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2024 (3) TMI 1461 - AT - Income TaxReopening of assessment u/s 147 - Assessee availed accommodating entries during the year under consideration - Reasons to believe - as per AO assessee could not prove the genuinity of the transactions made with the parties - HELD THAT - AO was justified in reopening the case of the assessee for the year under consideration u/s 147 of the Act and was having reason to believe that income had escaped assessment. The assessee has placed reliance on many cases which are on their own footings and distinguishable on facts and issues. Hence this ground of assessee s appeal is hereby rejected. Addition @ 6% of Bogus purchases as confirmed on Pankaj K. Choudhary 2021 (10) TMI 653 - ITAT SURAT Addition on account of providing accommodation entries (@ 2% commission) on account of unaccounted cash paid in obtaining the alleged accommodation entries. Assessee appeal partly allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal include: (a) Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961 ("the Act") was valid and justified, particularly whether the Assessing Officer had sufficient reasons to believe that income had escaped assessment based on information from the Investigation Wing. (b) Whether the assessee was correctly characterized as a diamond trader rather than a commission agent, and the implications of such classification on the assessment of income and additions. (c) Whether the addition of Rs. 1,16,49,88,059 on account of alleged bogus purchases/accommodation entries was justified, especially considering the contention that purchases were made on behalf of others and not owned by the assessee. (d) Whether the addition of commission expenses amounting to Rs. 2,32,99,761 for unaccounted cash paid in obtaining accommodation entries was rightly confirmed. (e) Whether the books of account were rightly rejected under section 145(3) of the Act. (f) Whether the assessee was denied the opportunity for cross-examination of third parties whose statements were relied upon for making additions. (g) Whether the addition of genuine purchases solely on the basis of third-party statements without direct transaction evidence was justified. 2. ISSUE-WISE DETAILED ANALYSIS (a) Validity of Reopening under Section 147 Legal Framework and Precedents: Section 147 of the Act permits reopening of assessment if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. The validity of reopening depends on existence of such reason to believe, which can be based on information received from investigation wings or other credible sources. The Supreme Court and various High Courts have held that mere suspicion is insufficient, but credible information or material can justify reopening. Precedents relied upon include:
Court's Interpretation and Reasoning: The Tribunal found that the Assessing Officer had recorded reasons for reopening based on credible information from the Investigation Wing, which indicated that the assessee was a beneficiary of accommodation entries provided by entities controlled by Bhanwarlal Jain and his group. The reopening was preceded by due procedure including approval from competent authority. The Tribunal held that the reopening was valid and justified. Application of Law to Facts: The Tribunal distinguished the assessee's reliance on cases where reopening was held invalid due to lack of specific information. Here, the information was specific and credible, linking the assessee to accommodation entries. The Tribunal followed binding precedents from the jurisdictional High Court and held the reopening valid. Conclusion: The ground challenging the validity of reopening was rejected. (b) Characterization of the Assessee as Diamond Trader vs Commission Agent Legal Framework: The distinction affects the nature of income and the treatment of purchases and sales in the accounts. A commission agent earns commission income and does not own the goods, whereas a trader owns the goods and the entire turnover is reflected in his accounts. Court's Reasoning: The Tribunal noted that the entire sales and purchases were routed through the assessee's bank account by cheque. This indicated ownership and control over the transactions, inconsistent with the role of a mere commission agent. The Tribunal accepted the Revenue's contention that the assessee was a trader, not a commission agent. Conclusion: The assessee was rightly treated as a diamond trader for assessment purposes. (c) Addition of Rs. 1,16,49,88,059 on Account of Bogus Purchases/Accommodation Entries Legal Framework and Precedents: The Income Tax authorities can disallow bogus purchases and make additions to income to prevent revenue leakage. However, additions must be reasonable and based on evidence. The Tribunal referred to decisions such as Mayank Diamond Private Limited (Gujarat High Court) and a Coordinate Bench decision in Pankaj K. Choudhary's case, which held that additions on bogus purchases should be limited to a reasonable percentage of the purchases, reflecting the profit component rather than the entire amount. Court's Reasoning and Findings: The Assessing