2024 (11) TMI 1499 - AT - Income Tax

Reassessment upheld under Section 147; Section 153C invocation rejected; income estimation and addition sustained, reduction plea dismissed

Income Tax Officer, Ward-3 (3) (1), Surat Versus Anil Ghanshyam Kumawat

Income Tax Officer, Ward-3 (3) (1), Surat Versus Anil Ghanshyam Kumawat - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147/148 is valid where proceedings arose from information obtained in a search of a third party and incriminating material pertaining to the assessee was obtained but no satisfaction note under section 153C was recorded or transmitted. 2. Whether proceedings should have been initiated under section 153C (assessment of any other person) instead of section 147/148 when incriminating documents/entries found in a search of another person indicate accommodation entries involving the assessee. 3. Whether disallowance/addition made by the Assessing Officer on account of alleged bogus purchases (accommodation entries) is sustainable and, if not, the quantum of permissible estimation of suppressed income (whether 25%, 12.5% or lower percentage is appropriate) where books are not rejected and sales are not disputed. 4. Whether cross-examination or production of corroborative evidence of third parties was necessary before making additions based on third-party search material and whether absence of such steps vitiates the addition. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147/148 based on information from search of a third party Legal framework: Section 147/148 permits reopening where Assessing Officer forms belief of escapement of income. Section 153C (as applicable for relevant years) provides special procedure where books/documents seized in search of one person pertain to another person; it envisages transmission of seized material and satisfaction notes and proceeds under provisions akin to section 153A. Statutory text, CBDT Circulars and later judicial pronouncements relevant to interplay were considered. Precedent Treatment: Authorities have upheld reopening on information from investigation/search wings where there exists a prima facie live link between seized material and the assessee (cited High Court decisions supporting revenue). Conversely, some decisions have held that where jurisdictional preconditions for section 153C are triggered, section 153C procedure must be followed. Interpretation and reasoning: The Court examined whether the mandatory conditions for invoking section 153C were satisfied - (i) recording of satisfaction by the AO of the searched person that seized material belongs to another person, (ii) handing over/transmission of seized material to the AO of such other person, and (iii) satisfaction by the receiving AO that material has bearing on determination of total income. On facts, no satisfaction note was recorded by AO of the searched person, no handing over/transmission occurred, and no satisfaction under section 153C by receiving AO was recorded. The reopening under section 147/148 was predicated on information received from the investigation wing (DGIT(Inv.)) rather than on exercise of jurisdiction under section 153C. Ratio vs. Obiter: Ratio - Where conditions precedent for section 153C are not satisfied (no satisfaction note/handing over/transmission), recourse to section 147/148 is not precluded and reopening under section 147 based on information from investigation wing is permissible. Obiter - Discussion of policy behind section 153C and machinery provisions as clarified by Circulars. Conclusions: Reopening under section 147/148 was valid in the absence of section 153C formalities. The cross-objection asserting that proceedings were bad in law for not invoking section 153C is dismissed. Issue 2 - Whether assessment had to be initiated under section 153C rather than section 147/148 Legal framework: Section 153C (as in force for relevant years) is a special machinery provision dealing with assessment of other persons where seized documents pertain to them; it contains non-obstante language but requires specified satisfactions and transmission. Judicial guidance (including Supreme Court decisions interpreting analogous provisions) and CBDT circulars explain need for cogent demonstrable material and satisfaction notes. Precedent Treatment: Recent High Court authority held that if the jurisdictional conditions to invoke section 153C are not satisfied (e.g., no satisfaction note or transmission), section 153C's non-obstante clause does not oust recourse to sections 147/148. Supreme Court authority establishes that a satisfaction note is a sine qua non for similar machinery provisions. Interpretation and reasoning: The Court applied the statutory requisites and precedents to the facts: the initiating material was information from DGIT(Inv.); there was no satisfaction note from AO of searched person and no formal transmission; therefore section 153C was not engaged. The Court relied on principle that machinery provisions operate