2025 (5) TMI 1422 - HC - Income Tax

Reopening of assessment - bogus purchases - ITAT perused the material on record and found that the Assessee had in fact established that its purchases were genuine - HELD THAT - ITAT had concluded that the Assessee had established the purchases made from the named two persons and the same could not be considered as bogus. Thus the findings of fact which are premised on a cogent material cannot by any stretch of imagination be termed as perverse or unsustainable. Plain reading of the assessment order indicates that the AO had only enhanced 20 percent of the purchases by accepting that the purchases were genuine although not from the same parties. This is not a case of accommodation entry. However CIT(A) proceeded further to hold that the purchases itself are bogus by alluring to the assessment orders passed in respect of the two persons from whom the purchases have been made. There is no material on record which would substantiate that the purchases reflected were accommodation entries. There is no allegation or finding that cash had been received back by the Assessee in respect of the purchases reflected in its books of account. On this ground alone the present appeal ought to have been dismissed.

Summary

The core legal questions considered by the Court include: (i) the validity and maintainability of the Revenue's appeal under Section 260A of the Income Tax Act, 1961, particularly in light of the tax effect threshold prescribed by the Central Board of Direct Taxes; (ii) the correctness of the reopening of assessment under Section 148 of the Act for the Assessment Year 2011-12 on the basis of alleged bogus purchases; (iii) the genuineness of the purchases made by the Assessee from certain vendors alleged to be involved in bogus transactions; (iv) the appropriateness of the additions made by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] on account of such purchases; and (v) whether the case falls within the exception of accommodation entries warranting interference despite the tax effect threshold.

Regarding the maintainability of the appeal, the Court examined the threshold limit of Rs. 2.00 Crores stipulated by the Central Board of Direct Taxes Circular dated 17.09.2024, which ordinarily bars appeals before the High Court where the tax effect is below this amount. The Revenue contended that the case fell within the exception for accommodation entries, thereby justifying the appeal. However, the Court found this contention to be unsubstantial. The assessment order accepted the genuineness of purchases, albeit from different parties, and did not establish that the transactions were accommodation entries. There was no evidence of cash being received back by the Assessee or any other indicia of accommodation entries. Consequently, the appeal was held to be not maintainable on this ground alone.

On the issue of reopening the assessment under Section 148, the AO initiated multiple rounds of reassessment proceedings based on information received from the Department's Investigation Wing alleging that certain purchases were bogus. The AO relied on the fact that the vendors were involved in suspicious cash transactions and that some vendors were not traceable at their given addresses. The AO made additions by estimating 20 percent of the purchase amounts as unexplained income. The CIT(A) enhanced this disallowance to the entire amount under Section 69C, holding that the suppliers were nonexistent. The Revenue supported these findings, relying on assessment orders passed against the vendors themselves, which noted cash deposits and withdrawals indicative of bogus transactions.

The Court analyzed the legal framework governing reassessment under Section 148, which requires the AO to have "reasons to believe" that income has escaped assessment. However, the reopening must be based on tangible material connecting the Assessee's transactions to the alleged escapement. The Court noted that the assessment orders against the vendors did not specifically reference the Assessee's purchases, nor was there any direct evidence linking the cash transactions of the vendors to the Assessee's payments. Importantly, there was no allegation that the Assessee made cash payments; payments were shown to have been made through banking channels.

In examining the genuineness of the purchases, the Court highlighted the detailed evidence furnished by the Assessee before the ITAT, including ledger accounts, purchase invoices, material receipt notes, VAT returns, weight slips, laboratory test reports, excise records, and bank statements evidencing payments. The ITAT found that the Assessee had satisfactorily established the genuineness of the purchases, and the AO's and CIT(A)'s disregard of this evidence was unwarranted. The Court emphasized that the ITAT's findings were based on cogent material and were not perverse or unsustainable.

The Court further addressed the competing arguments regarding the nature of the transactions. While the Revenue relied on the investigation reports and the assessment orders against the vendors to assert that the purchases were bogus, the Court found that such reliance was misplaced without any direct nexus to the Assessee's transactions. The CIT(A)'s enhancement of disallowance to the entire purchase amount under Section 69C was also found to be without basis, as the factual matrix did not support a conclusion that the suppliers were nonexistent or that the transactions were sham.

In conclusion, the Court held that the reopening of assessment and the additions made by the AO and CIT(A) were not justified on the facts and evidence. The ITAT's order allowing the Assessee's appeal was upheld. Additionally, the appeal filed by the Revenue was dismissed on the ground of non-maintainability due to the tax effect being below the prescribed threshold and the absence of any valid exception. The Court stated that no question of law arose for its consideration.

Significant holdings include the following verbatim excerpt from the ITAT's decision, which the Court endorsed:

"The assessee from its side, in order to prove the genuineness of purchases made from these two concerns, furnished copies of ledger accounts, purchase invoices, material, receipt notes, suppliers sale wise weight note, copies of VAT D-3, weight slip at factory premises, laboratory test report in factory of the assessee of goods purchased, details of excise register/ records maintained, bank statements showing payments made through banking channels. All these details were summarily brushed aside by the ld. AO added the profit element embedded in the value of purchases from these two concerns by estimating the profit at 20% thereon and made an addition of Rs 32,42,726/-."

This case establishes the principle that reopening of assessment under Section 148 must be supported by specific and direct material connecting the alleged escapement of income to the Assessee's transactions, and that mere adverse findings against third parties without such nexus cannot sustain additions. It also clarifies that the threshold limit for tax effect prescribed by the CBDT Circular is a substantive bar to appeals unless exceptions, such as accommodation entries, are convincingly demonstrated with supporting material.