2020 (9) TMI 619 - AT - Income Tax

Tribunal confirms addition for bogus purchases, upholds best judgment assessment emphasizing transaction legitimacy

The Tribunal upheld the Assessing Officer's decision regarding the bogus purchases made by the assessee from Maximus Gems and Surya Diam, confirming the ... Estimation of income - bogus purchases - HELD THAT:- For the purposes of making the best judgment assessment, past history of the assessee has been held as reliable and reasonable basis for estimation of profits. In the instant case, though the assessee was incorporated on 15.12.2011, no business was carried out in the said year and the current financial year 2011-12 is the effective first year of operations and the question of applying assessee’s past history therefore doesn’t arise for consideration as not relevant. Alternatively, comparable cases in the similar line of business should be considered by the authorities. There is nothing on record in respect of any comparable third party data and therefore, we deem it appropriate to set-aside the matter to the file of the AO for the limited purposes of identifying the comparable third party data and the comparison thereof with gross profit of 8.5% so declared by the assessee and then decide, the quantum of addition basis such variation, if any. The assessee is also directed to identify such comparable data and bring it to the notice of the Assessing officer for his examination and verification. Issues:1. Bogus purchases made by the assessee from Maximus Gems and Surya Diam.2. Invocation of section 145(3) by the Assessing Officer.3. Trading addition made by the Assessing Officer.4. Rejection of books of accounts by the ld CIT(A).5. Best judgment assessment by the Assessing Officer.Analysis:Issue 1: Bogus purchases made by the assesseeThe Assessing Officer alleged that purchases made by the assessee from Maximus Gems and Surya Diam were bogus. The investigation revealed a connection to M/s Bhanwar Lal Jain Group, where entries were considered non-genuine. The ld CIT(A) confirmed the addition of 25% of such purchases. The assessee contended that the AO did not provide concrete evidence of the purchases being non-genuine and that no notice under section 133(6) was issued for cross-examination. The Tribunal upheld the decision, stating that the assessee failed to prove the legitimacy of the purchases, leading to the rejection of the books of accounts under section 145(3).Issue 2: Invocation of section 145(3)The assessee argued that the ld CIT(A) wrongly invoked section 145(3) without pointing out specific defects in the books of accounts. However, the Tribunal upheld the ld CIT(A)'s decision, stating that the rejection of books was justified due to unverified and unsubstantiated purchases, amounting to almost 40% of total purchases. The Tribunal found no fault in the ld CIT(A)'s decision to invoke section 145(3).Issue 3: Trading additionThe Assessing Officer made a trading addition based on his judgment, which the ld CIT(A) partially upheld. The Tribunal directed the Assessing Officer to make a fair estimate of income instead of relying on the rejected book results. It emphasized that the assessment should be based on judicial considerations and not arbitrary decisions, requiring a best judgment assessment with a nexus to relevant material.Issue 4: Rejection of books of accountsThe Tribunal supported the ld CIT(A)'s rejection of the books of accounts under section 145(3) due to unverified purchases. It highlighted the importance of proving the legitimacy of transactions to maintain reliable books of accounts.Issue 5: Best judgment assessmentThe Tribunal set aside the matter to the Assessing Officer for a best judgment assessment, emphasizing the need for a fair estimate of income based on relevant material. It directed the AO to consider comparable third-party data for assessing the quantum of addition, ensuring a reasonable estimation of profits.In conclusion, the Tribunal disposed of the appeal by setting directions for a best judgment assessment, emphasizing the importance of proving the legitimacy of transactions and maintaining reliable books of accounts.