2017 (8) TMI 1754 - AT - Income Tax

Appellate order set aside; bogus purchase additions limited to 12.5% where books maintained and parties existed

ITAT, MUMBAI - AT set aside the appellate order and held that since books of account were not rejected and purchases were recorded, the parties could not ... Estimation of income - bogus purchases - HELD THAT:- We notice that the AO has not rejected the books of account and accepted the sales shown by the assessee. We further notice that the assessee has contended before the AO as well as before the CIT (A) that the parties have given some sort of affidavit and their names are appearing on the website, therefore it cannot be concluded that the parties were nonexistent. The entries regarding the purchases in question are made in the books of account and if the said parties had not paid the sales tax, the assessee’s purchases cannot be treated as bogus. We set aside the order of the Ld. CIT (A) and following the ratio laid down in CIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. [2013 (1) TMI 88 - BOMBAY HIGH COURT] and Simit P. Seth [2013 (10) TMI 1028 - GUJARAT HIGH COURT] the restrict the addition to 12.5% of the total amount of bogus purchase and direct the AO to compute the disallowance in terms of this order. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147/notice under section 148 was based on independent and valid belief that income chargeable to tax had escaped assessment. 2. Whether purchases shown as made from certain suppliers could be disallowed as bogus when books of account were not rejected, sales were accepted, and the assessee produced purchase invoices, delivery challans, inward register entries and bank payments. 3. If purchases are held to be non-genuine, what is the correct measure of addition - whole value of purchases or only the profit element (percentage of bogus purchases) - and what precedents govern the appropriate percentage. 4. Whether the assessee was entitled to cross-examine persons furnishing adverse information relied upon by the revenue before sustaining disallowance. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147/148 Legal framework: Reopening an assessment under section 147 requires that the Assessing Officer form an independent and valid belief, based on material, that income chargeable to tax has escaped assessment. The assessee must be supplied with reasons recorded and given opportunity to respond. Precedent treatment: The Tribunal examined relevant authorities discussed by the parties but did not overturn the reassessment on grounds of jurisdiction because the AO acted on specific information from the Investigation Wing/Sales Tax Department about issuance of bogus bills by the suppliers in question and proceeded with verification, summons under section 131 and examination of supporting documents. Interpretation and reasoning: The Court noted that the AO had material - information from investigative agencies indicating the suppliers issued bogus bills to multiple taxpayers - and performed inquiries (summons, verification of transport/delivery documents, bank payments, and non-appearance of suppliers). The reasons recorded were furnished to the assessee and the assessee was afforded opportunities to substantiate purchases. Ratio vs. Obiter: Ratio - where reopening is founded on concrete information from investigative sources and followed by verification steps, reopening is not ipso facto invalid. Obiter - general statements about validity standards beyond the facts of this case. Conclusions: Reopening was not quashed for want of independent and valid belief; procedural requirements (reasons, opportunity to respond) were complied with. Issue 2 - Whether purchases were bogus despite books not being rejected and sales accepted Legal framework: When revenue alleges bogus purchases, it must establish non-genuineness. If books of account are otherwise accepted and sales are not disturbed, the existence of corresponding purchases is relevant. Evidence such as invoices, delivery challans, inward registers, transport receipts and bank payments are material to prove genuineness. Precedent treatment: The Tribunal relied on jurisdictional and Supreme Court authorities (including the principle in Orissa Corporation and the Bombay High Court decision in Nikunj Eximp Enterprises) holding that acceptance of sales and books in part militates against treating corresponding purchases as wholly bogus and that non-appearance of suppliers alone is not conclusive. The Tribunal distinguished authorities relied on by the Revenue where facts supported complete disallowance. Interpretation and reasoning: The Tribunal found that the assessee produced purchase bills, delivery challans, inward register entries and bank payments for the transactions in issue; books of account were not rejected and sales were accepted. The Tribunal observed that mere non-appearance of suppliers or adverse information does not automatically negate purchases where supporting