2019 (7) TMI 927 - AT - Income Tax

Tribunal emphasizes independent assessment & procedural fairness in income tax ruling

The Tribunal ruled in favor of the assessee for A.Ys. 2012-13 and 2013-14, emphasizing the necessity of independent assessment and adherence to procedural ... Reopening of assessment - denial of natural justice - opportunity for cross examination denied - Unverifiable purchases of diamonds - GP rate determination - HELD THAT:- We found that the A.O. has reopened the case merely on the basis of information without conducting any independent enquiry. Thus, the reopening was not based on own satisfaction of the A.O. but on the borrowed satisfaction which can be clearly seen from the in his reasons for reopening. During the course of reassessment proceedings, the assessee had specifically requested the A.O. for copies of statement on which the A.O. was relying and an opportunity to cross examine the relevant parties. A.O. ignored the same and no opportunity was provided to the assessee. In reply to the assessee’s request, the A.O. in his order has rejected the same by specifically writing that the assessee’s right to cross examination of parties is not a part of reasonable opportunity of being heard. As per our considered view, seeking opportunity for cross examination of the party on whose statement the A.O. is relying upon is a right of the assessee in view of the principles of natural justice. ANDAMAN TIMBER INDUSTRIES VERSUS CCE [2015 (10) TMI 442 - SUPREME COURT] which held not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice. We also found that even same request was made before the ld. CIT(A) but the same was not considered and plea of the assessee was rejected. Therefore, the judgment of the Hon’ble Supreme Court is hold precedent and the assessee’s right to seek an opportunity for cross examination is justified and the rejection of the same resulted into nullity of the assessment itself in view of the decision of the Hon’ble Supreme Court in the case of Andaman Timber Industries (Supra). GP estimation on bogus purchases - in so far as the profit declared in respect of purchases from these alleged parties were more than the profit declared in respect of other parties and the average profit declared during the year under consideration. We also found that the assessee had consistently shown profit between 6 to 8% in the A.Y. 2013-14 and 7.80% in the A.Y. 2012-13, thus overall profit rate was 7.8%. The A.O. has made addition of 25% on alleged bogus purchases without any basis, by the impugned order, the ld. CIT(A) restricted the addition on the basis of past profit to 9.5% of alleged bogus purchases in A.Y. 2013-14 and 8.5% in the A.Y. 2012-13. We also found that over all profit declared by the assessee being 7.32% and 7.80% is substantially higher in both the years keeping in view the nature of business and industry standard. Therefore, this is not a case where it may be presumed that the assessee has made alleged bogus purchases in order to reduce its profit margin. - Decided in favour of assessee. Issues:1. Validity of reopening of assessment under Section 147 of the Income Tax Act, 1961.2. Opportunity for cross-examination of parties and principles of natural justice.3. Merit of addition based on alleged unverifiable purchases of diamonds and profit estimation.Issue 1: Validity of reopening of assessmentThe case involved appeals by the assessee against orders of the ld.CIT(A)-I, Jaipur for the A.Ys. 2012-13 and 2013-14 under Section 143(3) read with Section 147 of the Income Tax Act, 1961. The assessee challenged the reopening of assessment, arguing that it was not valid as the Assessing Officer (A.O.) had reopened the assessment solely based on information without conducting an independent enquiry. The A.O. had not formed his own satisfaction, relying instead on borrowed satisfaction from the Investigation Wing, Mumbai. The Tribunal noted that the A.O.'s reliance on external information without independent verification rendered the reopening invalid, citing relevant judicial precedents.Issue 2: Opportunity for cross-examination and principles of natural justiceDuring the reassessment proceedings, the assessee requested copies of statements and an opportunity to cross-examine relevant parties, but the A.O. denied these requests. The Tribunal emphasized that the right to cross-examine witnesses is a crucial aspect of natural justice. Citing the Supreme Court's ruling in M/s Andaman Timber Industries vs. Commissioner of Central Excise, the Tribunal held that the denial of cross-examination amounted to a violation of principles of natural justice. The rejection of the assessee's plea for cross-examination by both the A.O. and the ld.CIT(A) was considered a serious flaw, leading to nullity of the assessment.Issue 3: Merit of addition based on unverifiable purchasesThe A.O. disallowed a sum and added it to the income of the assessee based on alleged unverifiable purchases of diamonds. The ld.CIT(A) upheld the reopening but provided relief by estimating the profit rate at 8.5%. The Tribunal, after considering the arguments, found that the assessee had maintained proper stock and valid proofs for the purchases. The Tribunal noted that the profit rates declared by the assessee were consistent and comparative with industry standards. The Tribunal concluded that the addition made by the A.O. without sufficient basis was unwarranted, and the ld.CIT(A)'s decision to restrict the addition based on past profit rates was reasonable. Consequently, the Tribunal allowed the appeals of the assessee for both assessment years.In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeals for both A.Y. 2012-13 and 2013-14, highlighting the importance of adherence to procedural fairness, independent assessment, and merit-based additions in income tax assessments.