2023 (3) TMI 1603 - AT - Income Tax

Peak credit theory rejected; profit on alleged bogus purchases restricted to 5%, deductions under ss.80D, 80G remanded

Vaibhav Dipak Shah Versus Dy. CIT, Central Circle-2 (3) Mumbai

ITAT Mumbai-AT held that the AO was not justified in applying the peak credit theory for alleged bogus purchases where corresponding sales were undisputed ... Addition on account of peak balance of alleged bogus purchase - AO had received information from DDIT, Investigation, Mumbai that the assessee was beneficiary of bogus purchase from various hawala parties and pursuant to the enquiry u/s. 131 the assessee being proprietary of ‘M/s. Leo Gems’ has admitted in his statement recorded on oath that he has been a beneficiary of the accommodation entries - HELD THAT:- No justification in the action of the A.O. in applying peak credit theory for the purpose of making addition on bogus purchase. There is also no doubt in the purchases alleged to be bogus where neither the A.O. nor CIT (A) has disputed the corresponding sales made by the assessee. In the failure of identifying bogus sales, the purchases made by the assessee may be at best made from grey market from alleged bogus entities. The lower authorities have failed to substantiate if there was any latent or patent defect in the books of the assessee. There was no justification about the sales made by the assessee as to whether the same was genuine or sham transaction. As a necessary corollary since the corresponding sales was not said to be bogus, the purchases cannot also be held as ‘bogus’ except for the reason that the said purchases was made from bogus entities. We would like to place our reliance on the decision of Nitin Ramdeoji Lohia [2022 (11) TMI 480 - BOMBAY HIGH COURT] for the said proposition. Thus, addition should be restricted to 5% of the alleged bogus purchase and the A.O. is directed to estimate the profit at 5% on the bogus purchase Deduction of the claim u/s. 80D & 80G - It is observed that the A.O. has not made any discussion as to the said disallowance and the ld. CIT (A) has remanded this issue back to the A.O. for considering the assessee’s claim subject to verification of the facts. No infirmity in the order of the ld. CIT (A) in remanding this issue back to the A.O. for adjudicating the issue on the facts of the case. Hence, these two grounds may be remanded back to the A.O. for considering the claim of the assessee on the merits of the case. Hence, ground nos. 4 & 5 are allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether condonation of delay in filing the appeal is justified where delay arose from COVID-19 pandemic and frequent travel for business, i.e., whether 'sufficient reason' exists to condone delay. 2. Whether addition under section 69C of the Income Tax Act on account of peak balance of alleged bogus purchases can be sustained where (a) information from investigative wings and statements under section 131 suggest accommodation entries, but (b) corresponding sales are not disputed and purchases were effected through banking channels with quantitative details. 3. Whether, on the facts of repeated identical transactions across years and earlier tribunal direction to estimate profit on disputed purchases at a specified percentage, the principle applied earlier is binding or distinguishable when the assessing officer applies 'peak credit' theory instead of percentage profit estimate. 4. Whether claims for deductions under sections 80D and 80G should be adjudicated by the appellate authority or remanded to the assessing officer where the assessing officer made no discussion and the appellate authority remanded for verification. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay: Legal framework Legal framework: Administrative discretion to condone delay in filing appeals where sufficient cause is shown, including events like pandemic or unavoidable travel. Precedent Treatment: Lower authority exercised discretion by requiring showing of 'sufficient reason'; the Court applied established standard for condonation. Interpretation and reasoning: The Tribunal accepted affidavit and factual explanations that delay of 836 days arose from COVID-19 pandemic disruptions and business travel, concluding these amounted to 'sufficient reason'. Ratio vs. Obiter: Ratio - delay condoned on these facts; not an obiter. Conclusion: Delay in filing the appeal was condoned as caused by sufficient reason. Issue 2 - Addition under section 69C for alleged bogus purchases (application of peak credit theory vs. percentage profit estimate) Legal framework: Section 69C permits assessment of money credited in books, and assessing officer may make additions where purchases are found to be bogus or where accommodation entries inflate expenses; forensic approaches include peak credit theory and estimation by applying a percentage of gross profit to disputed purchases. Precedent Treatment: Earlier tribunal orders for identical business facts directed estimation of profit