Risk Management Strategy flags constitute valid information for reassessment proceedings under amended provisions from April 2021

The ITAT Ahmedabad upheld the validity of reassessment proceedings initiated based on information flagged under Risk Management Strategy, confirming this constitutes valid "information" under amended provisions effective 01.04.2021. The assessee's purchases from a supplier flagged as high-risk by GST authorities were deemed suspicious. While the CIT(A) had restricted additions under section 69C to 10% of transaction value, the ITAT further reduced this to 5% of the purchase value (Rs. 90,000 on Rs. 18,00,000), following precedents from Gujarat HC. The appeal was partly allowed, balancing revenue interests against preventing double taxation.

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The core legal questions considered in this appeal are twofold: first, the validity of the reassessment proceedings initiated under section 147 of the Income-tax Act, 1961 ("the Act"); and second, the correctness and quantum of the addition made by the Assessing Officer (AO) under section 69C of the Act, relating to alleged bogus purchases from a supplier flagged as a high-risk entity by GST authorities.

Regarding the validity of reassessment, the issue was whether the reopening of the assessment was justified on the basis of information flagged under the Risk Management Strategy of the CBDT through the Insight Portal, specifically concerning purchases from a vendor identified as issuing fake invoices and involved in accommodation entries. The AO issued notices under sections 148A(b), 148A(d), and 148 after considering the assessee's replies. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the reopening relying on Explanation 1(i) to Section 148, inserted by the Finance Act, 2021, which deems information flagged under prescribed risk management strategies as valid "information" for reopening assessments.

In analyzing this issue, the Court examined the amended legal framework introduced w.e.f. 01.04.2021, which expanded the scope of "information" sufficient to trigger reassessment. The Court found that the AO complied with the procedural requirements, including issuing requisite notices and considering the assessee's replies before reopening. The Court agreed with the CIT(A) that information from the Insight Portal qualifies as valid "information" under Explanation 1(i) to Section 148, thus validating the reassessment. The assessee's contention that the AO failed to record independent satisfaction was rejected. Consequently, the Court dismissed the ground challenging the reassessment's validity.

The second and principal issue concerned the addition of Rs. 20,14,258/- made by the AO under section 69C, treating the entire purchase amount from the flagged vendor as unexplained expenditure due to alleged bogus input tax credit and accommodation entries. The CIT(A) reduced this addition to 10% of the purchase value, estimating embedded income from possible inflated purchases. The assessee challenged both the quantum and the basis of this addition, contending that the purchases were genuine, supported by tax invoices, bank payments, stock registers, and GST returns; that the books of account were not rejected; and that the corresponding sales were accepted by the department with declared gross profit of 13.31%. The assessee also highlighted that the vendor's GST registration cancellation occurred after the relevant year and that in a subsequent assessment year (AY 2021-22), scrutiny of similar purchases from high-risk vendors resulted in acceptance of income without disallowance.

The Court undertook a detailed examination of the evidence and judicial precedents. It noted that the purchases were reflected in audited books, supported by banking transactions and stock records, and that sales were declared and accepted, with no rejection of books under section 145(3). The AO's reliance on the vendor's flagged status and GST registration cancellation was acknowledged, but the Court emphasized the absence of any enquiry or cross-examination by the assessee to disprove the allegations. The CIT(A)'s approach of estimating embedded income by applying 10% disallowance was recognized as an attempt to balance the competing interests.

However, the Court found the AO's complete disallowance of the purchases under section 69C to be excessive and not warranted on the facts, especially since the sales were accepted and payments were made through banking channels. The Court distinguished the AO's reliance on the Gujarat High Court decision in N.K. Industries Ltd. v. DCIT, noting that in that case, the facts involved search and seizure operations revealing sham transactions, admissions under section 132(4), and seizure of fictitious documents, which are absent here. The Court highlighted that the N.K. Industries decision ultimately held that tax cannot be levied on the entire purchase value when sales are accepted, but only on the profit element embedded in the transactions.

Further, the Court referred to the more recent Gujarat High Court decision in PCIT v. Jigisha Satishkumar Mehta, which upheld a modest addition of 5% of the alleged bogus purchases where documentary evidence was produced but the possibility of non-genuine billing could not be ruled out. The Court found the facts of the present case closely analogous to Jigisha Satishkumar Mehta, where the vendor was high risk but the assessee furnished primary evidence supporting the transactions.

Balancing these precedents and the evidentiary record, the Court concluded that while the entire disallowance was unjustified, a reasonable estimation of embedded income was warranted due to the flagged nature of the vendor and the failure to conclusively establish arm's length pricing. The Court therefore modified the CIT(A)'s 10% addition downward to 5% of the purchase value of Rs. 18,00,000/-, resulting in an addition of Rs. 90,000/-. This approach was deemed just and reasonable, safeguarding the revenue's interest while preventing double taxation and undue hardship to the assessee.

The Court also addressed the dispute over the purchase amount, accepting the assessee's submission that the correct figure was Rs. 18,00,000/- as opposed to Rs. 20,14,258/- flagged on the GST portal, since the latter represented an alleged ITC mismatch rather than the actual transaction value. The AO was directed to verify and give effect to the addition accordingly.

In summary, the Court held:

• The reassessment proceedings under section 147 were validly initiated based on information under the Risk Management Strategy, in compliance with the amended law.
• The AO's entire disallowance of purchases under section 69C was not sustainable where books were not rejected, sales were accepted, and payments were made through banking channels.
• Following judicial precedents, only the income element embedded in the purchases should be brought to tax, not the entire purchase value.
• A modest addition of 5% of the correct purchase value was appropriate to account for possible inflation or accommodation entries.
• The AO was directed to give effect to the addition of Rs. 90,000/- accordingly.

Thus, the appeal was partly allowed, with the reassessment upheld but the addition under section 69C substantially reduced.

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