2025 (7) TMI 821 - AT - Income Tax

Estimation of income - bogus purchases - addition of 25% with regard to bogus purchases - information received from Sales Tax department rooted through DGIT(Inv) that two parties namely were indulged in providing accommodation entries and assessee is one of the beneficiaries. Assessee furnished ledger accounts bank statement delivery challan corresponding sales and tax invoices but AO has rejected these documents holding that ledger accounts are own prepared documents and delivery challan does not mention any truck lorry number or any other mode of transportation HELD THAT - Once the assessee has shown source of the purchases from the books reflecting in the bank statement and corresponding sales has not been disputed then to infer that entire purchases are outside the books so as to make entire addition is unjustified. At the most it could be a case of suppression of profits whereby even if it is accepted that assessee might have paid the cheque to such parties and after receiving the cash back has purchased the material from the grey market it only leads to suppression of profits. In such a scenario application of GP rate is sufficient. Here in this case CIT(A) has already applied huge GP rate of 25% of such purchases which itself is at a much higher side. Accordingly we do not find any infirmity in the order of the ld.CIT(A) and the same is confirmed. Appeal of the Revenue is dismissed.

Summary

The core legal question considered in this appeal is whether the Assessing Officer (AO) was justified in making the entire addition of Rs. 41,86,53,520/- on account of alleged bogus purchases based on information received from the Sales Tax department, or whether the addition should be restricted as directed by the Commissioner of Income Tax (Appeals) [CIT(A)].

Another related issue concerns the validity and sufficiency of the evidence relied upon by the AO, including the rejection of the assessee's furnished documents such as ledger accounts, purchase bills, delivery challans, VAT invoices, and bank statements, and whether the application of a gross profit (GP) rate is an appropriate method of quantifying the undisclosed income.

Issue-Wise Detailed Analysis:

1. Legality and Justification of Reopening Assessment and Addition of Bogus Purchases

Relevant Legal Framework and Precedents: The reopening of assessment under section 147 requires that the AO have a "reason to believe" that income chargeable to tax has escaped assessment. The AO's reliance on information from the Directorate General of Income Tax (Investigation) and the Sales Tax department is a recognized basis for forming such belief. However, the reopening must be supported by tangible material, and the additions made must be justified on the basis of evidence.

Court's Interpretation and Reasoning: The Court noted that the AO's entire addition was premised on information received from the Sales Tax department that two suppliers were involved in accommodation entries, and the assessee was allegedly a beneficiary. The AO did not accept the documents produced by the assessee, including ledger accounts, purchase bills, delivery challans, VAT invoices, and bank statements, dismissing them as self-prepared or insufficiently detailed. The AO also faulted the assessee for not producing confirmations from the suppliers or the suppliers themselves.

Key Evidence and Findings: The assessee furnished detailed records including ledger accounts, bank statements showing payments through account payee cheques, delivery challans, corresponding sales invoices, and VAT returns. The corresponding sales were not disputed by the AO. The AO's rejection of these documents was based on the absence of certain details (e.g., truck numbers on delivery challans) and the non-appearance of the suppliers for verification.

Application of Law to Facts: The Court emphasized that once the assessee has demonstrated the source of purchases in the books, reflected in bank statements, and corresponding sales are not disputed, it is not justified to treat the entire purchases as bogus without further concrete evidence. The Court observed that the AO's approach of making the entire addition was excessive and unjustified.

Treatment of Competing Arguments: The Revenue argued that the information from the Sales Tax department and DGIT(Inv.) was sufficient to justify the addition, and that non-production of confirmations and suppliers warranted rejection of the documents. The assessee contended that the documents produced were genuine and sufficient to establish the purchases and corresponding sales, and that the AO's rejection was arbitrary.

Conclusions: The Court concluded that the AO's rejection of the documents and the entire addition was not sustainable. The reopening was valid, but the quantum of addition needed to be moderated.

2. Appropriateness of Restricting Addition to 25% of Bogus Purchases

Relevant Legal Framework and Precedents: In cases of suppression of profits or unexplained purchases, the application of a gross profit rate on the purchases is a recognized method to estimate the undisclosed income, especially where direct evidence is lacking or disputed. The rate applied must be reasonable and reflective of the business's gross profit margin.

Court's Interpretation and Reasoning: The Court observed that even if the purchases were partly accommodation entries with cash being routed back, this would amount to suppression of profits rather than the entire purchase being bogus. The CIT(A) had applied a gross profit rate of 25%, which the Court found to be on the higher side, thereby providing a liberal estimate in favor of the Revenue.

Key Evidence and Findings: The CIT(A) restricted the addition to 25% of the total purchases alleged to be bogus, amounting to Rs. 10,46,86,380/-. This was based on the premise that the purchases were not fully disallowed but only a portion representing suppressed profits was added back.

Application of Law to Facts: The Court held that the CIT(A)'s approach was reasonable and balanced, recognizing the prima facie information from the Sales Tax department but also giving credit to the assessee's documentary evidence. The application of a 25% gross profit rate was deemed appropriate to quantify the undisclosed income.

Treatment of Competing Arguments: The Revenue contended that the entire purchases should be added back as bogus. The assessee argued for complete rejection of the addition. The Court sided with the CIT(A)'s middle path approach.

Conclusions: The Court upheld the CIT(A)'s restriction of addition to 25% of the purchases, confirming the quantum of addition at Rs. 10,46,86,380/-.

Significant Holdings:

"Now once the assessee has shown source of the purchases from the books reflecting in the bank statement and corresponding sales has not been disputed then, to infer that entire purchases are outside the books so as to make entire addition is unjustified."

"At the most it could be a case of suppression of profits whereby even if it is accepted that assessee might have paid the cheque to such parties and after receiving the cash back has purchased the material from the grey market, it only leads to suppression of profits. In such a scenario application of GP rate is sufficient."

"Here in this case ld. CIT(A) has already applied huge GP rate of 25% of such purchases which itself is at a much higher side. Accordingly, we do not find any infirmity in the order of the ld.CIT(A) and the same is confirmed."

The Court confirmed the principle that reopening of assessment must be supported by tangible material beyond mere information, and that documentary evidence furnished by the assessee cannot be summarily rejected without cogent reasons.

In final determination, the Court dismissed the Revenue's appeal and upheld the CIT(A)'s order restricting the addition to 25% of the alleged bogus purchases, thereby reducing the quantum of income escaping assessment from Rs. 41,86,53,520/- to Rs. 10,46,86,380/-.