2022 (4) TMI 279 - AT - Income Tax

Tribunal reduces disallowance rate on alleged purchases, emphasizes reasonable percentage to prevent revenue leakage

The Tribunal upheld the validity of the reopening under Section 147/148 of the Income Tax Act but reduced the disallowance rate on alleged bogus purchases ... Reopening of assessment under section 147 - reliance on third party information from investigation wing - addition for bogus purchases and disallowance by profit element method - prevention of revenue leakage by disallowing embedded profitReopening of assessment under section 147 - reliance on third party information from investigation wing - validity of reopening of assessment under section 147/148 - HELD THAT: - The Tribunal upheld the reopening. The Assessing Officer formed belief on information received from the Investigation Wing (search on the Bhanwarlal Jain group) that the assessee was a beneficiary of accommodation entries; the assessee's objections were considered and disposed of in a speaking order. The Tribunal followed the jurisdictional High Court precedents cited in the record holding that receipt of investigation wing information that a well known entry operator provided bogus entries to various beneficiaries, including the assessee, furnished sufficient reason to reopen the assessment. The Tribunal therefore dismissed the ground challenging the assumption of jurisdiction, finding a live link between the investigation report and the reasong recorded for reopening. [Paras 15, 16]Reopening under section 147/148 held valid; ground dismissed.Addition for bogus purchases and disallowance by profit element method - prevention of revenue leakage by disallowing embedded profit - reliance on third party information from investigation wing - extent of disallowance for alleged bogus purchases - HELD THAT: - The Assessing Officer treated purchases from entities linked to the Bhanwarlal Jain group as bogus and made an addition (25% at AO level). The assessee produced purchase invoices, bank evidence of account payee cheques, stock registers, day to day records and sales, and sought copies of statements relied upon by investigation and cross examination, which were not furnished; the AO did not reject the books but proceeded on the basis of the investigation report. The CIT(A) reduced the addition to 12.5% having regard to the assessee's low gross profit (0.99%) and precedents; the Tribunal found 12.5% excessive and, applying the established approach of disallowing the profit element to guard against revenue leakage, concluded that a 6% disallowance of the disputed purchases is appropriate (noting industry gross profit norms of 5-7% and consistent treatment in similar cases). The Tribunal treated sales to a linked entity as part of the same bogus scheme and applied the percentage disallowance to the aggregate disputed transactions. [Paras 19, 20, 21]Addition confirmed in principle but quantitatively reduced; disallowance restricted to 6% of the disputed purchases.Final Conclusion: The appeal is partly allowed: the reopening under section 147/148 is sustained, but the disallowance on account of alleged bogus purchases is restricted to 6% of the disputed purchases for AY 2008-09. Issues Involved:1. Validity of reopening under Section 147/148 of the Income Tax Act.2. Addition on account of alleged bogus purchases.Issue-wise Detailed Analysis:1. Validity of Reopening under Section 147/148:The assessee challenged the reopening of the assessment on the grounds that the Assessing Officer (AO) initiated the reassessment based on third-party information without conducting any preliminary investigation. The AO received information from the DGIT (Investigation), Mumbai, indicating that the assessee was a beneficiary of bogus purchases from entities managed by Bhanwarlal Jain Group. The AO issued a notice under Section 148 after forming an opinion that income had escaped assessment.The Tribunal noted that the AO had disposed of the assessee’s objections in a detailed speaking order. The CIT(A) upheld the reopening, stating that the AO had received credible information from the investigation wing, which justified the reopening. The Tribunal referred to the jurisdictional High Court's decisions in Peass Industrial Engineers (P) Ltd Vs DCIT and Pushpak Bullion (P) Ltd Vs DCIT, which supported the AO’s action based on information from the investigation wing about accommodation entries provided by known entry operators. Consequently, the Tribunal found the reopening under Section 147/148 to be valid and dismissed the assessee’s ground on this issue.2. Addition on Account of Alleged Bogus Purchases:The AO made additions based on information from the investigation wing, which indicated that the assessee had shown bogus purchases from entities managed by Bhanwarlal Jain Group. The AO disallowed 25% of the aggregate transactions amounting to Rs. 1,73,49,664/-, resulting in a disallowance of Rs. 43,37,416/-. The assessee contended that the purchases were genuine, supported by proper documentation, and that the sales were accepted by the AO. The assessee also argued that no cross-examination of Bhanwarlal Jain was allowed, and no corroborative evidence was provided.The CIT(A) observed that the AO did not examine the detailed evidence provided by the assessee, such as books of accounts, stock registers, and sales registers, and noted that no defects were pointed out in these documents. The CIT(A) referred to the Tribunal’s decision in Bholanath Polyfab Pvt. Ltd. and the jurisdictional High Court's decision in M/s Mayank Diamond Pvt. Ltd., which suggested that disallowance of 100% of purchases was not justified, and a reasonable percentage should be considered to avoid revenue leakage. Consequently, the CIT(A) restricted the disallowance to 12.5% of the disputed purchases.The Tribunal, after considering submissions from both parties and examining the documentary evidence, concluded that the AO’s addition was solely based on third-party information without rejecting the assessee’s books of accounts. The Tribunal noted that the profit margin in the industry ranged from 5% to 7% and that similar cases involving purchases from Bhanwarlal Jain had seen disallowances restricted to 6% of the disputed purchases. Therefore, the Tribunal found the 12.5% disallowance by the CIT(A) to be on the higher side and restricted the disallowance to 6% of the disputed purchases.Conclusion:The Tribunal upheld the validity of the reopening under Section 147/148 but found the disallowance rate of 12.5% to be excessive. The disallowance was reduced to 6% of the disputed purchases, and the appeal was partly allowed. The order was pronounced on 28/03/2022, and the result was placed on the notice board.