2025 (4) TMI 1666 - AT - Income Tax

Reopening of assessment - Bogus purchases u/s 69C - CIT(A) deleted addition - HELD THAT - AO has not made any enquiry before issue of such notice u/s 148. We find that the AO has not recorded his independent satisfaction. He has simply relied upon the information passed on to him by the AO Abohar and relying on the report of the investigation wing he has proceeded to reopen the assessment without any independent satisfaction or findings that there has been any escapement of income. Respectfully following the law laid down in the case of M/s Supertech Forgings (India) Pvt. Ltd. 2023 (9) TMI 1165 - PUNJAB AND HARYANA HIGH COURT where the AO has disallowed the entire purchase as bogus purchase on the basis of statement of third parties recorded on the back of the assessee where they have denied making any sales to the assessee company and this information received by the AO was neither corroborated nor verified by the AO the Hon ble jurisdictional High Court quashed the reopening of the assessment. In the instant case the facts are identical to the case relied upon by the assessee and as such we have no hesitation in holding that the reassessment proceedings in the instant case by issue of notice u/s 148 dated 29.03.2021 is bad in law. We further find that in the recorded reasons the purchase from Evergreen Sales Corporation (ESC) has been (incorrectly mentioned at Rs.3, 98, 4048/-) against the correct amount 2, 43, 78, 214/- which proves that the wrong reasons to believe has been formed by the Assessing Officer and relying on the judgments cited by the assessee before us the reassessment proceedings are held to be void ab-initio and accordingly the cross objection of the assessee is allowed on this legal ground and reassessment proceedings as initiated by the AO by notice u/s 148 are liable to be quashed. Assessee appeal allowed.

Summary

ISSUES:

Whether addition of 100% of alleged bogus purchases under section 69C of the Income Tax Act, 1961 is justified where corresponding sales are accepted and books of account are not rejected.Whether reopening of assessment under section 148 beyond four years is valid where reopening is based solely on statements recorded behind the assessee's back without independent verification or corroboration.Whether statements recorded behind the back of the assessee without opportunity for cross-examination can be relied upon for making additions.Whether profit element embedded in purchases can be added to income when purchases are accepted but genuineness is doubted.Whether books of account not rejected by Assessing Officer can be disbelieved for disallowing purchases as bogus.

RULINGS / HOLDINGS:

On the issue of addition under section 69C, the Court held that when the purchases are found in the books of account, and sales are accepted, the entire purchase cannot be disallowed; only the "profit element embedded in such purchases is to be added to the total income." The addition was thus limited to 1.2% of the total purchases rather than 100% as made by the AO.The reopening of assessment under section 148 was held invalid as it was initiated beyond four years based solely on statements of third parties recorded behind the assessee without independent satisfaction or verification by the AO, amounting to "wrong reasons to believe" and rendering the reassessment proceedings "void ab-initio."The Court ruled that statements recorded behind the back of the assessee cannot be used for making additions unless the assessee is given an opportunity to cross-examine the witnesses, upholding the principle of natural justice.The Court upheld the principle that where books of account have not been rejected by the AO, entries in such books cannot be discarded as bogus, and additions cannot be made without pointing out specific defects in the accounts or stock records.

RATIONALE:

The Court applied statutory provisions under the Income Tax Act, 1961, specifically sections 69C (unexplained expenditure) and 148 (reopening of assessment), and relied on precedents including Supreme Court and High Court decisions emphasizing corroboration of information before reopening and the necessity of rejecting books of account before disallowing entries.The Court distinguished the reliance on the Supreme Court judgment in N.K. Proteins Ltd. v. DCIT, noting that in the present case, unlike in N.K. Proteins, no incriminating material such as seized blank cheques or vouchers was found, and no search was conducted; the assessee maintained proper books and stock registers accepted by the AO.The Court emphasized adherence to principles of natural justice, citing judgments that additions cannot be based solely on statements recorded without affording the assessee opportunity for cross-examination.The Court followed the legal doctrine that reopening assessments beyond four years requires tangible material and independent satisfaction of the AO, not mere reliance on third-party statements, consistent with jurisdictional High Court rulings.