2021 (10) TMI 606 - AT - Income Tax

Reopening of assessment u/s 147 - bogus purchases - Estimation of income - HELD THAT - We find that at the stage of issue of notice, the A.O. was not sure whether the assessee availed the alleged accommodation entry of unsecured loan or of alleged bogus purchases. There has to be a reasonable material before the AO on the basis of which a reasonable person can make requisite belief. The A.O. issued notice under section 148 in absence of reasonable material to form a reasonable belief that income has escaped tax. Under the circumstances, the action of the A.O. of reopening assessment in exercise of the power under section 148 of the Act cannot be sustained. Accordingly, we quash the re-assessment proceeding initiated in the case of the assessee. As we have quashed the reassessment, therefore, adjudication on the additions have become academic. In the result the Ground No. 1 of assessee s appeal is allowed.

Summary

Issues Involved:
1. Validity of reopening under Section 147 of the Income Tax Act.
2. Additions on account of bogus purchases.
3. Estimation of income from alleged bogus purchases.

Detailed Analysis:

1. Validity of Reopening under Section 147 of the Income Tax Act:
The assessee challenged the reopening of the assessment under Section 147, arguing that the conditions for initiating reassessment proceedings were not fulfilled. The reopening was based on information received from the DIT (Inv)-II, Mumbai, which indicated that the assessee was a beneficiary of accommodation entries from benami concerns managed by Bhanwarlal Jain. The assessee contended that the Assessing Officer (AO) did not conduct an independent inquiry and relied solely on third-party information. The AO failed to apply his own mind and did not provide tangible material to substantiate the reopening. The CIT(A) upheld the validity of the reopening, stating that the AO had reason to believe that income had escaped assessment based on the report from the Investigation Wing.

2. Additions on Account of Bogus Purchases:
The Revenue argued that the CIT(A) erred in deleting the additions made on account of bogus purchases. The AO had added the entire amount of ?1.87 crores as income, claiming that the purchases were inflated through bogus bills from non-existent entities like M/s. Kothari & Co. The assessee provided evidence such as purchase bills, stock registers, and bank statements to prove the genuineness of the transactions. The CIT(A) restricted the disallowance to 12.5% of the bogus purchases, following judicial precedents and considering the overall facts and submissions. The CIT(A) noted that the assessee maintained proper books of accounts and that the sales were accepted, thus the purchases could not be entirely doubted.

3. Estimation of Income from Alleged Bogus Purchases:
The Revenue contended that the CIT(A) erred in estimating the income at 12.5% of the bogus purchases without appreciating the AO's findings. The AO had disallowed the entire amount of bogus purchases, but the CIT(A) reduced it to 12.5%, citing various case laws and the fact that the assessee's gross profit rate was very low. The CIT(A) referred to the decision in Mayank Diamonds Pvt. Ltd., where the disallowance was sustained at a gross profit rate of 5%, but in the present case, the CIT(A) considered 12.5% reasonable due to the low gross profit rate shown by the assessee.

Conclusion:
The Tribunal quashed the reassessment proceedings, holding that the reopening was invalid as the AO did not have a live link between the material and the formation of belief regarding the escapement of income. The Tribunal emphasized that the AO's action was based on borrowed satisfaction from third-party information without independent verification. Consequently, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, rendering the adjudication on merits academic. The Tribunal also quashed the assessment orders in similar cases involving the same issues, following the same reasoning.