2025 (1) TMI 1338 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - AO has accepted the sales recorded by the assessee. The assessee could not have affected sales without purchasing the goods. The assessee could match the sale with corresponding purchases. Hence we are of the view that the disallowance of entire amount of purchases is not justified As held in M/s Mohammad Haji Adam Co 2019 (2) TMI 1632 - BOMBAY HIGH COURT the addition should be limited to the extent of bringing the GP rate on alleged bogus purchases to the same rate of other genuine purchases. In the instant case the assessee has shown that the GP rate on sale of alleged bogus purchases is more than the GP rate of other purchases. Hence no addition by way of disallowance of alleged bogus purchases is warranted in the facts of the present case. Decided in favour of assessee.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

1. The validity of the reopening of assessments for the Assessment Years 2011-12 and 2012-13.

2. The legitimacy of the disallowance of purchases, which were held as bogus by the Assessing Officer (AO).

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Reopening of Assessments

The reopening of assessments was initiated by the AO based on information from the Investigation Wing, which indicated that the assessee had engaged in transactions involving bogus purchase bills from certain suppliers. The legal framework for reopening assessments is governed by Section 148 of the Income Tax Act, which allows the AO to reassess income if there is reason to believe that income has escaped assessment.

The Court examined whether the AO had sufficient grounds to reopen the assessments. The assessee argued that the AO relied solely on the Investigation Wing's report without conducting an independent inquiry or providing the assessee with the materials on which the reopening was based. The Court noted that the AO must undertake an independent inquiry to substantiate the claims of bogus transactions, especially when suppliers have confirmed the transactions.

2. Legitimacy of Disallowance of Purchases

The AO disallowed the purchases, alleging them to be bogus, based on the Investigation Wing's report and the general statement of Shri Rajendra Jain, who later retracted his statement. The AO relied on precedents from the Supreme Court and the Gujarat High Court, which supported disallowance in cases of bogus purchases.

The assessee countered by presenting evidence of genuine transactions, including purchase invoices, payment details, stock registers, and confirmations from suppliers. The assessee also demonstrated that some purchases were exported, which involved customs clearance and banking channels, indicating genuine transactions.

The Court evaluated the AO's reliance on the Investigation Wing's report and noted that no independent verification was conducted. The suppliers confirmed the transactions, and the assessee provided evidence of matching purchases with sales. The Court emphasized that the AO must disprove the genuineness of purchases through independent inquiry, especially when the sales have been accepted.

SIGNIFICANT HOLDINGS

The Court held that the disallowance of the entire amount of alleged bogus purchases was not justified. The significant legal reasoning included:

1. The Court observed, "The AO did not find any defect or deficiency in the documents furnished by the assessee to prove the purchases. The report given by the Investigation Wing is a generalized report."

2. The Court noted, "The AO has accepted the sales recorded by the assessee. The assessee could not have affected sales without purchasing the goods."

3. The Court referenced the Bombay High Court's decision in M/s Mohammad Haji Adam & Co, which limited additions to the extent of bringing the GP rate on alleged bogus purchases to the same rate as other genuine purchases.

4. The Court concluded that since the gross profit rate on the alleged bogus purchases was higher than on other purchases, no addition was warranted.

5. The Court set aside the orders of the Ld.CIT(A) and directed the AO to delete the additions made for alleged bogus purchases for both assessment years.

In conclusion, the Court allowed the appeals of the assessee, emphasizing the necessity of independent verification by the AO and the inadequacy of relying solely on generalized reports from the Investigation Wing. The judgment underscores the principle that disallowance of purchases requires concrete evidence beyond mere suspicion or general statements.

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