only when their conditions are satisfied; absence of those conditions leaves normal reassessment provisions available to revenue. Ratio vs. Obiter: Ratio - Section 153C does not automatically oust section 147/148; invocation of section 153C requires fulfillment of its jurisdictional preconditions. Obiter - Observations on post-2015 amendments and their retrospective application in certain contexts. Conclusions: The Assessing Officer was entitled to proceed under section 147/148; the alternative contention that section 153C was mandatorily applicable is rejected. Issue 3 - Sustainabilty and quantum of addition for bogus purchases/accommodation entries Legal framework: Where purchases are found to be from accommodation/ dummy concerns, Assessing Officer may estimate suppressed income or disallow a reasonable percentage of such purchases; case law provides guidance on reasonable estimation (various percentages have been applied depending on facts). Principles include evaluation of books, sales acceptance/rejection, corroborative evidence and proportional estimation of suppressed profit. Precedent Treatment: Different tribunals/high courts have adopted varied percentage estimates (25%, 12.5%, 6%, or even 100% in extreme cases) based on factual matrix. The Assessment Officer relied on authorities applying 25% as reasonable; Appellate Authorities have in different cases restricted additions to lower percentages where books/sales were not rejected. Interpretation and reasoning: On facts, the Court observed that books of account were not rejected and sales were not disputed; assessee asserted commission agent status and produced commission agreements and ledgers. The AO made enquiries (133(6)/131) to third parties which returned adverse reports (parties found closed). The AO made disallowance of 25% following precedents; CIT(A) reduced to 12.5% noting absence of rejection of books and non-dispute of sales. Tribunal considered revenue submissions to enhance, but found no convincing reason to increase beyond CIT(A)'s estimate because of the accepted books/sales and lack of specific findings against the commission-agent contention. Ratio vs. Obiter: Ratio - Where books are not rejected and sales are not disputed, AO's estimate of suppressed profit should be moderate and cannot be enhanced merely because third-party search material exists; CIT(A)'s reduction to 12.5% is sustainable on the facts. Obiter - Reference to other benches' practice of 6% is noted but held inapplicable absent a cross-appeal or ground seeking further reduction. Conclusions: Addition of 12.5% of the disputed purchases is upheld; revenue appeal to restore 25% disallowance is dismissed. The Tribunal declines to reduce to 6% in absence of appropriate pleading/cross-appeal by assessee. Issue 4 - Necessity of cross-examination or production of corroborative evidence of third parties before making additions Legal framework: Principles of natural justice and fair procedure require that adverse material should be tested and assessee given opportunity; however, AO may rely on search/ investigation material and third-party reports if AO forms belief and issues show-cause and gives opportunity to reply. Requirement to summon third parties for cross-examination depends on facts and reasonableness of AO's steps. Precedent Treatment: Courts have required corroborative evidence in some circumstances and accepted AO's reliance on third-party search material and efforts at verification (133(6)/131) where parties could not be found or were dummy concerns. Interpretation and reasoning: The Court noted that the assessee requested cross-examination and production of statements; AO issued notices under 133(6) and deputed ward-inspector; reports indicated parties had closed businesses and confirmations were not furnished by assessee. The Tribunal found AO had taken reasonable verification steps and that absence of cross-examination did not vitiate the assessment where there existed sufficient corroborative materials from search and physical enquiries. Ratio vs. Obiter: Ratio - Failure to permit cross-examination of third-party witnesses does not automatically invalidate additions if AO has taken reasonable verification steps and independent corroborative material exists indicating fictitious nature of parties. Obiter - Emphasis on case-by-case assessment of procedural fairness. Conclusions: Absence of cross-examination did not render addition invalid given AO's verification steps and third-party inquiry results; however, quantum must be moderated given non-rejection of books and undisputed sales. Resultant Disposition and Consistency Principle The Tribunal dismissed revenue appeals for all assessment years, affirming the CIT(A)'s reduction to 12.5% for disputed purchases and dismissing the assessee's cross-objections seeking invalidation of reassessment on grounds of mandatory applicability of section 153C. The principle of consistency governed treatment of remaining assessment years.