2026 (1) TMI 469 - AT - Income Tax

Alleged bogus sales and purchase transactions under GST scrutiny: reassessment notice u/s147/148A quashed; additions deleted

Reopening under s.147 was held invalid because the AO acted on borrowed satisfaction, merely reproducing generalized Investigation Wing information ... Reopening of assessment u/s 147 - mandation of specification of clear charge - Reason to believe - borrowed satisfaction v/s independent application of mind - addition being 2% of total alleged bogus sale as commission received and bogus purchase thereby disallowed the same u/s 37 - As alleged case of the Assessee was reopened based on borrowed satisfaction without any direct or tangible nexus to the case of the Assessee and there was no live and rational nexus between information received and the belief of escapement of income formed by the A.O HELD THAT:- There was no live and rational nexus between the information received and the belief of escapement of income formed by the AO. It is well settled law that, the AO must demonstrate that the information relied upon has a direct, tangible, and specific connection with the Assessee’s transactions and the alleged escapement of income. Mere receipt of general or unverified information cannot, by itself, justify the reopening of assessment or sustain an addition. The 'reason to believe' contemplated u/s 147 requires the AO to form an independent belief founded on relevant and verifiable material that bears a live link with the alleged undisclosed income. The reasons recorded in the notice issued under Section 148A(b) of the Act clearly reflects that the AO merely reproduced the generalized information without verifying its accuracy or relevance to the Appellant. The notice issued u/s 148A(b) was based on a report from the Investigation Wing alleging that the Appellant had entered into transactions with one Shri Jitender, Proprietor of M/s Veekay Enterprises. Notice did not clarify whether the alleged transaction related to sales made by the Appellant or purchases made from the said concern. This ambiguity in the very foundation of the proceeding clearly reflects that the AO had not verified the underlying facts or examined the records to ascertain the actual nature of the transaction before recording his satisfaction. There was no live and rational nexus between the information received and the belief of escapement of income formed by the AO. It is well settled law that, the AO must demonstrate that the information relied upon has a direct, tangible, and specific connection with the Assessee’s transactions and the alleged escapement of income. Mere receipt of general or unverified information cannot, by itself, justify the reopening of assessment or sustain an addition. The 'reason to believe' contemplated u/s 147 requires the AO to form an independent belief founded on relevant and verifiable material that bears a live link with the alleged undisclosed income. The reasons recorded in the notice issued u/s 148A(b) of the Act clearly reflects that the AO merely reproduced the generalized information without verifying its accuracy or relevance to the Appellant. The notice issued u/s 148A(b) was based on a report from the Investigation Wing alleging that the Appellant had entered into transactions with one Shri Jitender, Proprietor of M/s Veekay Enterprises. However, the notice did not clarify whether the alleged transaction related to sales made by the Appellant or purchases made from the said concern. This ambiguity in the very foundation of the proceeding clearly reflects that the AO had not verified the underlying facts or examined the records to ascertain the actual nature of the transaction before recording his satisfaction. Quantum of the alleged transaction mentioned in the notice issued u/s 148A(b) of the Act notice was factually incorrect. The notice referred to a figure of Rs. 5.52 crore, whereas the Assessee’s actual recorded sales to M/s Veekay Enterprises were Rs. 5.21 crore. The AO made no attempt to verify the correct figures from the Assessee’s books of account or supporting records. This discrepancy further demonstrates that the belief of escapement was formed on unverified and unreliable material having no live nexus with the Assessee’s case. Thus, it is evident that the AO's belief was formed mechanically, without establishing any live, rational, or proximate connection between the information received and the alleged escapement of income. Decided in favour of assessee. Addition being estimated commission at 2% on alleged bogus sales - It was the specific case of the Assessee that the above sales were duly accounted for in the books of account, reflected in the audited financial statements and accompanied by the collection bank deposit of applicable GST. However, AO did not carry out any verification from the purchaser, did not point out any defect in the documents, nor confronted the Assessee with any adverse material. Further, the findings of the AO, affirmed by the CIT(A) was based on suspicion and conjecture without any tangible material showing that the Assessee received any commission or engaged in accommodation transactions. No evidence has been brought on record to demonstrate flow of funds, receipt of cash, or any other form of benefit accruing to the Assessee. Such estimated addition made in a mechanical manner, lacks any factual or legal foundation and deserves to be deleted. Hon'ble Delhi Tribunal in the case of JMK Exports [2024 (4) TMI 742 - ITAT DELHI] observed that when sales are verifiable, duly reflected in statutory returns and even accepted by the VAT Department, treating them as unexplained cash credits under section 68 of the Act is unsustainable. It emphasized that the burden shifts to the AO to disprove the genuineness once the assessee produces cogent documentary evidence and mere suspicion or unverified third-party statements cannot justify the addition. Further, it is an admitted position of the Revenue that the supplies were duly made by the Assessee, as neither the corresponding sales nor the books of account have been disturbed or rejected. The only addition made by the AO being a notional estimate of 2% commission has no legs to stand, as it is unsupported by any evidence or material on record. The A.O. proceeded entirely on presumption by estimating a 2% commission without identifying any corresponding flow of funds, receipt, or benefit to the