2025 (11) TMI 1149 - AT - Income Tax

Addition under section 68 invalid where ED complaint alone, books accepted and sales not doubted; matter remitted for fresh hearing

ITAT upheld that additions under section 68 based solely on an ED complaint were unsupported where the Investigation Wing found entries bogus but the AO ... Reopening of assessment - additions u/s. 68 - proceedings solely based upon a complaint lodged by the Directorate of Enforcement - HELD THAT:- It is crystal clear that entries were found to be bogus by the Investigation Wing of ED. Ld. Assessing Officer’s order but had not rejected books of accounts. Ld. AO had not doubted the sales. The appellant/assessee has requested three years gross profit of the sale to be applied. In view of above material facts in interest of justice, orders of both the authorities below are set aside and the matter is restored to the file of Ld. AO for applying three years gross profit of the sale of the assessee after affording fair opportunity of hearing to the assessee. Appeal of the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the reopening of assessment under Section 147/148 was validly initiated based on information from the Directorate/Enforcement and risk-flagging, including whether the jurisdictional threshold and requirement of independent verification were met. 2. Whether additions under Section 68 treating alleged receipt as unexplained/capital/other sources are sustainable where (a) investigation (Enforcement Directorate) found entries to be bogus, and (b) books of account and recorded sales were not rejected by the Assessing Officer. 3. Whether, given the factual matrix (investigative finding of bogus entries but no rejection of books of account and the assessee seeking application of gross profit), the appropriate remedial course is an immediate affirmation of additions or a remand to the Assessing Officer to apply three years' gross profit after affording opportunity of hearing. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Reopening under Section 147/148 (jurisdictional threshold and independent verification) Legal framework: Reopening of assessment under Section 147/148 requires belief that income has escaped assessment based on information that satisfies the jurisdictional threshold; first proviso requires supply of information in certain cases and proper satisfaction/verification. Interpretation and reasoning: The Tribunal recorded the factual chronology showing information from Directorate/Enforcement, risk-flagging on departmental portal, and issuance of notices after judicial developments on writ challenges. The Tribunal noted the assessee's challenge to notices and the referenced Supreme Court disposal of related writs but did not conduct a detailed legal adjudication on the sufficiency of the satisfaction for reopening. Rather, the Tribunal observed that the Assessing Officer had proceeded with assessment but had not rejected the books of account nor specifically doubted the sales recorded. Precedent treatment: Although the assessee pleaded case law (as set out in grounds) challenging reopening on the basis of borrowed satisfaction and non-supply of information (citing authorities in grounds), the Tribunal did not expressly follow, distinguish, or overrule any precedent on validity of reopening. The point was not finally determined on legal principle but considered in light of subsequent factual disposition. Ratio vs. Obiter: Obiter - the Tribunal did not lay down a binding legal ratio as to the sufficiency of the reopening satisfaction; it treated the reopening issue as part of the factual matrix leading to a discretionary remedial outcome. Conclusion: The Tribunal did not strike down the reopening on legal grounds; instead, it remitted the matter for fresh consideration on assessment consequences, implicitly leaving the legality of reopening open and focusing on fair adjudication of tax consequences. Issue 2 - Sustainability of Section 68 additions where ED found entries bogus but AO did not reject books of account or sales Legal framework: Section 68 permits taxation of unexplained cash credits/unexplained receipts when the assessee fails to satisfactorily explain creditors or receipts. Assessing Officer must form satisfaction based on material and may reject books of account if not dependable. Where sales/receipts are recorded in books and offered to tax, the AO must examine evidence and apply appropriate principles (including commercial expediency, documentary evidence, and nexus). Interpretation and reasoning: The Tribunal examined the record and found: (a) the Enforcement Directorate/investigation identified entries as bogus; (b) the Assessing Officer, in the assessment order, did not reject the books of account nor express doubt about the recorded sales; and (c) the assessee sought application of three years' gross profit of the sales to determine taxable income. Given these facts, the Tribunal concluded that simply sustaining large additions under Section 68 without applying the avenue sought by the assessee (three years' gross profit) and without rejecting books of account amounted to an unjust outcome in the interest of justice. Precedent treatment: The assessee relied on various authorities in its grounds (including propositions that Section 68 should not be mechanically invoked against normal business transactions or that the assessee need not prove negatives). The Tribunal did not undertake a detailed precedent analysis to resolve competing legal tests but relied on factual incompleteness in the assessment to justify remand. Thus no precedent was expressly followed, distinguished, or overruled on the issue. Ratio vs. Obiter: Ratio - the Tribunal's operative legal finding is that where investigative findings label entries as bogus but the Assessing Officer has not rejected books or doubted sales and the assessee requests application of gross profit, the appropriate remedial course may be to remit for fresh determination applying gross profit after giving opportunity of hearing. This is the binding outcome in the appeal. Conclusion: Additions under Section 68 could not be sustained as finally assessed without the Assessing Officer applying the method of computing taxable income (three years' gross profit on sales) and affording the assessee a fair hearing; therefore the assessment and appellate orders were set aside and remitted. Issue 3 - Appropriate remedial course: remand for application of three years' gross profit and opportunity of hearing Legal framework: Tribunals/Courts have discretion to remit matters for fresh consideration where the assessment is incomplete or procedural fairness requires further enquiry; equitable and judicial review powers permit restoration for proper application of law to facts. Interpretation and reasoning: Considering the factual matrix - ED's finding of bogus entries, AO's non-rejection of books, absence of express doubt on sales, and the assessee's plea for applying three years' gross profit - the Tribunal exercised its remedial discretion. Rather than adjudicating complex disputed facts and evidence de novo, the Tribunal set aside the orders of the authorities below and restored the matter to the Assessing Officer with a specific directive: to apply three years' gross profit of the sales after affording the assessee a fair opportunity of hearing. Precedent treatment: The Tribunal did not cite or rely on particular precedents to justify remand; the decision rests on case-specific equitable considerations and procedural fairness. Ratio vs. Obiter: Ratio - the Tribunal's directive to remit for application of three years' gross profit after hearing is the operative, dispositive order and forms the binding conclusion of the judgment in these proceedings. Conclusion: The appeal was allowed for statistical purposes by setting aside the assessment and appellate orders and remitting the matter to the Assessing Officer to compute tax consequences by applying three years' gross profit to the sales, with prior opportunity of hearing to the assessee. Cross-references and Practical Effect 1. The Tribunal's outcome is fact-driven: investigative labeling of entries as bogus alone did not lead to an immediate affirmance of the Section 68 addition where the Assessing Officer had not rejected books and the assessee proposed a specific computational approach (three years' gross profit). 2. The Tribunal did not decide the broader legal questions on reopening validity, burden of proof, or the full scope of Section 68 jurisprudence; those issues remain open for fresh consideration by the Assessing Officer on remand.