2017 (9) TMI 426 - AT - Income Tax

ITAT upholds reassessment under Income Tax Act, limits disallowance to 12.5% of bogus purchases

The ITAT partly allowed the appeals, upholding the validity of the reassessment proceedings under section 147 of the Income Tax Act. The disallowance was ... Addition on account of unexplained expenditure - CIT(A) confirmed disallowance of 25% of the alleged bogus purchases -Information received from the Sales Tax Department and also from the office of the DGIT(Inv), Mumbai that assessee is beneficiary of accomodation entries from bogus hawala dealers - Held That:- the facts of the present case indicate that assessee has made purchase from the grey market which gives the assessee savings on account of non-payment of tax and others at the expenses of the exchequer. - a 12.5% disallowance out of the bogus purchases would meet the end of justice - Decision in the case of Simit P. Sheth [2013 (10) TMI 1028 - GUJARAT HIGH COURT] followed - Decided partly in favor of assessee. Issues Involved:1. Validity of the reassessment proceedings initiated under section 147 of the Income Tax Act.2. Confirmation of the disallowance of 25% of the alleged bogus purchases.Issue-wise Detailed Analysis:1. Validity of the reassessment proceedings initiated under section 147 of the Income Tax Act:The first issue raised pertains to the validity of the reassessment proceedings initiated under section 147 of the Income Tax Act. The assessee contended that the Commissioner of Income Tax (Appeals) erred in passing the order under section 143 read with section 147, rendering the whole assessment bad in law, especially after a gap of four years and based on borrowed satisfaction.The Assessing Officer (AO) initiated action under section 147 based on information from the Sales Tax Department and the office of the DGIT(Inv), Mumbai, indicating that the assessee was a beneficiary of accommodation bills from bogus hawala dealers. The AO noted discrepancies in the documents provided by the hawala dealer, M/s. Arun Paper & Iron Traders, and concluded that the purchases were not genuine.The CIT(A) upheld the reopening of the assessment, citing that the original return was processed under section 143(1), which does not constitute an assessment. The CIT(A) referenced the Supreme Court's decision in Assistant Commissioner of Income-tax v Rajesh Jhaveri Stock Brokers (P.) Ltd, which clarified that the AO is free to initiate proceedings under section 147 if the conditions are fulfilled, even if the original return was processed under section 143(1).The CIT(A) further noted that the AO only needs to possess a prima facie view at the time of issuing a notice under section 148, supported by decisions such as Raymood Woollen Mills Ltd. v. ITO and CIT v. Nova Promoters & Finlease (P) Ltd. The CIT(A) concluded that the AO had valid information leading to a reason to believe that income had escaped assessment, thus justifying the reopening.The ITAT upheld the CIT(A)'s decision, emphasizing that tangible and cogent incriminating material received by the AO formed a live link with the reason to believe that income had escaped assessment. The ITAT referenced the Supreme Court's decision in CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, which stated that at the initiation stage, what is required is a reason to believe, not the established fact of escapement of income.2. Confirmation of the disallowance of 25% of the alleged bogus purchases:The second issue raised concerns the confirmation of the disallowance of 25% of the alleged bogus purchases. The AO, after independent inquiries, concluded that the assessee had not purchased goods from the hawala party and had only taken accommodation entries to inflate expenses and reduce profitability.The CIT(A) held that since the sales were not doubted, the assessee must have made purchases from other sources in the grey market. Therefore, the CIT(A) directed that the disallowance be restricted to 25% of the bogus purchases, following the Hon'ble Gujarat High Court's decision.The ITAT, upon reviewing the facts, found overwhelming evidence indicating that the impugned purchases were bogus. However, since the sales were not doubted, it was settled law that 100% disallowance for bogus purchases could not be done. The ITAT referenced the Hon'ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises, which supported the proposition that when sales are not doubted, 100% disallowance is not appropriate.Considering the facts and circumstances, the ITAT concluded that a 12.5% disallowance out of the bogus purchases would meet the ends of justice, following the Hon'ble Gujarat High Court’s decision in the case of Simit P. Seth. Consequently, the ITAT directed that the disallowance be restricted to 12.5% of the bogus purchases.Conclusion:The appeals filed by the assessee were partly allowed. The ITAT upheld the validity of the reassessment proceedings under section 147 and directed that the disallowance be restricted to 12.5% of the bogus purchases. The order was pronounced in the open court on 17/08/2017.