Tribunal directs AO on bogus purchase additions, limits fishing inquiries during reassessment

The Tribunal partially allowed the appeals, directing the AO to add 12.5% of the total amount of bogus purchases and deleting other additions upheld by the CIT(A). It emphasized that the AO cannot conduct fishing inquiries during reassessment and confirmed that additions must align with the reasons recorded for issuing notice under section 148.

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Issues Involved:
1. Jurisdiction of AO to make additions on issues not related to the reasons recorded for issuing notice u/s 148.
2. Addition on account of bogus purchases.
3. Disallowance of various expenses debited to Profit & Loss A/c.
4. Addition of borrowed funds as unexplained cash credits u/s 68.
5. Disallowance of interest expense u/s 40(a)(ia).

Issue-wise Detailed Analysis:

1. Jurisdiction of AO to Make Additions on Issues Not Related to Reasons Recorded for Issuing Notice u/s 148:
The assessee argued that the AO erred in making additions on matters not related to the reasons recorded for issuing notice u/s 148, thus traveling beyond the scope of reassessment. The CIT(A) agreed with this contention, citing the Hon’ble Delhi High Court in Ranbaxy Laboratories Ltd. vs. CIT, which states that Explanation 3 to section 147 does not empower the AO to make roving enquiries in respect of other matters. The Tribunal upheld this view, noting that the department did not appeal against the CIT(A)’s findings, thus the legal principle that the AO cannot make fishing enquiries during reassessment proceedings was confirmed.

2. Addition on Account of Bogus Purchases:
The AO added Rs. 17,19,214/- as bogus purchases from M/s Prayan Trading Co. and M/s Sampark Steels, citing lack of supporting documents like VAT receipts, transport bills, etc. The CIT(A) upheld this addition. The Tribunal, however, acknowledged that while the purchases were not genuine, only the profit element from such purchases should be added to the income. Citing the Hon’ble Gujarat High Court in CIT vs. Simit P. Seth, the Tribunal directed the AO to add 12.5% of the total bogus purchases amounting to Rs. 17,19,214/-.

3. Disallowance of Various Expenses Debited to Profit & Loss A/c:
The AO disallowed various expenses totaling Rs. 2,85,180/- in ITA No. 214/MUM/2019 and Rs. 6,20,512/- in ITA No. 215/MUM/2019, considering them unexplained u/s 69C. The CIT(A) confirmed these disallowances. However, the Tribunal, aligning with its finding on the jurisdiction issue, deleted these additions since they were not related to the reasons recorded for issuing notice u/s 148.

4. Addition of Borrowed Funds as Unexplained Cash Credits u/s 68:
The AO added Rs. 6,50,000/- in ITA No. 214/MUM/2019 and Rs. 9,50,000/- in ITA No. 215/MUM/2019 as unexplained cash credits u/s 68, which the CIT(A) sustained. The Tribunal, consistent with its findings on the jurisdiction issue, deleted these additions, as they were not related to the reasons recorded for issuing notice u/s 148.

5. Disallowance of Interest Expense u/s 40(a)(ia):
In ITA No. 215/MUM/2019, the AO disallowed Rs. 5,36,251/- of interest expense u/s 40(a)(ia), which the CIT(A) upheld. The Tribunal deleted this disallowance, adhering to its stance on the jurisdiction issue.

Conclusion:
The Tribunal partly allowed the appeals, directing the AO to make an addition of 12.5% of the total amount of bogus purchases and deleting the remaining additions sustained by the CIT(A). The Tribunal emphasized that the AO cannot make fishing enquiries during reassessment proceedings and upheld the principle that additions should be confined to the reasons recorded for issuing notice u/s 148.

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