documentary entries exist in the assessee's records. Ratio vs. Obiter: Ratio - where books and sales are accepted and supporting documents exist, purchases should not be summarily treated as wholly bogus simply on adverse information; corroborative internal entries and payment traces are relevant. Obiter - suggested approaches to evaluation of documentary evidence beyond the present facts. Conclusions: The authorities below erred in treating entire purchases as assessable income without considering accepted books/sales and the documentary evidence produced by the assessee; purchases could not be wholly disallowed on the record before the Court. Issue 3 - Measure of addition when purchases are held non-genuine: whole amount vs. profit element (12.5%) Legal framework: Where purchases are found to be bogus, the revenue may seek to add back unsubstantiated purchases as income. Judicial decisions have considered whether the whole purchase amount or only the profit element should be added; principles of fairness and precedents govern the appropriate measure. Precedent treatment: The Tribunal applied the ratio of the Bombay High Court decision in CIT vs. Nikunj Eximp Enterprises and the Gujarat High Court decision in CIT vs. Simit P. Seth, which held that only the profit element embedded in bogus purchases could be added, quantified at a percentage (12.5% in the cited precedent) of the total bogus purchases. The Tribunal found the Revenue's authorities (various High Court and Supreme Court decisions) distinguishable on facts and not controlling for measuring the addition in this case. Interpretation and reasoning: Given acceptance of books and sales, and the presence of documentary entries and bank payments, the Tribunal concluded that even if purchases are regarded as non-genuine to some extent, the correct and proportionate approach is to add only the embedded profit to the assessee's income rather than the whole purchase value. The Tribunal relied on established ratios restricting additions to a profit percentage where suppliers are found to have issued bogus bills but the assessee's transactional records are not wholly discredited. Ratio vs. Obiter: Ratio - where partial factual acceptance (books not rejected, sales accepted, some documentary evidence) exists, the permissible addition for bogus purchases is limited to the profit element; the Tribunal directed computation at 12.5% of the contested purchases following the precedents it applied. Obiter - choice of the exact percentage (12.5%) derives from reliance on those precedents rather than an independent factual profitability analysis in the record. Conclusions: The Tribunal restricted the addition to 12.5% of the total amount of contested purchases for the assessment years under appeal and directed the Assessing Officer to compute the disallowance accordingly. Issue 4 - Right to cross-examine persons giving adverse information Legal framework: Procedural fairness may require opportunity to test adverse information, including by cross-examination, depending on how material such information is to the formation of belief and the assessment decision. Precedent treatment: The decision notes the assessee's request to cross-examine persons who provided adverse information but records that the authorities below afforded opportunities to the assessee to substantiate transactions and that reasons recorded and relevant information were shared; the Tribunal did not find reversible procedural deficiency for lack of cross-examination in the circumstances. Interpretation and reasoning: The Tribunal assessed that adequate opportunity was given to the assessee to substantiate purchases through production of documents and that the AO undertook independent verification steps (summons, verification of transport/delivery documents, inquiries). The non-appearance of suppliers and the investigative information were considered but, on the totality of evidence, did not warrant further remedy of cross-examination as a ground to set aside the reassessment or to justify full addition where precedents limit the quantum to the profit element. Ratio vs. Obiter: Ratio - absence of formal cross-examination of adverse informants did not vitiate the process where the assessee received reasons, had opportunities to supply evidence, and the AO conducted independent verification; no further procedural relief was required on these facts. Obiter - broader entitlement to cross-examine in different factual matrices. Conclusions: No additional relief was granted on the ground of denial of cross-examination; the Tribunal treated the procedural opportunities afforded as adequate under the facts. Final Disposition The Tribunal set aside the CIT(A)'s orders to the extent of the full additions and remitted computation to the Assessing Officer, directing that the disallowance in respect of contested purchases be restricted to 12.5% of the total amount of those purchases for each assessment year; appeals were thereby partly allowed.