2023 (9) TMI 613 - AT - Income Tax

Reopening of assessment - difference between purchases as recorded in the audited accounts and as the payment made to Indian Oil Corporation Limited (IOCL) - AO on the ground that the true value of the gross profit shown by the assessee was not verifiable, rejected the books of accounts of the assessee and estimated the income of the assessee at 4% - HELD THAT - A perusal of the assessment order shows that the assessee has successfully reconciled the difference in the purchase figure. This has resulted into no addition being even proposed by the AO much less made. As the ground on which the reopening has been done itself no more survives and no addition has resulted from the reasons on which the reopening has been done, obviously the reasons of the reopening itself has failed and, therefore, the reopening proceedings itself has failed and assessment proceeding is quashed. The arguments raised by the ld.Sr. DR that the Explanation 3 to Section 147 of the Act protects the assessment even though no addition has been made, does not stand to reason insofar as the wordings used in the said section is that, the AO may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148. Thus, the reasons on which the reopening as done must first survive and only when such reason survive then in the course of such assessment, the AO finds other issues which have come to his notice, liberty is granted to the AO to make addition on this additional issues also . When the primary issue fails, the reopening fails along with that. In the present case the reopening has been done because there was allegation of understatement in respect of the purchases. When no addition has been made on that count and that issue has already been reconciled by the assessee and accepted by the AO, the reopening itself failed. Consequential assessment will also fail. AO having rejected the books of accounts has not given any comparable case for the purpose of estimating the income of the assessee at 4%. Admittedly, the above method for estimation would be the assessee s own declaration for the earlier and subsequent assessments. Even that has not been attempted by the AO. In absence of a verifiable and authenticable comparable case, the assessment as has been done by the AO remains unsubstantiated and the same stands deleted. Even on this ground also the addition as made by the AO on merits, is hereby deleted. Appeal of assessee allowed.

Summary

Issues: Reopening of assessment and estimation of income

Reopening of Assessment:
The appeal was filed against the order of the ld. CIT(A)-2 for the assessment year 2011-2012, where the assessee challenged the reopening of the assessment and the estimation of income. The AO reopened the assessment due to a difference in purchases recorded in the audited accounts and payments made to Indian Oil Corporation Limited (IOCL). However, it was argued that the assessee successfully reconciled the purchase figures, and no addition was made in respect of purchases. The AO then questioned the correctness of the sale figure and estimated the income at 4% due to unverifiable gross profit. The Tribunal held that since the ground for reopening no longer existed as the purchases were reconciled and accepted, the reopening and consequential assessment were quashed.

Estimation of Income:
Regarding the estimation of income, the AO did not provide any comparable cases to justify estimating the income at 4%, higher than the accepted gross profit of 2.5%. The AO's decision was deemed arbitrary without evidence of comparable cases. The Sr. DR argued for upholding the estimation at 4% due to the nature of the assessee's business and lack of evidence for lower estimates. However, the Tribunal found the AO's estimation unsubstantiated and deleted the addition made on these grounds. The Tribunal emphasized the importance of verifiable and authenticable comparable cases for income estimation.

Conclusion:
The Tribunal ruled in favor of the assessee, allowing the appeal and deleting the additions made by the AO. The Tribunal highlighted that the reopening failed as the primary issue of understated purchases was reconciled, and the estimation of income lacked a basis in comparable cases. Therefore, the assessment proceedings were quashed, and the appeal of the assessee was allowed on both grounds.