2020 (7) TMI 150 - AT - Income Tax

Tribunal Confirms Order for Fresh Assessment, Citing Errors and Revenue Impact in Original Tax Evaluation.

The Tribunal upheld the PCIT's order under section 263, finding the original assessment erroneous and prejudicial to revenue interests. The AO is directed ... Revision u/s 263 - bogus purchases - AO had not examined the genuineness of the purchase transaction - whether the PCIT is justified in setting aside the assessment order and directing the learned Assessing Officer to pass the assessment order de novo by calling relevant details, applying the relevant law in an objective manner? - HELD THAT:- PCIT perused the assessment order and assessment records and found that the assessment order dated 21/12/2017, passed by the learned Assessing Officer under section 147/143(3) was erroneous insofar as prejudicial to the interest of the revenue. The impugned order does not show that the review of the assessment order dated, 21/12/2017 by the JCIT is the sole basis for exercise of jurisdiction under section 263 of the Act by the ld. PCIT. Forward of the case by the JCIT is only triggered the process of the ld. PCIT perusing the assessment order and assessment records to reach a conclusion that the order passed under section 147/143(3) of the Act was erroneous, insofar as it is prejudicial to the interest of the revenue. PCIT reached an independent conclusion as to the nature of the assessment order after perusal of the assessment order and assessment record, and consequently cannot it be said that the action was taken by the learned PCIT was on the borrowed satisfaction. We expressed our opinion that the assessment order does not indicate that AO had examined the genuineness of the purchase transaction in the light of the audited accounts of the assessee. More particularly the fact that out of the alleged purchasers of ₹ 69,75,369/- , there was payment to the suppliers only to the extent of ₹ 14 lakhs and the balance amount of rupees. 55,75,369/- was shown to have been outstanding goes unverified and the assessment order is silent on this aspect. Order passed under section 263 of the Act clearly shows that the learned PCIT had examined the record and reached a reasonable conclusion that this non-examination of the genuineness of the purchases to apply the law laid down by the Hon’ble Gujarat High Court in the case of NK Proteins [2016 (6) TMI 1139 - GUJARAT HIGH COURT] renders the impugned assessment order as erroneous insofar as it is prejudicial to the interest of revenue. It cannot, therefore, be said that the learned PCIT did not conduct any independent enquiry to reach a conclusion that the assessment order is also prejudicial to the interest of the revenue. Learned PCIT is right in his observation that the examination of the genuineness of the purchases is necessary in this case. PCIT rightly assumed jurisdiction and it is only after perusal of the assessment order and assessment record, he rejected the contentions of the assessee that the view taken by the learned Assessing Officer is also one of the plausible views.- Decided against revenue. Acceptance of trading results - Assessee submitted procedure for assessment in the case of the persons engaged in the diamond manufacturing and/or trading, and this instruction says that if such an assessee had shown a sum equal to or higher than 6% of his total turnover from such business, as is income under the header “Profit and Gains of Business or Profession” for a particular assessment year, the learned Assessing Officer shall accept his trading result - HELD THAT:- While declining to quash the impugned order’ section 263 of the Act, we direct the learned Assessing Officer to examine the books of accounts of the assessee in the light of the observations made by the learned PCIT, and also to consider the CBDT instruction bearing number 2 of 2008 dated 22/2/2008 and to take a plausible view to pass the fresh assessment order. Apeal of the assessee is allowed in part. Issues Involved:1. Legitimacy of the purchases made by the assessee.2. Whether the entire amount of purchases should be disallowed or only the profit element embedded therein should be taxed.3. Validity of the order passed under section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT).Detailed Analysis:1. Legitimacy of the Purchases:The assessee filed a return of income for the assessment year 2010-11, which was processed under section 143(1) of the Income Tax Act, 1961. A search and seizure action conducted on certain individuals revealed that they were providing accommodation entries in the nature of bogus sales and unsecured loans. The Assessing Officer (AO) noted that the assessee failed to furnish evidence establishing the receipt of goods purportedly purchased from these individuals. Consequently, the AO held that the bills obtained by the assessee were part of transactions involving accommodation entries.2. Disallowance of Entire Purchases vs. Profit Element:The AO considered whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein. The AO referred to decisions of the Hon’ble Gujarat High Court in CIT vs. Bholanath Ply Fab P. Ltd. and CIT vs. Simit P. Sheth, concluding that only the profit embedded in the purchases should be taxed. The AO added Rs. 10,00,966/- to the income of the assessee, representing 14.35% of the inflated purchases.3. Validity of the Order under Section 263:The PCIT reviewed the assessment order and records, noting that the AO made a presumption without evidence that the purchases were made from the grey market. The PCIT argued that in the absence of evidence showing purchases from another source, the entire purchases should be disallowed. The PCIT referred to the decision of the Hon’ble Gujarat High Court in NK Proteins Ltd vs. DCIT, asserting that the entire amount of bogus purchases should be added back. Consequently, the PCIT set aside the assessment order under section 263 and directed the AO to pass a fresh assessment order after calling relevant details and applying the law objectively.Appeal by the Assessee:The assessee contested the PCIT's order, arguing that the AO had already considered the relevant material and that the PCIT's action was based on borrowed satisfaction. The assessee contended that the decision in NK Proteins was not applicable as the purchases in the present case were not entirely bogus. The assessee also cited the CBDT instruction prescribing a 6% profit margin for diamond traders, which the AO should have considered.Tribunal's Findings:The Tribunal noted that the PCIT reached an independent conclusion that the assessment order was erroneous and prejudicial to the interest of the revenue. The Tribunal rejected the contention that the PCIT's action was based on borrowed satisfaction. It was observed that the AO failed to refer to the books of accounts to verify the genuineness of the purchases and did not provide a detailed examination of the transactions. The Tribunal upheld the PCIT's order, directing the AO to re-examine the books of accounts and consider the CBDT instruction.Conclusion:The Tribunal concluded that the PCIT rightly assumed jurisdiction under section 263 and directed the AO to pass a fresh assessment order after a thorough examination of the books of accounts and relevant details. The appeal of the assessee was allowed in part, with instructions to the AO to consider the observations made by the PCIT and the CBDT instruction.Result:The appeal of the assessee is allowed in part, and the AO is directed to re-examine the case and pass a fresh assessment order in light of the Tribunal's observations and the CBDT instruction.