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 ... Reopening of assessment - Estimation of income - bogus purchases - AO has made the addition to the income which was already declared by the Appellant in Income Disclosure Scheme, 2016 - HELD THAT:- Assessee had not been able to substantiate the authenticity of the purchase transactions in question to the satisfaction of the A.O. Apart from that, we find substance in the observation of the AO that now when the assessee had come forth with a disclosure under IDS, 2016 which, inter alia, was made towards purchases made from one of the aforementioned parties i.e. Shri Laxmi Agrotech therefore, the said fact in itself substantiates the in genuineness/unverifiability of the purchases claimed by the assessee to have been made from the said party. Considering the aforesaid factual position, we concur with view taken by the A.O that as the books of accounts of the assessee did not inspire much of confidence as regards its correctness, therefore, the same were liable to be rejected u/s 145(3) of the Act. As further given a thoughtful consideration to the claim of the Ld. AR, that as the assessee had declared part of the bogus purchases/gross profit of his regular business transactions in the IDS, 2016, therefore, the same could not have been once again subjected to tax by the A.O. At the same time, we are unable to concur with him that Section 189 of the Finance Act, 2016 places an embargo on the A.O to reopen a case where a declaration under IDS, 2016 was issued. Adverting to the quantification of the addition made by the A.O, a strong conviction that now when the assessee had failed to substantiate the authenticity of the purchase transactions in question, then it can safely be concluded that he had made the purchases not from the abovementioned two parties but had procured the goods at a discounted value from the open/grey market. In so far the working out of the disallowance by the A.O on an ad-hoc rate of 25% of the value of the impugned purchases is concerned, we are unable to fathom as to on what basis he had adopted the same without giving any cogent reason. Admittedly, the addition in the hands of the assessee is liable to be restricted only to the extent of the profit which he would have made by procuring the goods at a discounted value from the open/grey market as against the inflated value at which the same were booked on the basis of the bogus bills in his books of account. In so far the issue of quantification of the profit which the assessee would have made by procuring the goods in question from the open/grey market is concerned, we find that in the case of M/s. Mohhomad Haji Adam & Company [2019 (2) TMI 1632 - BOMBAY HIGH COURT] while upholding the order of the Tribunal, had observed, that the addition in the hands of the assessee as regards the bogus/unproved purchases was to be made to the extent of bringing the G.P rate of such purchases at the same rate as those of other genuine purchases. As the assessee had declared under IDS, 2016 an amount which comprises of, viz. (i) peak bogus purchases claimed by the assessee to have been made from Shri Laxmi Agrotech and (ii) towards gross profit of his overall trading transactions during the year therefore, the same would have a strong bearing while quantifying the addition that would be called for in the hands of the assessee in terms of my aforesaid observations. Apart from that, as the assessee had already declared a gross profit for the year under consideration i.e. A.Y.2012- 13 in his declaration under IDS, 2016, therefore, the addition, if any, that would be worked out by the A.O as regards the profit which the assessee would have made by procuring the goods in question at a discounted value from the open/grey market, as against the value booked in his books of accounts, i.e by restricting the addition to the extent of the difference between the gross profit of genuine purchases transactions and gross profit of bogus purchases transactions [excluding purchase] would be reduced on a pro-rata basis, i.e to the extent such gross profit is attributable to bogus/unverified purchase transactions vis-à-vis total purchases made during the year. Accordingly, on the basis of my aforesaid observations the matter is restored to the file of the A.O. Before parting, may herein clarify that the A.O shall in the course of the set-aside assessment proceedings remain at a liberty to verify the authenticity/correctness of the details furnished by the assessee - Grounds of appeal raised by the assessee are allowed for statistical purposes. 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.