2017 (12) TMI 1000 - AT - Income Tax

Tribunal upholds Assessing Officer's decision on bogus purchases, quashes CIT's orders.

The Tribunal held that the Assessing Officer's orders for the assessment years 2010-11 and 2011-12 were not erroneous or prejudicial to the revenue. The ... Revision u/s 263 - AO had not examined the addition to be made in the light of the provision of section 69C for bogus purchases - Held that:- In the present case, the assessee has shown the expenditure on purchases in the books of accounts and explained the source of payment through banking channels. In such circumstances, there was no basis to say that applicability of the provisions of sec.69C of the Act were not enquired into by the AO while concluding the assessment. The Hon’ble Allahabad High Court in the case of Pr. CIT vs Ram Shankar Yadav (2017 (8) TMI 858 - ALLAHABAD HIGH COURT) held that provisions of Sec.69C of the Act are not mandatory and the AO has discretion to add or not to add unexplained expenditure based on sound judicial principles. In the impugned order, the CIT has observed that the AO ought to have made enquiries from the alleged bogus purchase bill/entry providers and held that purchases were bogus. The AO has already held that the purchases were bogus and the only question before him was as to whether the entire purchases ought to be added as income or only a portion of the purchases towards inflated cost. CIT has made reference to Explanation-2 to Sec.263 of the Act introduced by the Finance Act, 2015. Explanattion-2 so introduced sets out cases in which order of the AO can be deemed as erroneous. The said explanation does not dispense with compliance or existence of (i) there being no enquiry made by the AO; (ii) the AO’s conclusion being contrary to CBDT Circular or (iii) against decision of Jurisdictional High Court or Supreme Court. In the present case the CIT in the impugned order has not brought facts to show the existence of absence of enquiry especially when the AO has already concluded that the purchases by the assessee from four parties mentioned by the DGIT(Investigation) Mumbai in its report were bogus. Thus the orders of the AO were not erroneous and prejudicial to the interest of the revenue for failure to make enquiry on the applicability of Sec.69C of the Act. We, therefore, quash the orders u/s 263 of the Act and allow the appeals of the assessee. Issues Involved:1. Legitimacy of the purchases claimed by the assessee.2. Application of Section 69C of the Income Tax Act, 1961.3. Whether the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of the revenue.4. Validity of the CIT's invocation of Section 263 of the Income Tax Act, 1961.Detailed Analysis:1. Legitimacy of the Purchases Claimed by the Assessee:The assessee, a company engaged in manufacturing and supplying alloy steel, had its assessments for A.Y. 2010-11 and 2011-12 reopened under Section 147 based on information from the DGIT (Investigation) Mumbai, indicating bogus purchase bills. For A.Y. 2010-11, purchases from M/s. Divya Enterprise and M/s. Kamal Traders totaling Rs. 33,30,912 were considered bogus. For A.Y. 2011-12, purchases from M/s. Tushar Enterprise, Arihant Sales Corporation, Divya Enterprise, and Kamal Traders totaling Rs. 72,84,304 were deemed bogus. The AO, after examining the sales and stock registers, concluded that the sales were genuine and estimated that 3% of the bogus purchases should be treated as income, adding Rs. 1,09,420 for A.Y. 2010-11 and Rs. 2,38,633 for A.Y. 2011-12.2. Application of Section 69C of the Income Tax Act, 1961:The CIT argued that the AO's order was erroneous for not examining the addition in light of Section 69C, which deals with unexplained expenditure. The CIT contended that once purchases are held bogus, the entire amount should be added as unexplained expenditure. However, the assessee countered that the source of payments was explained through account payee cheques and recorded in the books of accounts, thus Section 69C was not applicable. The assessee cited various judicial precedents supporting the view that only the profit element in such purchases should be added, not the entire amount.3. Whether the AO's Order was Erroneous and Prejudicial to the Interest of the Revenue:The CIT invoked Section 263, asserting that the AO's failure to consider Section 69C rendered the order erroneous and prejudicial to the revenue. The assessee argued that the AO's view of adding only 3% of the bogus purchases was a possible and legally sustainable view. The Tribunal noted that the AO made detailed inquiries, examined the stock registers, and found the sales genuine. The AO's decision to add only the profit element was based on sound judicial principles and was not unsustainable in law.4. Validity of the CIT's Invocation of Section 263:The Tribunal examined whether the CIT's invocation of Section 263 was justified. The CIT relied on Explanation 2 to Section 263, introduced by the Finance Act, 2015, which deems an order erroneous if it is passed without necessary inquiries or verification. However, the Tribunal found that the AO had indeed made inquiries and that the CIT's order did not bring out facts showing the absence of inquiry. The Tribunal cited decisions from the ITAT and High Courts, supporting the view that Explanation 2 does not override the requirement of showing that the AO's order was erroneous and prejudicial to the revenue.Conclusion:The Tribunal concluded that the AO's orders for A.Y. 2010-11 and 2011-12 were not erroneous or prejudicial to the interest of the revenue. The AO had made necessary inquiries and adopted a legally sustainable view by adding only the profit element of the bogus purchases. Therefore, the Tribunal quashed the CIT's orders under Section 263 and allowed the appeals of the assessee. The appeals were allowed, and the AO's assessment orders were upheld.