acknowledged that while the purchases were not genuine, only the profit element from such purchases should be added to the income. Citing the Hon’ble Gujarat High Court in CIT vs. Simit P. Seth, the Tribunal directed the AO to add 12.5% of the total bogus purchases amounting to ?17,19,214/-.

3. Disallowance of Various Expenses Debited to Profit & Loss A/c:
The AO disallowed various expenses totaling ?2,85,180/- in ITA No. 214/MUM/2019 and ?6,20,512/- in ITA No. 215/MUM/2019, considering them unexplained u/s 69C. The CIT(A) confirmed these disallowances. However, the Tribunal, aligning with its finding on the jurisdiction issue, deleted these additions since they were not related to the reasons recorded for issuing notice u/s 148.

4. Addition of Borrowed Funds as Unexplained Cash Credits u/s 68:
The AO added ?6,50,000/- in ITA No. 214/MUM/2019 and ?9,50,000/- in ITA No. 215/MUM/2019 as unexplained cash credits u/s 68, which the CIT(A) sustained. The Tribunal, consistent with its findings on the jurisdiction issue, deleted these additions, as they were not related to the reasons recorded for issuing notice u/s 148.

5. Disallowance of Interest Expense u/s 40(a)(ia):
In ITA No. 215/MUM/2019, the AO disallowed ?5,36,251/- of interest expense u/s 40(a)(ia), which the CIT(A) upheld. The Tribunal deleted this disallowance, adhering to its stance on the jurisdiction issue.

Conclusion:
The Tribunal partly allowed the appeals, directing the AO to make an addition of 12.5% of the total amount of bogus purchases and deleting the remaining additions sustained by the CIT(A). The Tribunal emphasized that the AO cannot make fishing enquiries during reassessment proceedings and upheld the principle that additions should be confined to the reasons recorded for issuing notice u/s 148.

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