ITAT deletes addition on unverifiable purchases as gross profit rate exceeded benchmark under section 153A assessment

The ITAT Jaipur allowed the assessee's appeal in a second round of litigation involving assessment under section 153A. The case concerned bogus purchase vouchers allegedly used for money laundering to claim section 80HHC deductions through hawala transactions. The tribunal found that the AO failed to verify transactions as directed by the HC in the first round and improperly rejected books of account without satisfying section 145(3) conditions. The CIT(A)'s addition of 25% of unverifiable purchases was deleted as the assessee's gross profit rate exceeded the HC's benchmark for such cases, supported by comparable cases and partner's statement confirming 50% profit margins.

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Issues Involved:

1. Validity of assessment orders and additions made therein.
2. Rejection of books of accounts under Section 145(3) of the Income Tax Act.
3. Genuineness of purchases and estimation of profit on unverifiable purchases.
4. Compliance with Section 153D regarding approval for assessment orders.

Detailed Analysis:

1. Validity of Assessment Orders and Additions:

The primary issue was whether additions could be made in completed assessments without incriminating material. The assessee argued that no incriminating material was found during the search to justify additions for the assessment years 1998-99 to 2001-02. The assessee relied on the Supreme Court's decision in PCIT Central-3 V/s Abhisar Buildwell Private Limited, which prohibits additions in the absence of incriminating material. The Tribunal found that the assessment orders were not based on any new findings or evidence and were merely reiterations of previous assessments. Consequently, the Tribunal held that no additions could be made without incriminating material.

2. Rejection of Books of Accounts:

The rejection of books of accounts was contested by the assessee, who argued that no defects were pointed out in the books, nor was a show-cause notice issued as required under Section 145(3). The Tribunal noted that the lower authorities failed to identify any specific defects or non-compliance with accounting standards. The Tribunal emphasized that the invocation of Section 145(3) requires specific findings of incorrectness or incompleteness, which were absent in this case. Therefore, the Tribunal held that the rejection of books was unjustified.

3. Genuineness of Purchases and Estimation of Profit:

The Tribunal examined whether the estimation of profit at 25% on unverifiable purchases was justified. The assessee provided evidence of genuine transactions with the disputed parties, supported by statements and affidavits. The Tribunal referred to previous ITAT rulings and Rajasthan High Court decisions that confirmed the genuineness of transactions with these parties. The Tribunal also considered the gross profit rates declared by the assessee, which were higher than the industry average. Citing the Rajasthan High Court's decision in M/S Clarity Gold (P) Ltd., which set a benchmark gross profit rate of 12% for similar cases, the Tribunal concluded that no further additions were warranted since the assessee's declared profits exceeded this benchmark.

4. Compliance with Section 153D:

The assessee challenged the assessment orders on the grounds of non-compliance with Section 153D, which mandates prior approval from a Joint Commissioner. The Tribunal noted that the assessment orders lacked any mention of such approval, raising doubts about compliance. The Tribunal referenced the Orissa High Court's decision in ACIT Vs. Serajuddin and Co., which emphasized the mandatory nature of Section 153D's approval requirement. Given the absence of evidence of such approval, the Tribunal found the assessment orders procedurally flawed.

Conclusion:

The Tribunal allowed the appeals filed by the assessee, holding that the assessment orders were invalid due to the absence of incriminating material, unjustified rejection of books of accounts, and procedural non-compliance with Section 153D. The Tribunal directed the deletion of additions made on unverifiable purchases, as the assessee's declared gross profits were higher than the industry standard. The decision underscores the importance of adhering to procedural requirements and relying on substantive evidence in tax assessments.

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