2022 (7) TMI 1260 - AT - Income Tax

Reopening of assessment u/s 147 - reasons recorded by the learned assessing officer shows that there was a tax evasion petition received by the income tax Officer - HELD THAT - As central bureau of investigation has investigated and come to the conclusion that the assessee s books of accounts are manipulated and fabricated to suit the personal purposes and diversion of funds for the personal purposes of the chief promoter of Reliable group of companies Mr. Nemchand Gala. There were also finding with respect to the investigation made by the Department of Central investigation bureau stating that all books of accounts maintained by the assessee are fabricated and are not reliable, as not maintained day to day. There was also an allegation of diversion of funds of the banks and the company used for the personal purpose of the directors. On the receipt of this letter from the ITO 1 (2) 4), Mumbai, AO found that assessee has not filed return of income for assessment year 2009 10 and therefore he has reason to believe that income has escaped assessment. No infirmity in the order of the learned CIT An in upholding the validity of the reopening of the assessment. Accordingly, ground number 1 of the appeal of the assessee is dismissed. Estimation of income - bogus purchases - HELD THAT - As it is a case of the circular trading entered into by the assessee along with its related parties where there is no evidence whether the rates charged by the parties in the circular rate were at market rate and further when the goods are sold without any physical movement of the goods, the sales and the purchases are not at all reliable. The transactions are also rooted through journal entries. The quantity of goods involved in the circular trading is also not ascertained that how much is involved in circular trading and what is the actual sale and purchase of the assessee. The assessee has purchased 2,44,29,155 KG and sold the same quantity and there is no opening stock and closing stock during the year. Therefore, the explanation of the assessee becomes unreliable with respect to the gross profit shown by the assessee. No infirmity in the order of the CIT A in upholding disallowance of expenditure estimating income at the rate of 12.5% of such bogus purchases. Accordingly, ground number 3 of the appeal is dismissed. Addition u/s 68 - HELD THAT - Merely because a person is a promoter/director of the group, the genuineness of the transaction and creditworthiness of that person requires to be proved independently. Even before us, no evidence is produced except the copy of reply of the assessee dated 28/9/2017 wherein the bank statement of Mekan Gala for the month of March 2009 was produced. CIT A also did not care to identify whether the amount of credit is in the name of Mr. Nemchand J gala or Mekan J Gala, whether these are different persons or one person, and if they are different, what is the relationship. Thus, assessee has failed to show the genuineness of the transaction with respect to this party also as far as the credit received during the year in that account are concerned. The findings of the learned CIT A cannot be sustained. Accordingly, the amount credited in the account of global Impex paper private limited and Mr. NJ Gala are required to be added u/s 68 of the income tax act as assessee has failed to prove the genuineness of the transaction. In view of this ground number, 3 and 4 of the appeal of the learned assessing officer are allowed.

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income-tax Act, 1961.
2. Confirmation of the ex parte order passed by the Assessing Officer.
3. Disallowance of expenditure by adopting an estimated Gross Profit (G.P.) Ratio of 12.5% of purchases.
4. Deletion of addition made under Section 68 of the Income-tax Act on account of unproved unsecured loans.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The assessee challenged the reopening of the assessment, arguing that it was based on borrowed satisfaction from a tax evasion petition by the Central Bureau of Investigation (CBI) and that no independent inquiry was conducted by the Assessing Officer (AO). The Tribunal upheld the reopening, noting that the assessee had not filed its return of income and the AO had valid reasons to believe that income had escaped assessment based on tangible material from the CBI's investigation. The Tribunal emphasized that the adequacy of reasons for reopening cannot be tested at the notice stage and that the AO had applied his mind to the information received.

2. Confirmation of the Ex Parte Order:
The assessee did not press this ground of appeal, and no arguments were advanced. Consequently, this ground was dismissed by the Tribunal.

3. Disallowance of Expenditure by Adopting Estimated G.P. Ratio:
The AO disallowed various expenditures totaling ?94.89 crores, citing the lack of supporting documentation and the circular nature of transactions with related parties. The CIT(A) confirmed the disallowance of ?11.29 crores, adopting an estimated G.P. ratio of 12.5% on the purchases. The Tribunal upheld this decision, noting that the transactions were not settled through banking channels, lacked evidence of transportation, and involved circular trading. The Tribunal found the explanation of the assessee unreliable and confirmed the disallowance based on the estimated G.P. ratio.

4. Deletion of Addition under Section 68:
The AO had added ?11.83 crores as unexplained loan liabilities under Section 68. The CIT(A) deleted the addition, stating that the secured loan from UCO Bank could not be added under Section 68 and that the remaining unsecured loans were either opening balances or had minimal movements. The Tribunal upheld the deletion of the secured loan but found fault with the deletion of ?3.58 crores from Global Paper Impex Pvt. Ltd. and ?8.12 lakhs from Mr. Nemchand J. Gala. The Tribunal noted that the assessee failed to prove the genuineness and creditworthiness of these transactions, especially given the circular trading nature of transactions with related parties. Consequently, the Tribunal reinstated these additions under Section 68.

Conclusion:
The Tribunal dismissed the appeal of the assessee, confirming the validity of the reopening of the assessment and the disallowance of expenditure. The Tribunal partly allowed the appeal of the Revenue, reinstating the additions under Section 68 for unexplained loan liabilities from related parties. The order was pronounced in the open court on 26.07.2022.

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