2023 (5) TMI 1346 - AT - Income Tax

Books rejection upheld for bogus purchases but 25% disallowance rate lacks justification under Section 145(3)

ITAT Raipur held that the AO correctly rejected the assessee's books under Section 145(3) due to bogus purchases from unverified parties. The assessee's ... Rejection of books of account under section 145(3) of the Income tax Act as unreliable - quantification of addition for bogus/unsubstantiated purchases by aligning gross profit rate with genuine purchases - reopening of assessment after acceptance of a declaration under the Income Declaration Scheme, 2016 does not ipso facto bar reopening under section 147 - admission of additional evidence under Rule 29 of the Income tax Rules for purposes of remand and verificationRejection of books of account under section 145(3) of the Income tax Act as unreliable - Whether the assessee's books of account were liable to be rejected as not inspiring confidence in light of admitted disclosure under IDS and inability to substantiate purchases. - HELD THAT: - The Tribunal accepted the Assessing Officer's finding that the assessee failed to substantiate the authenticity of purchases from the two tainted parties and that the disclosure made under IDS, 2016 corroborated the inveracity/unverifiability of such purchases. On that factual foundation the Tribunal concurred with the A.O.'s conclusion that the books did not inspire confidence and were liable to be rejected under section 145(3). [Paras 12, 13]Books of account rejected under section 145(3) for lack of reliability; findings of non genuine/unverifiable purchases upheld.Quantification of addition for bogus/unsubstantiated purchases by aligning gross profit rate with genuine purchases - admission of additional evidence under Rule 29 for verification during remand - Quantification of the addition in respect of bogus/unverified purchases and the procedural course to be followed. - HELD THAT: - The Tribunal held that an ad hoc disallowance of 25% without explanation was unsustainable. Applying the principle endorsed by the Hon'ble High Court of Bombay, the addition must be limited to the profit the assessee would have earned by procuring goods from the open/grey market - i.e. by bringing the gross profit rate on the impugned purchases to the same rate as genuine purchases. The Tribunal admitted the assessee's computation/chart under Rule 29 as additional evidence and remanded the matter to the A.O. to rework the addition following that methodology and to verify the correctness/authenticity of the details in the chart; further directions were given to exclude the declared peak purchase amount from Shri Laxmi Agrotech and to proportionately reduce any addition by the part of gross profit already declared under IDS, 2016. [Paras 10, 14, 15, 16, 17]Matter restored to A.O. to recompute addition by aligning GP rates as explained and to verify the admitted chart; addition to be restricted accordingly (remand for quantification and verification).Reopening of assessment after acceptance of a declaration under the Income Declaration Scheme, 2016 does not ipso facto bar reopening under section 147 - Whether acceptance of the assessee's declaration under IDS, 2016 by the Principal Commissioner precluded the Assessing Officer from reopening the assessment under section 147. - HELD THAT: - The Tribunal considered the assessee's contention that acceptance of the IDS declaration divested the assessing authority of jurisdiction to reopen. Relying on facts that the assessee could not substantiate transactions and that disclosure under IDS supported the conclusion of unverifiable purchases, the Tribunal did not accept that Section 189 of the Finance Act, 2016 operates as an absolute embargo on reopening under section 147 in the circumstances of this case. [Paras 11, 13]Contention that acceptance of IDS declaration barred reopening rejected; reopening under section 147 stands in the facts of this case.Final Conclusion: Appeal allowed for statistical purposes: books rejected under section 145(3); addition sustained in principle but remitted to the Assessing Officer for recomputation by restricting the addition to the difference in gross profit (bringing GP rate of impugned purchases in line with genuine purchases), with verification of the admitted computation/chart and adjustment for amounts declared under IDS, 2016; other general grounds dismissed as not pressed. Issues Involved:1. Disallowance of 25% of total purchases u/s 145(3) of the Income Tax Act, 1961.2. Consideration of income already declared under the Income Disclosure Scheme (IDS), 2016.3. Jurisdiction to reopen the case u/s 147 of the Act after acceptance under IDS, 2016.4. Double taxation on the same income.Summary:Issue 1: Disallowance of 25% of total purchases u/s 145(3) of the Income Tax Act, 1961The assessee challenged the disallowance of 25% of total purchases amounting to Rs. 4,79,800/- made by the Assessing Officer (A.O.) u/s 145(3). The A.O. had reopened the case u/s 147 based on information from a survey u/s 133A, which revealed that the assessee procured bogus purchase bills amounting to Rs. 30,12,000/- from two parties. The A.O. directed the assessee to furnish various documents to verify the authenticity of these purchases. Despite the assessee's submission of requisite details, the A.O. concluded that the purchases were not genuine and disallowed 25% of the value of bogus purchases, making an addition of Rs. 7,53,000/-. After allowing relief for the amount declared under IDS, 2016, the addition was scaled down to Rs. 4,79,800/-. The Tribunal found merit in the assessee's contention that the addition should be restricted to the difference in the gross profit of genuine and bogus purchases, as held in the case of M/s Mohammad Haji Adam & Company. The matter was restored to the A.O. to rework the addition accordingly.Issue 2: Consideration of income already declared under the Income Disclosure Scheme (IDS), 2016The assessee argued that the addition made by the A.O. resulted in double taxation, as the income was already declared under IDS, 2016. The Tribunal acknowledged that the assessee had declared Rs. 2,73,200/- under IDS, 2016, and directed the A.O. to consider this while reworking the addition.Issue 3: Jurisdiction to reopen the case u/s 147 of the Act after acceptance under IDS, 2016The assessee contended that the Principal Commissioner of Income Tax (Pr. CIT) had accepted the disclosure under IDS, 2016, and was thus divested of jurisdiction to reopen the case u/s 147. The Tribunal did not concur with this argument, stating that Section 189 of the Finance Act, 2016, does not place an embargo on the A.O. to reopen a case where a declaration under IDS was issued.Issue 4: Double taxation on the same incomeThe Tribunal recognized the potential for double taxation and directed the A.O. to telescope the amount declared under IDS, 2016, while reworking the addition. The A.O. was instructed to exclude the peak bogus purchases of Rs. 2,80,000/- and consider the gross profit of Rs. 2,73,200/- declared under IDS, 2016, on a pro-rata basis.Conclusion:The appeal was allowed for statistical purposes, and the matter was restored to the A.O. to rework the addition in line with the Tribunal's observations, considering the gross profit variance and the amount declared under IDS, 2016. The A.O. was given the liberty to verify the authenticity of the details furnished by the assessee. Grounds of appeal No. 3 and 4 were dismissed as not pressed.