2018 (4) TMI 625 - AT - Income Tax

Tribunal reduces penalty on bogus purchases, validates reassessment based on fresh info.

The Tribunal upheld the reopening of the assessment due to tangible incriminating material showing the assessee's involvement in bogus purchase entries. ... Reopening of assessment - Addition of 25% on account of bogus purchase - reason to believe - Held that:- Tangible and cogent incriminating material were received by the AO which clearly showed that the assessee was beneficiary of bogus purchase entries from bogus entry providers which formed the reason to believe by the AO that income has escaped assessment. The information so received by the AO has live link with reason to believe that income has escaped assessment. On these incriminating tangible material information, assessment was reopened. At this stage there has to be prima facie belief based on some tangible and material information about escapement of income and the same is not required to be proved to the guilt. The facts and circumstances of the present case indicate that assessee has engaged into dealings in the grey market. Dealings in the grey market give the assessee various savings at the expense of the Exchequer. Hence, on the overall consideration of facts and circumstances and following the decision in the case of CIT vs Simit P. Sheth [2013 (10) TMI 1028 - GUJARAT HIGH COURT] we hold that a disallowance of 12.5% of the bogus purchase would meet the end of justice. Accordingly, we modify the order's of authorities below and direct that the disallowance in this case should be restricted to 12.5% of the bogus purchase. - Decided partly in favour of assessee. Issues Involved:1. Validity of the reopening of the assessment.2. Merits of the addition of 25% on account of bogus purchases.Detailed Analysis:1. Validity of the Reopening of the Assessment:Background:The assessee, engaged in the business of reselling and trading iron and steel, had their case initially processed under section 143(1). Subsequently, the Assessing Officer (AO) received information from the DGIT (Investigation) and the Sales Tax Department that the assessee had claimed purchases from parties declared as hawala dealers. The AO reopened the case based on this information, treating the purchases as unexplained expenditure under section 69C of the Income Tax Act.Assessee's Arguments:- The reopening was challenged on the grounds that no assessment under sections 143(1), 143(3), or 144 was completed.- The reassessment was initiated mechanically based on information from the Investigation Wing without independent inquiry.- No return of income was filed in response to the notice under section 148, making the assessment illegal.- Section 151 was violated as the AO sought approval from CIT-24, Mumbai, which was not required.- The addition was made on presumption and suspicion, and the case was reopened to verify bogus purchases, but the addition was made under section 69C.Tribunal's Findings:- The Tribunal upheld the reopening, stating that the AO received tangible and cogent incriminating material showing the assessee was a beneficiary of bogus purchase entries.- The information received from the DGIT (Investigation) was based on statements and affidavits from hawala dealers who admitted to issuing bogus bills without delivering goods.- The Tribunal referred to the Supreme Court decision in CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, which stated that for reopening, there needs to be a prima facie belief based on tangible information about income escapement, not a final proof of guilt.- The Tribunal concluded that the AO had sufficient cause and justification for reopening the assessment based on fresh information and tangible materials.2. Merits of the Addition of 25% on Account of Bogus Purchases:Background:The AO treated the aggregate purchases from five parties as unexplained expenditure under section 69C, based on the information that these parties were hawala dealers issuing accommodation bills without actual sale and delivery of goods.Assessee's Arguments:- The assessee argued that the purchases were genuine, supported by bank payments, and that the AO did not reject the books of accounts.- The assessee produced evidence of payments from the bank account and requested cross-examination of the parties, which was not granted.- The assessee relied on various judicial decisions to support their case.Tribunal's Findings:- The Tribunal found that the AO had conducted necessary inquiries, and the notices issued to the parties returned unserved. The assessee failed to produce any confirmation or evidence of transportation of goods.- The Tribunal noted that the Sales Tax Department's findings and the AO's investigation established that the parties issued bogus bills without supplying goods.- The Tribunal referred to the Gujarat High Court decision in CIT vs. Simit P. Sheth, which held that a disallowance of 12.5% of bogus purchases was justified when sales were not doubted.- The Tribunal modified the order of the authorities below and directed that the disallowance should be restricted to 12.5% of the bogus purchases, considering the assessee's dealings in the grey market.Conclusion:The Tribunal upheld the reopening of the assessment based on tangible and cogent information received by the AO. On the merits, the Tribunal modified the addition, restricting the disallowance to 12.5% of the bogus purchases, considering the overall facts and circumstances of the case. The appeals by the assessee were partly allowed.