2023 (7) TMI 338 - AT - Income Tax

Appeal allowed for statistical purposes with directions to reassess income addition under section 69C.

Shiv Trading Co. Versus The Income Tax Officer, NFAC, Delhi.

Shiv Trading Co. Versus The Income Tax Officer, NFAC, Delhi. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether purchases shown in the books, found to be supported by documentary evidence from a party later held to have issued bogus bills, can be treated as bogus purchases and added back as income under section 69C. 2. Whether, where books of account and sales are not rejected and sales are not dislodged, the entire amount of bogus purchases can be added to income, or the addition must be limited to the notional profit that would have accrued by acquiring goods at market/grey-market rates (quantification of addition). 3. Whether the Assessing Officer's failure to provide opportunity/communication (copies of recorded reasons/third-party statements) affected the validity of the addition and what procedural steps are required on remand. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of treating purchases as bogus and invoking section 69C Legal framework: Section 69C permits inclusion in income of amounts found to be investments or expenditures related to entries in books that are unexplained or proved to be false; assessment proceedings under section 147/148 permit reopening on reasons to believe income has escaped assessment. Precedent treatment: The Tribunal relied on recorded statements of the proprietor of the alleged supplier admitting issuance of bogus purchase bills; such third-party admissions have previously been treated as cogent evidence to classify transactions as bogus. Interpretation and reasoning: The Court found the assessee failed to substantiate authenticity of purchases totaling Rs. 26.88 lakhs, while the proprietor of the supplier admitted issuance of bogus bills. Given the absence of corroborative evidence from the assessee, the Tribunal held the purchases were correctly found to be bogus and amenable to addition under section 69C. Ratio vs. Obiter: Ratio - where purchases are shown to be supported by bogus bills and the assessee cannot substantiate genuineness, the amount can be treated as bogus and added under section 69C. Obiter - none additional on this point. Conclusion: The classification of the impugned purchases as bogus and application of section 69C was upheld in principle. Issue 2 - Extent of addition when books/sales are not rejected: quantification by reference to gross profit rate Legal framework: Fundamental tax principle that where sales recorded in regular books are accepted and only the source/cost is in question, the revenue cannot simply tax the entire purchase value; quantification should reflect actual undisclosed profit. Assessing Officer may compute addition by bringing gross profit (GP) rate of impugned purchases in line with genuine purchases. Precedent treatment (followed/distinguished): The Tribunal applied and followed the reasoning of a higher court decision which held that when sales are accepted and books are not rejected, additions in respect of bogus purchases should be restricted by aligning the GP rate of such purchases to the GP rate of other genuine purchases. That authority was expressly followed as governing quantification. Interpretation and reasoning: The Court noted the AO did not reject the assessee's books or dislodge recorded sales; factual matrix showed goods were likely procured from open/grey market at discounted rates and routed through bogus bills to inflate purchases. Accordingly, penalizing the assessee by adding the entire invoiced purchase amount would be improper where sales and books remain intact. The correct approach is to determine the notional profit that would have arisen had the goods been acquired at their real cost and to add that profit amount by bringing the GP rate of the impugned purchases to parity with genuine purchases. Ratio vs. Obiter: Ratio - where purchases are held bogus but books and sales are intact, the addition is to be restricted to the profit element by adjusting the GP rate of such purchases to that of genuine purchases; full disallowance of the entire purchase amount is not the appropriate measure. Obiter - characterization that goods were likely bought from grey market at discounted rate (factual finding supporting quantification). Conclusion: The AO's wholesale addition was set aside for quantification consistent with the stated approach. The matter was remitted to compute addition by bringing the GP rate of impugned purchases equal to that of genuine purchases, thereby restricting the addition to the notional profit element. Issue 3 - Procedural fairness and remand directions Legal framework: Principles of natural justice and statutory fairness require that the assessee be given reasonable opportunity of being heard in set-aside proceedings; reopening under section 147/148 requires recorded reasons and appropriate disclosure to the assessee where material is relied upon. Precedent treatment: The Tribunal recognized that while the reopening and substantive finding of bogus purchases were supportable on record, remand proceedings must adhere to procedural safeguards. Interpretation and reasoning: Although the impugned additions were upheld in principle, the Tribunal directed that on remand the AO must afford the assessee a reasonable opportunity of being heard while computing the restricted addition. The order implicitly accepts that copies of relevant material and fair opportunity should be made available during set-aside proceedings to enable meaningful contestation of quantification. Ratio vs. Obiter: Ratio - remand must include provision of reasonable opportunity of hearing to the assessee when quantifying addition; the AO must follow natural justice in set-aside proceedings. Obiter - specifics regarding provision of reasons/third-party statements were not finally adjudicated beyond the direction for reasonable opportunity. Conclusion: The matter is restored to the Assessing Officer with explicit direction to compute the addition by aligning GP rate and to afford the assessee a reasonable opportunity of being heard in the set-aside proceedings. Interplay and final disposition Legal reasoning synthesised: The Court reconciled the need to treat purchases supported by admitted bogus bills as additions under section 69C with the countervailing principle that accepted sales and unrejected books preclude taxing the entire purchase value. The lawful remedy is to quantify only the notional profit by matching GP rates of bogus purchases to genuine purchases. Final outcome: The Tribunal allowed the appeal for statistical purposes by setting aside the quantum of addition and remitting the matter to the Assessing Officer to compute the restricted addition in conformity with the above ratio and after affording the assessee a reasonable opportunity to be heard.