2021 (6) TMI 116 - AT - Income Tax

Revision u/s 263 - addition u/s 68 - GP estimation - HELD THAT - As assessee has furnished necessary documents with respect to parties from whom it has realized the amount against the sales made to them. In other words the burden imposed i.e. identity, genuineness of transactions and parties credit worthiness upon the assessee, for invoking the provision of section 68 were duly complied with. Accordingly, the AO has not treated the amount of sales as unexplained cash credit under section 68 - AO has taken a conscious view which was one of the possible view by accepting the purchases and sales as genuine. Thus CIT cannot substitute the possible view taken by the AO Even for the sake of adjudication, we assume that the purchases viz a viz sales are bogus in the given facts and circumstances, then also the entire amount of sales cannot be treated as unexplained cash credit of the assessee. It is because the assessee has not shown the gross amount of sales as agricultural income rather it has shown only the difference between the purchase and sales whereas the original party namely M/s Greenwell Orchard has shown the entire amount of sale as agriculture income without showing any expenses. Accordingly the AO in the assessment of M/s Greenwell Orchard has allocated 20% of the sales value as expenses which was subsequently reduced by the learned CIT (A) to the tune of 5% of the sales value. Assessment framed in the case of M/s Greenwell Orchard under section 143(3) read with section 147 of the Act has been set aside by the learned Pr. CIT under section 263 on the reasoning that the entire amount of sale proceeds is unaccounted income of the assessee. From all these above details, it is revealed that it was the Greenwell Orchard which was engaged in generating/converting its unaccounted income into agriculture income wherein the assessee was only one of the conduit - entire amount of sales cannot be taxed in the hands of the assessee as unexplained cash credit - the amount of income generated by the assessee, in the capacity of acting as a conduit, i.e. commission on such entries provided by it which may be brought to tax. Thus the entire amount of sales cannot be treated as income of the assessee. Hence, the order of the l d. CIT under section 263 of the Act is not sustainable - Decided in favour of assessee.

Issues Involved:
1. Legitimacy of invoking section 263 by the Principal Commissioner of Income Tax (Pr. CIT).
2. Validity of treating the purchase of standing teakwood timber as bogus.
3. Assessment of unexplained credits under section 68 of the Income Tax Act.
4. Adequacy of the Assessing Officer’s (AO) inquiry and application of mind.
5. Acceptance of trading transactions by the AO.
6. Consistency of treatment of transactions between the assessee and the seller.
7. Legitimacy of reopening the assessment based on previously considered reasons.
8. Impact of the seller’s voluntary inclusion of income from the alleged sale.

Detailed Analysis:

1. Legitimacy of invoking section 263 by the Principal Commissioner of Income Tax (Pr. CIT):
The Pr. CIT invoked section 263 of the Act, contending that the AO’s assessment was erroneous and prejudicial to the interest of the Revenue. The Pr. CIT argued that the AO should have treated the amount credited in the books for the payment made to M/s Greenwell Orchard against bogus purchases as unexplained cash credit under section 68, rather than merely enhancing the Gross Profit (GP).

2. Validity of treating the purchase of standing teakwood timber as bogus:
The Pr. CIT based the claim of bogus purchases on the statement of a partner from M/s Greenwell Orchard during a survey, which suggested that the purchase transactions were not genuine. However, the assessee countered by providing evidence of the transactions, including balance sheets, tax audit reports, bank statements, and confirmations from the parties involved.

3. Assessment of unexplained credits under section 68 of the Income Tax Act:
The AO initially proposed to treat the sales amount as unexplained cash credit, but ultimately only enhanced the GP rate due to the low GP declared by the assessee. The Pr. CIT argued that the AO should have treated the entire sales amount as unexplained cash credit under section 68, given the purchases were deemed bogus.

4. Adequacy of the Assessing Officer’s (AO) inquiry and application of mind:
The Pr. CIT criticized the AO for not conducting necessary inquiries and for reaching a conclusion that contradicted the initial findings. The AO had accepted the transactions as genuine after detailed inquiries, including examining the books and confirming transactions with the parties involved.

5. Acceptance of trading transactions by the AO:
The AO, after conducting inquiries, accepted the trading transactions and enhanced the GP from 2.34% to 8%. The assessee argued that the AO’s acceptance of the transactions as genuine and the subsequent enhancement of GP was a valid exercise of discretion.

6. Consistency of treatment of transactions between the assessee and the seller:
The assessee contended that since the sales by M/s Greenwell Orchard and the purchases by the assessee were accepted as genuine in their respective assessments, the transactions should not be considered bogus in the assessee’s case.

7. Legitimacy of reopening the assessment based on previously considered reasons:
The assessee argued that the reopening of the assessment was based on reasons already considered in the original assessment, and thus, it was merely a substitution of opinion, which cannot be considered erroneous for invoking revision proceedings under section 263.

8. Impact of the seller’s voluntary inclusion of income from the alleged sale:
The Pr. CIT noted that M/s Greenwell Orchard had voluntarily included the income from the alleged sale as unaccounted income for A.Y. 2013-14, which was used to support the claim of bogus purchases by the assessee. However, the assessee argued that this inclusion pertained to a different assessment year and should not affect the current assessment year under consideration.

Conclusion:
The Tribunal concluded that the AO had taken a possible view based on the evidence provided, and the Pr. CIT could not substitute this view with his own. The Tribunal noted that the AO had conducted necessary inquiries and accepted the transactions as genuine, which was a valid exercise of discretion. The Tribunal also highlighted that even if the transactions were assumed to be bogus, the entire sales amount could not be treated as unexplained cash credit, and only the income generated by the assessee as a conduit could be taxed. Therefore, the Tribunal quashed the order of the Pr. CIT under section 263 and allowed the appeal of the assessee.

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