Assessee. Addition made by the A.O. on account of bogus purchases from M/s Royal International - In order to substantiate the genuineness of the purchase, Assessee produced purchase invoices, purchase orders, delivery challans, goods receipt notes, transporter's receipts, and proof of payment through regular banking channels. The purchases were duly recorded in the books of account, reflected in the audited financial statements and corresponded to the quantitative details of consumption and production. The AO did not point out any discrepancy in the stock register, consumption pattern, or sales corresponding to such purchases. AO while making the above addition was that there existed a difference in the HSN code between the invoices issued by M/s Royal International and the internal classification adopted by the Appellant - It was the case of the Assessee that such a difference is purely technical and does not affect the nature, description or authenticity of the goods purchased. Further contended that the applicable GST rate under both HSN codes was identical. Therefore, in our opinion, there was no question of revenue loss or tax evasion. A mere difference in classification cannot be treated as evidence of bogus purchase when there is no contrary material available and the rate of tax and the nature of goods remain the same. It is a settled principle that a bona fide buyer cannot be penalized for any procedural or classification difference arising from the supplier's end, particularly when the purchases are supported by valid documents, payment through banking channels and are otherwise genuine and verifiable. As decided in Sushil Kumar [2025 (7) TMI 1769 - ITAT DELHI] held that when purchases are supported by proper bills, banking payments, and duly reflected in GST returns with ITC claimed and allowed, such transactions cannot be disbelieved merely on suspicion. The Tribunal also observed that the fact that some suppliers were inactive on the GST portal or had not filed returns cannot be a ground for making additions in the hands of the purchaser, as there is no legal obligation on the buyer to ensure the supplier's tax compliance. In the case in hand, there is no allegation or finding that the supplier was a non-existent entity, that goods were not received, or that any portion of payment flowed back to the Assessee. AO failed to conduct even a basic verification from the supplier or examine the detailed evidence submitted. CIT(A), while upholding the addition, merely repeated the conclusions of the AO without dealing with the evidences or factual explanations placed on record. Assessee appeal allowed. Issues: (i) Whether reassessment under Section 147/148 was valid where reasons reproduced Investigation Wing information without verification and lacked live nexus; (ii) Whether notice under Section 148 issued by jurisdictional AO violated Section 151A/Notification No.18/2022 requiring e-assessment by National Faceless Assessment Centre; (iii) Whether addition of Rs.11,05,348 as 2% commission on alleged bogus sales is sustainable; (iv) Whether disallowance of Rs.88,95,892 as bogus purchases is sustainable.Issue (i): Whether reassessment under Section 147/148 was valid where reasons reproduced Investigation Wing information without verification and lacked live nexus.Analysis: The Tribunal examined the reasons recorded under Section 148A(b) and the Investigation Wing report relied upon by the AO. It found contradictions and absence of verification (ambiguity between identified persons, incorrect transaction quantum, and no linkage to assessee). The Tribunal applied the legal requirement that the AO must form an independent belief based on direct, tangible, and verifiable material that bears a live link to alleged escaped income, and that mere reproduction of generalized or unverified information or borrowed satisfaction is insufficient.Conclusion: In favour of Assessee.Issue (ii): Whether notice under Section 148 issued by jurisdictional AO violated Section 151A/Notification No.18/2022 requiring e-assessment by National Faceless Assessment Centre.Analysis: The Tribunal noted the ground raised by the assessee and the related judicial decision relied upon by parties. The assessee conceded that the jurisdictional High Court had decided the specific issue against it; the Tribunal recorded that position and considered the ground accordingly.Conclusion: Against Assessee.Issue (iii): Whether addition of Rs.11,05,348 as 2% commission on alleged bogus sales is sustainable.Analysis: The Tribunal considered the documentary proof produced by the assessee (tax invoices, GST returns, transport documents, bank statements, confirmations) and the absence of any verification by the AO from purchasers or any evidence of benefit/flow of funds to the assessee. It applied authorities holding that notional or hypothetical income cannot be taxed and that once cogent contemporaneous records are produced, mere suspicion does not justify additions.Conclusion: In favour of Assessee.Issue (iv): Whether disallowance of Rs.88,95,892 as bogus purchases is sustainable.Analysis: The Tribunal evaluated the material on record and found no investigation input implicating the supplier, full documentary support for purchases (invoices, delivery challans, transporter receipts, bank payments, GST filings and ITC), and no verification from the supplier by the AO. The selective disallowance of a portion of identical purchases without objective basis was held to be arbitrary and unsupported by verifiable material.Conclusion: In favour of Assessee.Final Conclusion: The recorded reasons for reopening lacking verification and live nexus render the reassessment proceedings invalid to the extent based on such material; additions founded on notional estimation or selective disallowance unsupported by independent verification are unsustainable and are to be deleted, while the jurisdictional notice objection is decided against the assessee in view of the conceded judicial position.Ratio Decidendi: Reopening under Section 147 requires an independent reason to believe based on direct, tangible and verifiable material bearing a live nexus to the alleged escapement of income; once an assessee produces cogent contemporaneous records, additions based on notional estimates or unverified third-party information are unsustainable unless the AO adduces independent, verifiable material to disprove genuineness.