2020 (3) TMI 686 - AT - Income Tax

Tribunal allows appeal, confirms addition for purchases, deems reassessment valid, rejects peak credit method.

Manubhai Gems Private Ltd. Versus DCIT-Central Circle-2 (3), Mumbai

Manubhai Gems Private Ltd. Versus DCIT-Central Circle-2 (3), Mumbai - TMI Issues Involved:1. Confirmation of addition of Rs. 13,02,88,386/- on alleged bogus purchases under Section 69C.2. Validity of the reassessment proceedings.3. Retraction of statements made during survey proceedings.4. Determination of the appropriate method for calculating additions (peak credit vs. profit element).Detailed Analysis:Issue 1: Confirmation of Addition on Alleged Bogus Purchases under Section 69CThe assessee contested the confirmation of addition of Rs. 13,02,88,386/- on the grounds of alleged bogus purchases. The Revenue received information from the Sales Tax Department indicating that the assessee inflated expenses through bogus purchases. During the survey under Section 133A, it was found that the assessee did not follow the standard operating procedure for purchases from certain parties, which were identified as providers of accommodation bills by the Sales Tax Department. The assessee's director admitted to purchasing bullion from some entities and packing material from others, but later retracted the statement, claiming the transactions were mere book entries. The Assessing Officer (AO) disallowed the purchases under Section 69C, concluding that the assessee made purchases in cash from the open market using undisclosed income and procured accommodation bills to regularize these purchases.Issue 2: Validity of the Reassessment ProceedingsThe assessee argued that the reassessment proceedings were beyond the scope of the original reasons for reopening the assessment. The reassessment was initiated based on the belief that the assessee booked bogus purchases, inflating expenses and showing less income. The AO made additions on account of unexplained expenditure under Section 69C, which the assessee claimed was beyond the scope of the reassessment. However, the Tribunal found that the sole subject matter of the reassessment was the booking of bogus purchases, and the additions made were related to this issue. The Tribunal held that the reassessment proceedings were valid as the additions did not travel beyond the recorded reasons.Issue 3: Retraction of Statements Made During Survey ProceedingsThe Tribunal held that the retraction of a statement made by one person by another person was not valid. The retraction should be made by the same person who made the statement. Therefore, the retraction by another director was disregarded. However, the Tribunal also noted that additions based solely on statements made during survey proceedings under Section 133A would not hold much evidentiary value unless corroborated by other material evidence. The Tribunal found that the additions were primarily based on the director's statement and information from the Sales Tax Department.Issue 4: Determination of the Appropriate Method for Calculating AdditionsThe AO adopted the peak credit method to calculate the additions, assuming cash payments were made on the date of bogus purchase bills and cash was received back on the date of cheque payments. The Tribunal, however, found that the purchases to the extent of Rs. 11,63,89,354/- were reversed in subsequent years and were mere paper entries. The Tribunal concluded that these transactions should be disregarded, and no additions should be made for these purchases. For the remaining purchases of Rs. 3,84,03,652/-, the Tribunal noted that the assessee made cheque payments and purchased material in cash from the open market. The Tribunal held that an adhoc estimated addition of 5% of the remaining purchases would be appropriate, amounting to Rs. 19,20,183/-. The rest of the additions were deleted.Conclusion:The appeal was partly allowed. The Tribunal confirmed the addition to the extent of Rs. 19,20,183/- and deleted the balance additions. The reassessment proceedings were held valid, and the retraction of statements by another person was disregarded. The Tribunal adopted an adhoc estimated addition method instead of the peak credit method for calculating the additions.