ITAT Validates Assessment Reopening, Limits Disallowance to 12.5%

The ITAT upheld the validity of the reopening of the assessment under Section 147 of the Income Tax Act, dismissing the assessee's challenge on the ground of borrowed satisfaction. Regarding the disallowance of alleged bogus purchases, the ITAT directed that the disallowance be restricted to 12.5% of the purchases, partly allowing the appeals filed by the assessee.

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Issues Involved:
1. Validity of the reopening of assessment under Section 147 of the Income Tax Act.
2. Confirmation of disallowance of 25% of the alleged bogus purchases.

Issue-wise Detailed Analysis:

1. Validity of the reopening of assessment under Section 147 of the Income Tax Act:

The first issue raised by the assessee is whether the Commissioner of Income Tax (Appeals) erred in passing the order under Section 143 read with Section 147, thereby rendering the whole assessment bad in law, particularly after a gap of four years and based on borrowed satisfaction.

The Assessing Officer (AO) received information from the Sales Tax Department and the office of the DGIT(Inv), Mumbai, indicating that the assessee was a beneficiary of accommodation bills of purchases from certain bogus hawala dealers, specifically M/s. Arun Paper & Iron Traders. The AO initiated action under Section 147 of the Act based on this information.

The AO's enquiry revealed discrepancies in the bills and delivery challans submitted by the assessee and M/s. Arun Paper & Iron Traders, indicating that the documents were non-genuine. Notices issued under Section 142(1) and 133(6) were either partially responded to or not responded to at all by the assessee. Consequently, the AO added back the entire amount of Rs. 5,51,165/- to the total income under Section 69C, treating the purchases as bogus.

The CIT(A) upheld the reopening of the assessment, citing the Supreme Court's decision in ACIT vs. Rajesh Jhaveri Stock Brokers (P.) Ltd and DCIT vs. Zuari Estate Development & Investment Co. Ltd, which held that reassessment can be resorted to if no assessment is made under Section 143(1). The CIT(A) also referenced the Gujarat High Court's decision in Peass Industrial Engineers Pvt Ltd vs. DCIT, which supported the action taken by the AO based on information received from the DGIT(Inv).

The ITAT found that the AO had tangible and cogent incriminating material indicating that the assessee was a beneficiary of bogus purchase entries, forming a reasonable belief that income had escaped assessment. The ITAT referred to the Supreme Court's decision in CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, which stated that at the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief.

Based on the above, the ITAT upheld the validity of the reopening of the assessment, dismissing the assessee's challenge on the ground of borrowed satisfaction.

2. Confirmation of disallowance of 25% of the alleged bogus purchases:

The second issue raised by the assessee is whether the CIT(A) erred in confirming the disallowance of 25% of the alleged bogus purchases.

The CIT(A) held that since the sales were not doubted by the AO, the assessee must have made purchases from some other sources in the grey market. Therefore, following the Gujarat High Court's decision, the CIT(A) restricted the disallowance to 25% of the bogus purchases.

The ITAT noted that overwhelming evidence indicated that the impugned purchases were bogus, with documents regarding the actual movement of goods found to be dubious. The ITAT referred to the Gujarat High Court's decision in N. K. Industries vs. Dy. CIT, where 100% of the bogus purchases were added to the assessee's income, and the Supreme Court dismissed the special leave petition against this order.

However, since the sales were not doubted, the ITAT held that 100% disallowance for bogus purchases could not be done, following the jurisdictional High Court's decision in the case of Nikunj Eximp Enterprises. The ITAT concluded that the assessee made purchases from the grey market, saving on account of non-payment of tax and other expenses. Therefore, a 12.5% disallowance out of the bogus purchases would meet the ends of justice, following the Gujarat High Court's decision in Simit P. Seth.

Accordingly, the ITAT directed that the disallowance be restricted to 12.5% of the bogus purchases, partly allowing the appeals filed by the assessee.

Order pronounced in the open court on 17/08/2017.

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