2021 (8) TMI 507 - AT - Income Tax

Bogus purchases - disallowance @3.55% of the alleged bogus purchases and working out average gross profit in erroneous manner - HELD THAT - We note that even after noting that the payments are in multiple of large amounts with no relationship whatsoever with the invoice value, Ld.CIT(A) has not made any further investigation - examination of the bank statement and the concerned party ledger account shows that payments have a pattern of huge payments periodically and AO also has noted that time lag between payment is not in accordance with what is there in other account. The examination of the financials of the assessee shows that against an issued capital of ₹ 5 crores, there is share premium account of 57.6 crores. The assessee company also has received ₹ 35.48 crores share premium during the year also. There are loan and advances without detail of ₹ 25.36 crores and sundry debtor of ₹ 24.45 crores. CIT(A) has all these documents before him. The circular movement needed to be examined, when the addition made by the AO was in term of peak credit. It was incumbent upon Ld.CIT(A) to examine this aspect and in our considered opinion, the Ld.CIT(A) has erred in over looking these aspects. In our considered opinion, the interest of the justice demands that the issue be remitted to the file of Ld.CIT(A) to examine the issue, we note that in light our observations hereinabove. Accordingly, the issue is remitted to Ld.CIT(A). Needless to add, assessee should be granted adequate opportunities. Reopening of assessment u/s 147 - HELD THAT - We have heard both the parties and perused the record. No separate argument was placed orally by Ld. Counsel of the assessee on this issue. We note Ld.CIT(A) has taken a correct view of the matter. On the facts and circumstances, it cannot be said that reassessment is a change of opinion here. It is trite that there has to be an opinion first only then there can be issue of change of opinion. Moreover it is also settled law that at the time of notice escapement need not be proved to the hilt. We agree with Ld.CIT(A) that AO had valid reason for reopening. The case laws referred by Ld.CIT(A) also germane. Appeals are allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of alleged bogus purchases.
2. Addition on account of peak credit of bogus purchases.
3. Addition of commission expenses on bogus purchases.
4. Validity of reassessment proceedings initiated under Section 147 of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Alleged Bogus Purchases:
The Assessee and Revenue both appealed against the CIT(A)'s decision regarding the disallowance of alleged bogus purchases. The Assessee argued that the CIT(A) erred in retaining the disallowance at 3.55% of the alleged bogus purchases and in the erroneous calculation of average gross profit. The Revenue contended that the CIT(A) wrongly restricted the addition to the average gross profit of three previous years instead of the peak credit of ?4,93,60,854/- as determined by the Assessing Officer (AO). The AO had noted that the Assessee failed to produce supporting documents for the purchases and had indulged in sham transactions. The CIT(A), however, found that the AO did not dispute the sales and concluded that corresponding purchases should not be doubted. The Tribunal observed that the CIT(A) should have conducted further investigation, given the payments were in large multiples and there was no direct evidence of money being routed back to the Assessee.

2. Addition on Account of Peak Credit of Bogus Purchases:
The AO added ?4,93,60,854/- to the Assessee's income based on the peak credit method, which estimates the highest credit balance in the accounts of bogus traders. The CIT(A) rejected this approach, opting instead to add the average gross profit of 3.55% over three years. The Tribunal noted that the CIT(A) should have examined the circular movement of funds and the pattern of large payments more thoroughly. The issue was remitted back to the CIT(A) for further examination and appropriate action.

3. Addition of Commission Expenses on Bogus Purchases:
The AO added ?18,01,043/- as unaccounted commission expenses, estimating that the Assessee paid 1% commission on the total bogus purchases of ?18,01,04,399/-. The CIT(A) deleted this addition, reasoning that since the purchases were not proven to be bogus, the commission expenses could not be added. The Tribunal found no infirmity in the CIT(A)'s decision to delete the commission expenses.

4. Validity of Reassessment Proceedings Initiated Under Section 147:
The Assessee challenged the validity of reassessment proceedings initiated under Section 147, arguing it was based on a change of opinion. The CIT(A) upheld the reassessment, noting that the AO had valid reasons to believe that income had escaped assessment based on information from the DGIT (Investigation). The Tribunal agreed, stating that the AO had sufficient cause to initiate reassessment and that it was not merely a change of opinion. The Tribunal upheld the CIT(A)'s decision on this matter.

Conclusion:
The Tribunal remitted the issue of bogus purchases and peak credit back to the CIT(A) for further investigation, while upholding the deletion of commission expenses and the validity of the reassessment proceedings. All appeals were allowed for statistical purposes.