Officer initially made 100% addition on the alleged bogus purchases based on the Investigation Wing's report and statements of third parties. The CIT(A) reduced this to 12.5%, noting that no sale is possible without purchases and that the books were not rejected. The Tribunal further reduced the addition to 6%, considering the assessee's gross profit rate of 0.78% and net profit of 0.02%, and relying on binding High Court precedent (Gyanchand S. Jain case) which upheld 6% addition on bogus purchases. Application of Law to Facts: The Tribunal emphasized that the tax authorities are entitled to tax the income component of the disputed transactions to prevent revenue leakage, not the entire transaction value. The assessee's low gross profit rate justified a lower addition percentage. Treatment of Competing Arguments: The assessee argued that purchases were genuine and made on behalf of others, supported by documentary evidence and bank statements, and that no cross-examination was allowed on third party statements. The Revenue contended that the assessee was linked to accommodation entries and that the entire transactions passed through the assessee's bank account, indicating ownership. Conclusion: The Tribunal partly allowed the appeal by reducing the addition to 6% of the disputed purchases, confirming that some addition was warranted but 100% addition was excessive. (d) Addition of Rs. 2,32,99,761 on Account of Commission Expenses for Accommodation Entries Legal Framework: Commission paid for obtaining accommodation entries, especially if unaccounted, is liable to be added to income under the Act. Court's Reasoning: The Assessing Officer found that an average 2% commission is paid for accommodation entries which was not accounted for by the assessee. The Tribunal upheld this addition, noting that commission income is taxable and the unaccounted cash paid for obtaining accommodation entries is rightly added. Conclusion: The addition on account of commission expenses was confirmed. (e) Rejection of Books of Account under Section 145(3) Legal Framework: Section 145(3) allows the Assessing Officer to reject books of account if they are not maintained properly or do not reflect the true income. Court's Reasoning: The Assessing Officer rejected the books due to non-accounting of commission expenses and the nature of transactions indicating accommodation entries. The Tribunal did not find any fault with this rejection in the facts of the case. Conclusion: The rejection of books of account was upheld. (f) Opportunity for Cross-Examination Legal Framework: While procedural fairness is important, the rigour of the Evidence Act does not strictly apply to tax proceedings. Cross-examination of third parties is not a mandatory requirement in all cases. Court's Reasoning: The Tribunal noted that the assessee was provided the material and had opportunity to respond. The Assessing Officer's reliance on third party statements without cross-examination was held to be permissible under the tax laws. The Tribunal observed that the rigour of evidence rules is not applicable before tax authorities. Conclusion: No infirmity was found in the procedure followed by the Assessing Officer in this regard. (g) Addition of Genuine Purchases Solely on Third Party Statements Court's Reasoning: The Tribunal noted that the Assessing Officer did not dispute the genuineness of sales and did not reject the books of account. The CIT(A) also reduced the addition to 12.5% initially and the Tribunal further reduced it to 6%, indicating that the entire purchases could not be disallowed merely on third party statements. The Tribunal emphasized the need for reasonable additions reflecting profit margin rather than blanket disallowance. Conclusion: The addition was moderated to a reasonable percentage, recognizing the possibility of some genuine purchases. 3. SIGNIFICANT HOLDINGS "Assessing Officer was justified in reopening the case of the assessee for the year under consideration u/s 147 of the Act and was having reason to believe that income had escaped assessment." "The assessee was rightly treated as a diamond trader and not merely as a commission agent, as all sales and purchases were routed through the assessee's bank account." "Addition of 6% of the disputed purchases is sufficient to meet the possibility of revenue leakage, considering the low gross profit rate declared by the assessee." "Addition of commission expenses of Rs. 2,32,99,761 on account of unaccounted cash paid for obtaining accommodation entries is upheld." "Rejection of books of account under section 145(3) is justified in the facts and circumstances of the case." "The rigour of the Evidence Act is not applicable before tax authorities; reliance on third party statements without cross-examination does not vitiate the assessment." The Tribunal's final determination was to dismiss the appeal challenging reopening, partly allow the appeal on quantum by reducing the addition on bogus purchases to 6%, confirm the commission addition, and uphold the rejection of books and other findings of the Assessing Officer and CIT(A).
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