2024 (12) TMI 1644 - AT - Income Tax

Tax authority's bogus-purchase additions largely deleted after only one supplier's purchases proved; limited addition and reduced penalty sustained

ITAT MUMBAI (AT) upheld the CIT(A)'s findings that only purchases from one supplier stood proved and deleted the remaining additions for alleged bogus ... Addition of bogus purchases - Penalty proceedings u/s.271(1)(c) - CIT(A) deleted addition - HELD THAT:- The only purchase as noted by the ld. CIT(A) was from M/s Impex Gems and there were no other purchases from any such 7 other companies controlled by Shri Bhawarlal Jain. The whole premise and basis to acquire jurisdiction was vague and wrong assumption of facts. Since assessee had not filed any cross appeal or cross objection against the order of CIT (A) and we also tried to enquire from the Registry, whether assessee has filed any appeal against order dated 16/05/2024 before this Tribunal and it was found that there was no such appeal for A.Y.2012-13 against this order. Though the CIT(A) has confirmed the entire purchases debited in the books of accounts and deleted the balance addition, however, the entire purchases could not have been added, because the source of purchases are from the books, therefore, at the most some GP rate should have been applied. Since assessee has not challenged the order of the CIT (A), accordingly, the order of the ld. CIT(A) confirming the addition is upheld and the balance addition deleted by the ld. CIT(A) is found to correct on facts and material on record. The department has also not brought anything on record to counter the finding of the ld. CIT (A) and has filed the second appeal raising various grounds mechanically and non application of mind whether assessee actually made any such purchases or not. Thus, the grounds raised by the Revenue are dismissed. Penalty levied u/s.271(1)(c) - AO has levied the penalty in his exparte order on the entire alleged bogus purchases - CIT (A) has reduced the quantum of penalty to the extent of addition confirmed by him in the quantum proceedings - Since no cross appeal has been filed by the assessee, accordingly, the order of the ld. CIT(A) is upheld as once the substantial quantum itself has been deleted on the ground that no such purchases was ever made by the assessee and accordingly, the grounds raised by the Revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the reopening of assessment under section 147 read with section 144 was validly based on tangible information when the reason recorded by the Assessing Officer alleged bogus purchases of a much larger sum than reflected in the assessee's books. 2. Whether the addition made by the Assessing Officer on account of alleged bogus purchases should be sustained in full where the assessee's books and the disclosure in the return and final accounts show a much smaller turnover and purchases, and where documentary evidence (invoices, ledger entries, RTGS confirmation) exists for some purchases. 3. Whether, and to what extent, penalty under section 271(1)(c) is sustainable when the quantum of addition on merits is substantially reduced by the appellate authority. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147/144 based on the material before the AO Legal framework: Reopening under section 147 requires that the AO has reason to believe income has escaped assessment supported by material; jurisdictional basis must be factually sound and not based on vague or incorrect assumptions. Precedent treatment: No specific judicial precedents were invoked in the impugned orders; treatment of reopening validity was considered on facts and sufficiency of material. Interpretation and reasoning: The Tribunal examined the reasons recorded and the contemporaneous material relied upon by the AO, noting that the information alleged purchases of Rs.7.83 crores from several suppliers but the assessee's own books and final accounts disclosed total turnover of Rs.34,43,269 and purchases only from one supplier (Impex Gems) amounting to Rs.24,72,470 (plus VAT). The AO's reasons did not verify the return, trading account, or ledger before recording the large figure; thus the foundational premise for reopening was a vague and factually incorrect assumption. The Tribunal also noted procedural lapses claimed by the assessee (non-service of notice/order), but the appellate authority had already dismissed the specific challenge to reopening; the Tribunal therefore limited its examination to the sufficiency and correctness of materials forming the basis of additions on merits. Ratio vs. Obiter: Ratio - where reopening is based on vague/incorrect factual premise and AO does not verify available returns/accounts, the reopening support weakens and merits close factual scrutiny. Obiter - procedural non-service aspects were noted but not finally determinative because the appellate authority had addressed reopening. Conclusion: The information on which reopening was premised was found vague and incorrectly assumed purchases far exceeding those reflected in the