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 from 12.5% to 6% of the disputed purchases. The appeal was partly allowed, with the Tribunal emphasizing the need for a reasonable percentage of disallowance to prevent revenue leakage. The decision was made on 28/03/2022, and the outcome was posted on the notice board.

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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.

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