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 disclosure under Income Disclosure Scheme 2016 substantiated the genuineness concerns regarding purchases from one party. However, the Tribunal found the AO's ad-hoc 25% disallowance rate unjustified without proper reasoning. The addition should be restricted to profit differential between genuine and bogus purchases, calculated pro-rata based on the gross profit already declared under IDS 2016. The matter was remanded to AO for proper quantification considering the IDS declaration and applying the gross profit rate differential methodology.

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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, 1961
The 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), 2016
The 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, 2016
The 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 income
The 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.

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