Reassessment on third-party information and estimation of profit element on bogus purchases where genuineness is not proved.

Reassessment under sections 147 and 148 is valid where the original return was only processed under section 143(1) and tangible material from the Investigation Wing, based on Sales Tax information, indicates escapement of income. Where the assessee fails to prove the genuineness of purchases, does not produce suppliers, and supporting evidence of delivery or transport is not satisfactory, the purchase claim may be treated as non-genuine. In such cases, if sales are not disturbed, only the profit element embedded in the disputed purchases may be estimated for taxation, with due credit for declared gross profit after verification.

---

---

Issues: (i) Whether reassessment under section 147 of the Income-tax Act, 1961 based on information from the Sales Tax / Investigation wing was valid, and (ii) whether addition by estimating profit at 12.5% on alleged bogus purchases was justified.

Issue (i): Whether reassessment under section 147 of the Income-tax Act, 1961 based on information from the Sales Tax / Investigation wing was valid

Analysis: The return had originally been processed only under section 143(1), so no opinion had been formed earlier and the doctrine of change of opinion did not apply. The reassessment was initiated within four years on the basis of tangible material received from the Investigation Wing, which in turn was founded on information from the Sales Tax authorities showing that the assessee was a beneficiary of accommodation entries from multiple entities that had admitted issuing bogus bills without delivery of goods. Such material was held sufficient to form the requisite belief that income had escaped assessment.

Conclusion: Reopening under sections 147 and 148 was held to be valid and legal, against the assessee.

Issue (ii): Whether addition by estimating profit at 12.5% on alleged bogus purchases was justified

Analysis: The assessee could not discharge the primary burden of proving genuineness of the purchases. The suppliers were not produced, most notices under section 133(6) remained unanswered, and supporting evidence of movement of goods, transport, and delivery was not furnished to the satisfaction of the authorities. At the same time, the sales were not disturbed and the purchases had to be accepted to the extent necessary for turnover, so the proper course was estimation of the profit element embedded in the disputed purchases. In the facts of the case, 12.5% was treated as a fair and rational estimate.

Conclusion: The addition was sustained in principle at 12.5% of the alleged bogus purchases, with credit for the declared gross profit to be given after verification, partly in favour of the assessee.

Final Conclusion: The reassessment was upheld, but the disallowance on bogus purchases was sustained only to the extent of estimated profit element and after granting permissible gross profit credit, resulting in partial relief to the assessee.

Ratio Decidendi: Where reassessment is founded on tangible third-party information suggesting escapement of income and the assessee fails to prove genuineness of purchases, the reassessment is valid and only the profit element embedded in bogus purchases may be estimated and brought to tax.

---