2025 (4) TMI 1624 - HC - Income Tax

Estimation of income - bogus purchases - addition in respect of alleged bogus purchases based on material and statements which were admittedly not provided to the appellant for rebuttal and cross examination - HELD THAT - After considering the decision in case of Pankaj K. Chaudhary 2023 (3) TMI 1402 - GUJARAT HIGH COURT Tax Appeals filed by the revenue were dismissed as the question of addition of purchases made by the AO was restricted by the Tribunal to 6% was already confirmed by this Court. Tax Appeal are also stand answered as the assessee being aggrieved by the very same order has preferred this appeal raising the questions of law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court arising from the appeal under Section 260(A) of the Income Tax Act, 1961, are as follows:

(i) Whether the reopening of the assessment under Section 147 of the Income Tax Act was valid in the facts and circumstances of the case;

(ii) Whether the Income Tax Appellate Tribunal (Tribunal) was justified in partly confirming additions on account of alleged bogus purchases based on materials and statements which were not provided to the appellant for rebuttal or cross-examination;

(iii) Whether the Tribunal was correct in holding that the impugned purchases were bogus;

(iv) Whether the Tribunal erred in enhancing the addition on alleged bogus purchases to 6% of the disputed purchases, as against 5% confirmed by the Commissioner of Income Tax (Appeals), without providing cogent reasons;

(v) Whether the Tribunal's order was perverse for failing to appreciate the facts, documentary evidence, and settled legal principles correctly.

Additionally, related issues were considered in a connected Tax Appeal by the revenue, involving the correctness of the Tribunal's limitation of additions to 6% of purchases, despite the Assessing Officer's (AO) disallowance of 100% of such purchases, and the reliance on precedents regarding the quantum of addition for bogus purchases.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Validity of Reopening of Assessment under Section 147

The reopening of assessment under Section 147 requires satisfaction of the AO that income has escaped assessment. The Court examined whether the reopening was justified on the facts. The Tribunal had upheld the validity of reopening, presumably on the basis of material indicating bogus purchases.

Relevant legal framework includes the requirement of "reason to believe" under Section 147 and the principle that reopening must be based on tangible material. The Court noted no challenge to this principle and found no error in the Tribunal's conclusion that reopening was valid. The Court did not find any material irregularity or illegality in the reopening process.

Issue (ii): Confirmation of Additions Based on Material Not Provided for Rebuttal

The appellant contended that additions were confirmed based on material and statements not disclosed for cross-examination, violating principles of natural justice. The Court observed that the Tribunal's order did not explicitly address this procedural grievance.

However, the Court relied on the overall record and found that the appellant had adequate opportunity to contest the additions and that the material was part of the record. The Court did not find sufficient grounds to interfere with the Tribunal's findings on this procedural aspect.

Issue (iii): Whether Purchases Were Bogus

The Tribunal held that the purchases were bogus, based on evidence including the nature of the sellers (bogus paper concerns), lack of genuine business transactions, and corroborative statements. The Court noted that the Tribunal's conclusion was supported by material on record and consistent with established legal principles regarding accommodation entries and sham transactions.

Precedents recognize that transactions lacking commercial substance and involving accommodation entries can be treated as bogus. The Court found no error in the Tribunal's application of law to facts in holding the purchases as bogus.

Issue (iv): Enhancement of Addition from 5% to 6% Without Cogent Reasons

The Tribunal enhanced the addition on bogus purchases from 5% (confirmed by the Commissioner of Income Tax (Appeals)) to 6% without providing detailed reasons. The appellant challenged this as arbitrary.

The Court noted that the enhancement was minor and within the Tribunal's discretionary power to estimate additions. The Court referred to a connected Tax Appeal by the revenue, where the Tribunal's power to fix additions at 6% was upheld, citing the decision in Mayank Diamonds Pvt. Ltd. and other precedents.

The Court held that the absence of elaborate reasons for the 1% enhancement did not vitiate the order, especially since the quantum was modest and consistent with judicial trends in such matters.

Issue (v): Allegation of Perversity in Tribunal's Order

The appellant alleged that the Tribunal's order was perverse for failing to appreciate facts, evidence, and settled legal principles. The Court examined the record and found that the Tribunal's order was reasoned and based on relevant evidence and applicable law.

The Tribunal had considered documentary evidence, statements, and legal precedents comprehensively. The Court found no perversity or miscarriage of justice warranting interference.

Related Issue: Quantum of Addition on Bogus Purchases

The connected Tax Appeal by the revenue challenged the Tribunal's limitation of addition to 6% of purchases, against the AO's disallowance of 100%, contending that the purchases were sham transactions fabricated through bogus paper concerns.

The Court referred to the decision in Principal Commissioner of Income Tax vs. Pankaj K. Chaudhary, which upheld the Tribunal's approach of estimating addition at 6%, relying on the Gujarat High Court's decision in Mayank Diamonds Pvt. Ltd., which fixed additions at 5% of turnover for similar bogus purchase cases.

The Court dismissed the revenue's appeal and consequently applied the same reasoning to the appellant's appeal, holding that the Tribunal's quantum of addition was justified and consistent with settled legal principles.

3. SIGNIFICANT HOLDINGS

The Court made the following crucial legal determinations:

"The reopening of assessment under Section 147 was validly upheld by the Tribunal on the basis of material indicating escapement of income through bogus purchases."

"The Tribunal was justified in confirming additions on bogus purchases despite the appellant's contention regarding non-disclosure of certain material for cross-examination, as the appellant had adequate opportunity to contest and the material was part of the record."

"The impugned purchases were correctly held to be bogus, supported by evidence of sham transactions and accommodation entries, consistent with established legal principles."

"The enhancement of addition from 5% to 6% by the Tribunal, though without detailed reasons, was within its discretionary power and consistent with judicial precedents, and did not warrant interference."

"The Tribunal's order was neither perverse nor contrary to settled legal principles, having duly considered facts, evidence, and relevant case law."

"The limitation of addition to 6% of purchases in cases of bogus purchases is supported by authoritative precedent and represents a reasoned judicial approach balancing the need to disallow bogus transactions without imposing excessive penalties."

Accordingly, the appeal was dismissed in consonance with the prior decision in the connected Tax Appeal No.107 of 2024, affirming the Tribunal's order and reasoning.