2025 (5) TMI 1585 - AT - Income Tax

Estimation of income - disallowance of bogus purchases - HELD THAT - Assessee has already declared the sales and also recorded accommodation entries the AO has disallowed the whole purchases as not proper. Hon ble High Court has considered similar issues and they held that in case of bogus purchases only certain percentages has to be sustained as income of the assessee considering the actual benefit earned by the assessee in such transactions. As assessee has already declared GP rate of 2.1% in its return of income. Therefore ITAT has sustained GP rate of 12.5% as reasonable addition. In the present case assessee has already declared GP rate of 2.1% (approx.) in the return of income therefore the differential rate of 10% may be added as income of the assessee i.e. 12.5% minus 2.5%. Appeal of the assessee is partly allowed.

Summary

The core legal questions considered in this appeal revolve around the validity and jurisdiction of reopening the assessment under Sections 147/148 of the Income Tax Act, 1961; the correctness and reasonableness of the addition on account of alleged bogus purchases; adherence to principles of natural justice including the opportunity of cross-examination; the adequacy and appreciation of documentary evidence submitted by the assessee; the application of legal principles regarding the quantum of addition in cases of bogus purchases; the reliance on information from the Investigation Wing without further inquiry; the impact of audited books of accounts on the assessment; and consistency in assessment treatment vis-`a-vis prior orders involving similar transactions.

Regarding the reopening of assessment under Sections 147/148, the primary legal framework requires the Assessing Officer (AO) to satisfy jurisdictional preconditions, including the existence of new material or information warranting reassessment. The assessee contended that no new material was brought on record and no independent inquiry was conducted, rendering the reopening invalid. The Tribunal examined whether the information received from the Directorate of Income Tax Investigation (DDIT) constituted sufficient grounds. The Court noted that the AO acted upon information from the Investigation Wing alleging suspicious transactions with a party engaged in an unrelated business (cashew nuts) despite the assessee's business in fabrics. The Tribunal found the reopening procedurally valid, as the AO had jurisdiction to reassess upon receipt of credible information indicating possible undisclosed income. Thus, the reopening was upheld.

On the issue of the addition for alleged bogus purchases amounting to Rs. 24,20,165/-, the legal principle is that purchases must be genuine and supported by evidence of delivery to be allowable expenses. The AO disallowed the entire amount, relying on the absence of proof of delivery and corroborative evidence. The assessee submitted purchase bills, payment proofs through banking channels, delivery challans, and audited financial statements to substantiate the genuineness of transactions. However, the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] found these insufficient and relied heavily on information from the Investigation Wing without conducting independent verification. The assessee argued this was a non-application of mind and arbitrary.

The Tribunal recognized the reliance on Investigation Wing information but emphasized the need for independent inquiry under Sections 131 and 133(6) of the Act to verify such claims. The failure to conduct such inquiries was a lacuna but did not entirely negate the basis for addition. The Tribunal further examined judicial precedents which established that in cases of bogus purchases, it is not necessary to disallow 100% of the purchases; rather, a reasonable addition based on the gross profit (GP) rate should be made to reflect the actual benefit derived.

Applying this principle, the Tribunal noted that the assessee had declared a GP rate of approximately 2.1% in the return of income. The Tribunal observed that various Benches of the Income Tax Appellate Tribunal (ITAT) have sustained a GP rate of 12.5% as a reasonable addition in similar cases. Therefore, instead of sustaining the entire disallowance, the Tribunal directed an addition equivalent to the difference between 12.5% and the declared 2.1%, effectively adding 10.4% as income attributable to the alleged bogus purchases. This approach balanced the need to tax unaccounted income without imposing an arbitrary and disproportionate addition.

Regarding the principles of natural justice, the assessee contended that no opportunity was given to cross-examine the persons whose statements formed the basis of the bogus purchase allegations. The Tribunal acknowledged this contention but did not find that the failure to allow cross-examination vitiated the entire reassessment, especially where the assessee was given opportunities to submit documentary evidence and explanations. Nonetheless, the Tribunal emphasized that adherence to natural justice is critical and should be observed in future proceedings.

The Tribunal also addressed the contention that the books of accounts were duly audited without discrepancies, which should weigh in favor of the assessee. While recognizing the audit, the Tribunal held that an audit report alone does not conclusively prove the genuineness of transactions when credible information suggests otherwise. Thus, the audit was a relevant but not decisive factor.

On the issue of consistency and prior treatment, the assessee pointed out that in a related assessment involving the Karta with identical facts and transactions, only 12.5% of the purchases were added to income, whereas in the present case, 100% was added. The Tribunal found merit in this argument, noting that consistency in assessment is a recognized principle to ensure fairness and avoid arbitrariness. The Tribunal's reduction of the addition to the differential GP rate aligned with this principle and remedied the inconsistency.

In conclusion, the Tribunal held that the reopening of assessment was valid, the addition for bogus purchases was justified but not to the extent of 100%, and a reasonable addition based on the GP rate differential was appropriate. The Tribunal emphasized the necessity of independent inquiry and adherence to natural justice principles. The appeal was partly allowed by reducing the addition accordingly.

Significant holdings include the Tribunal's observation that "in cases of bogus purchases, various Benches of ITAT have sustained GP rate of 12.5% as reasonable addition," and that "where the assessee has declared a GP rate of 2.1%, the differential rate of 10% may be added as income." This establishes the principle that additions for bogus purchases should be proportionate to the actual benefit derived, rather than a blanket disallowance. The Tribunal also underscored the importance of consistency in assessment treatment and the need for independent verification beyond mere reliance on information from the Investigation Wing.