books; however, because the CIT(A) dismissed the reopening challenge, the Tribunal proceeded to examine merits and confined itself to upholding the CIT(A)'s factual findings rather than setting aside the reopening on jurisdictional grounds. Issue 2 - Legitimacy and quantum of additions for alleged bogus purchases Legal framework: Additions for undisclosed or bogus purchases must be based on evidence that the purchases were not genuine; entries in books, supporting invoices, bank payments and evidence of delivery are relevant; where books reflect specific purchases, additions must be limited to amounts not satisfactorily explained. Precedent treatment: No contrary precedents were cited by the AO or Revenue; the Tribunal applied standard evidentiary principles to distinguish between documentary legerdemain and demonstrable economic reality. Interpretation and reasoning: The Tribunal accepted the CIT(A)'s factual findings that the assessee's books and final accounts recorded only Rs.24,72,470 as local purchases from Impex Gems (with associated import transactions), and that evidentiary materials were produced: tax invoices, ledger copy, tax audit report of the supplier, RTGS payment evidence and supplier confirmation of receipt. The Investigation Wing's seized material linked Impex Gems' documents to the list of entries prepared in the search of other entities controlled by the alleged back offices; the CIT(A) nevertheless concluded that the specific purchase of Rs.24,72,470 was a part of accommodation entries based on admissions and seized material but that there was no evidence the assessee made purchases aggregating Rs.7.83 crores from the other seven suppliers. The Tribunal noted that while paper trails can be contrived in accommodation arrangements, the AO had not established that purchases beyond those appearing in the assessee's own books were ever made. Given the absence of any cross-appeal by the assessee against the confirmation of Rs.24,72,470, the Tribunal declined to disturb the CIT(A)'s confirmation of that quantum but agreed with the deletion of the balance addition of Rs.7.59 crores for lack of evidence of actual purchases. Ratio vs. Obiter: Ratio - additions must correspond to amounts reasonably attributable to undisclosed or bogus transactions as shown by cogent material; where the assessee's books disclose only limited purchases and the AO fails to prove larger purchases, additions cannot be sustained beyond amounts shown in the books. Obiter - observations on the propensity for fabricated paper trails in accommodation entries and the need for corroborative evidence of delivery. Conclusion: The Tribunal upheld the CIT(A)'s restriction of the addition to Rs.24,72,470 (the amount appearing in the assessee's books and not successfully disputed by cross-appeal) and deleted the balance addition of Rs.7,59,16,324 for want of evidence; Revenue's grounds challenging this on merits were dismissed. Issue 3 - Penalty under section 271(1)(c) consequent to disallowance reduction Legal framework: Penalty under section 271(1)(c) is linked to concealment or furnishing inaccurate particulars; quantum of penalty ordinarily correlates with the income added; appellate reduction of addition affects the penalty leviable, and penalty needs to be justified as per the reduced tax effect. Precedent treatment: No specific precedent was cited; the Tribunal applied principle that penalty must align with confirmed tax effect. Interpretation and reasoning: The AO levied penalty in the ex parte order on the full alleged bogus purchases of Rs.7.83 crores. The CIT(A) reduced the penalty to correspond with the quantum of addition confirmed in the merits proceedings (Rs.24,72,470). The Tribunal observed that once substantial quantum was deleted on the ground that such purchases were never made by the assessee, the AO's basis for penalising on the larger sum evaporated. As the assessee did not file a cross-appeal contesting the CIT(A)'s confirmation of the smaller quantum, the Tribunal upheld the reduction of penalty to the extent of the confirmed addition. Ratio vs. Obiter: Ratio - penalty must be computed having regard to the quantum of income that is ultimately confirmed; where additions are deleted, corresponding penalty cannot be sustained on deleted amounts. Obiter - none beyond reiteration of the linkage between confirmed additions and penalty. Conclusion: The Tribunal upheld the CIT(A)'s reduction of penalty to the amount commensurate with the confirmed addition of Rs.24,72,470 and dismissed Revenue's challenge to the penalty. Overall Conclusion The Tribunal dismissed the Revenue's appeals: the addition sustained was confined to Rs.24,72,470 as confirmed by the CIT(A); additions aggregating Rs.7.59 crores were deleted for lack of evidence of actual purchases; the penalty was reduced to reflect only the sustained addition. The Tribunal found the AO's large-scale addition and penalty to be founded on vague and unverified assumptions and unsupported by the assessee's books or admissible evidence for the bulk of the alleged purchases.