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2025 (5) TMI 610 - AT - Income TaxValidity of the reassessment - flagged information under Risk Management Strategy constitutes valid information for reopening under the amended law w.e.f. 01.04.2021 - bogus purchases from a supplier flagged as a high-risk entity by GST authorities - CIT(A) concluded that the possibility of inflation in the purchase price or the transaction being in the nature of accommodation entries could not be ruled out - Addition u/s 69C restricted by the CIT(A) to 10% of the transaction value on an estimated basis. HELD THAT - AO issued notice u/s 148A(b) duly considered the assessee s response and passed an order under section 148A(d) followed by issue of notice under section 148. CIT(A) has upheld the validity of such reopening by relying on Explanation 1(i) to Section 148 which was inserted by the Finance Act 2021 and deems information flagged under the prescribed strategy as information suggesting escapement of income. We are in agreement with the view of the CIT(A) in this regard. The procedure followed by the AO complies with the amended framework of law and therefore the ground challenging the validity of the reassessment is liable to be rejected. Accordingly Ground No. 1 of the appeal is dismissed. Estimation of income on bogus purchases - In line with the principle laid down in Jigisha Satishkumar Mehta 2022 (9) TMI 1324 - GUJARAT HIGH COURT and the ultimate ratio of N.K. Industries Ltd. 2016 (6) TMI 1139 - GUJARAT HIGH COURT we consider it just and reasonable to restrict the disallowance to 5% of the purchase value i.e. 5% of Rs. 18, 00, 000/- resulting in an addition of Rs. 90, 000/-. This estimation safeguards the interest of revenue while preventing double taxation and undue hardship to the assessee. Appeal of the assessee is partly allowed.
The core legal questions considered in this appeal are twofold: first, the validity of the reassessment proceedings initiated under section 147 of the Income-tax Act, 1961 ("the Act"); and second, the correctness and quantum of the addition made by the Assessing Officer (AO) under section 69C of the Act, relating to alleged bogus purchases from a supplier flagged as a high-risk entity by GST authorities.
Regarding the validity of reassessment, the issue was whether the reopening of the assessment was justified on the basis of information flagged under the Risk Management Strategy of the CBDT through the Insight Portal, specifically concerning purchases from a vendor identified as issuing fake invoices and involved in accommodation entries. The AO issued notices under sections 148A(b), 148A(d), and 148 after considering the assessee's replies. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the reopening relying on Explanation 1(i) to Section 148, inserted by the Finance Act, 2021, which deems information flagged under prescribed risk management strategies as valid "information" for reopening assessments. In analyzing this issue, the Court examined the amended legal framework introduced w.e.f. 01.04.2021, which expanded the scope of "information" sufficient to trigger reassessment. The Court found that the AO complied with the procedural requirements, including issuing requisite notices and considering the assessee's replies before reopening. The Court agreed with the CIT(A) that information from the Insight Portal qualifies as valid "information" under Explanation 1(i) to Section 148, thus validating the reassessment. The assessee's contention that the AO failed to record independent satisfaction was rejected. Consequently, the Court dismissed the ground challenging the reassessment's validity. The second and principal issue concerned the addition of Rs. 20,14,258/- made by the AO under section 69C, treating the entire purchase amount from the flagged vendor as unexplained expenditure due to alleged bogus input tax credit and accommodation entries. The CIT(A) reduced this addition to 10% of the purchase value, estimating embedded income from possible inflated purchases. The assessee challenged both the quantum and the basis of this addition, contending that the purchases were genuine, supported by tax invoices, bank payments, stock registers, and GST returns; that the books of account were not rejected; and that the corresponding sales were accepted by the department with declared gross profit of 13.31%. The assessee also highlighted that the vendor's GST registration cancellation occurred after the relevant year and that in a subsequent assessment year (AY 2021-22), scrutiny of similar purchases from high-risk vendors resulted in acceptance of income without disallowance. The Court undertook a detailed examination of the evidence and judicial precedents. It noted that the purchases were reflected in audited books, supported by banking transactions and stock records, and that sales were declared and accepted, with no rejection of books under section 145(3). The AO's reliance on the vendor's flagged status and GST registration cancellation was acknowledged, but the Court emphasized the absence of any enquiry or cross-examination by the assessee to disprove the allegations. The CIT(A)'s approach of estimating embedded income by applying 10% disallowance was recognized as an attempt to balance the competing interests. However, the Court found the AO's complete disallowance of the purchases under section 69C to be excessive and not warranted on the facts, especially since the sales were accepted and payments were made through banking channels. The Court distinguished the AO's reliance on the Gujarat High Court decision in N.K. Industries Ltd. v. DCIT, noting that in that case, the facts involved search and seizure operations revealing sham transactions, admissions under section 132(4), and seizure of fictitious documents, which are absent here. The Court highlighted that the N.K. Industries decision ultimately held that tax cannot be levied on the entire purchase value when sales are accepted, but only on the profit element embedded in the transactions. Further, the Court referred to the more recent Gujarat High Court decision in PCIT v. Jigisha Satishkumar Mehta, which upheld a modest addition of 5% of the alleged bogus purchases where documentary evidence was produced but the possibility of non-genuine billing could not be ruled out. The Court found the facts of the present case closely analogous to Jigisha Satishkumar Mehta, where the vendor was high risk but the assessee furnished primary evidence supporting the transactions. Balancing these precedents and the evidentiary record, the Court concluded that while the entire disallowance was unjustified, a reasonable estimation of embedded income was warranted due to the flagged nature of the vendor and the failure to conclusively establish arm's length pricing. The Court therefore modified the CIT(A)'s 10% addition downward to 5% of the purchase value of Rs. 18,00,000/-, resulting in an addition of Rs. 90,000/-. This approach was deemed just and reasonable, safeguarding the revenue's interest while preventing double taxation and undue hardship to the assessee. The Court also addressed the dispute over the purchase amount, accepting the assessee's submission that the correct figure was Rs. 18,00,000/- as opposed to Rs. 20,14,258/- flagged on the GST portal, since the latter represented an alleged ITC mismatch rather than the actual transaction value. The AO was directed to verify and give effect to the addition accordingly. In summary, the Court held:
Thus, the appeal was partly allowed, with the reassessment upheld but the addition under section 69C substantially reduced.
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