on disputed purchases at a fixed percentage (5%) in prior assessment years. The assessing officer in the impugned year applied peak credit theory and made a larger addition. The Tribunal relied on higher court authority supporting examination of books and real nature of entries where records are bogus, but also followed prior tribunal conclusions limiting addition to percentage estimate when facts are identical. Interpretation and reasoning: Tribunal examined material: (a) information from investigative authorities and admissions under section 131 that suggested accommodation entries; (b) declarations by alleged suppliers to sales tax authorities admitting non-supply; (c) assessee's records showing purchases paid by account-payee cheques with quantitative details; and (d) absence of any dispute about corresponding sales. The Tribunal emphasized that where corresponding sales are not shown to be bogus and no latent patent defect is proved in the assessee's books, purchases cannot automatically be treated as fully bogus merely because the counter-party is alleged to be bogus. The Tribunal found no change in circumstances from prior years and no justification for applying peak credit theory in place of the previously applied percentage profit estimate. Accordingly, it restricted the addition to a 5% estimate on the disputed purchases, directing the assessing officer to compute addition accordingly. Ratio vs. Obiter: Ratio - where facts are identical across assessment years and corresponding sales are undisputed, an assessing officer should not apply peak credit theory to make full additions for alleged bogus purchases; instead, the addition may be restricted to a reasonable percentage estimate of profit (5% on the facts here). Obiter - observations about the weight to be accorded to admissions under section 131 and declarations to sales tax authorities (contextual; not the primary basis for the result given reliance on identical-facts principle). Conclusion: Addition under section 69C sustained only to the extent of 5% of the alleged bogus purchases; peak credit addition set aside and remitted for computation at 5%. Issue 3 - Applicability of prior tribunal direction for identical facts vs. distinguishing on methodology Legal framework: Principles of consistency in taxation proceedings and re-examination of approach where assessing officer changes methodology; tribunal may follow its own earlier findings on identical facts unless distinguishing circumstances exist. Precedent Treatment: Prior tribunal direction to estimate profit at a fixed percentage on disputed purchases for the same business and materially identical circumstances; assessing officer sought to distinguish by adopting a different method (peak credit) and by pointing to differing treatment in earlier years (use of gross profit percentage by A.O.). Interpretation and reasoning: Tribunal held that the only material difference was the identity of hawala parties, which did not alter the factual matrix; no fresh infirmity in assessee's books or in genuineness of sales was demonstrated. Therefore, the tribunal applied precedent reasoning and limited the addition to the previously applied percentage estimate. The Tribunal rejected the assessing officer's distinction and found no justification for departing from the earlier method. Ratio vs. Obiter: Ratio - prior tribunal approach on identical facts is to be followed absent material change; methodologically, peak credit theory is not to be applied where the factual matrix and prior consistent treatment support the percentage estimate. Obiter - comment that mere use of banking channels and availability of quantitative details are relevant but not conclusive on genuineness. Conclusion: Prior tribunal direction estimating profit at 5% on disputed purchases is applicable to the impugned year; A.O. directed to compute addition accordingly. Issue 4 - Remand of section 80D and 80G claims for adjudication by assessing officer Legal framework: Appellate authority may remand issues to assessing officer for fact-finding where lower authorities failed to discuss or verify claims; parties entitled to adjudication on merits after verification. Precedent Treatment: Appellate practice supports remand where assessment file lacks discussion or where factual verification remains incomplete. Interpretation and reasoning: The Tribunal observed that the assessing officer did not discuss the disallowances under sections 80D and 80G and the appellate authority remanded those grounds for verification. The Tribunal found no infirmity in remand and directed the assessing officer to adjudicate the claims on merits after verification. Ratio vs. Obiter: Ratio - remand of disputed deduction claims to assessing officer for verification and adjudication is appropriate where initial assessment contains no discussion; not obiter. Conclusion: Grounds relating to sections 80D and 80G are remitted to the assessing officer for consideration on merits; allowed for statistical purposes.