2025 (6) TMI 1519 - AT - Income Tax

Bogus purchases - purchases from the three tainted parties - CIT(A) deleted addition - HELD THAT - On a perusal of the order of the CIT(Appeals) it transpires that the assessee had joined as a partner in M/s. Gauri Construction in A.Y. 2011-12 the year in which M/s Gauri Construction was converted into a firm from a proprietorship concern. CIT(Appeals) further opined that when the bogus transactions of M/s Gauri Construction for the year A.Y.2010-11 were noticed by the Commercial tax Department subsequently they were tagged alongwith the PAN of the partner which by that time was the assessee. It was also observed by the CIT(A) that the notices of the A.O were addressed to M/s Gauri Construction but the PAN was used that of the assessee. When all the evidences placed before the A.O were in the name of M/s. Gauri Construction therefore there was no justification on the part of the A.O to have drawn adverse inferences in the hands of the assessee. CIT(Appeals) who had rightly vacated the addition and thus uphold the same. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal pertain primarily to the validity of the addition made by the Assessing Officer (A.O) on account of alleged bogus purchases and the legality of the reassessment proceedings initiated under section 147 read with section 143(3) of the Income-tax Act, 1961. Specifically, the issues are:

1. Whether the Commissioner of Income-Tax (Appeals) (CIT(A)) was justified in deleting the addition of Rs. 9,56,180/- made by the A.O on account of bogus purchases purportedly made by the assessee.

2. Whether the reassessment proceedings initiated under section 147/148 were valid, including the legality of the notice issued, jurisdiction of the A.O, and compliance with procedural requirements such as issuance of notice under section 143(2).

3. Ancillary issues raised by the assessee as cross objections challenging the reopening of the assessment on grounds of lack of material for formation of belief, jurisdictional issues, and procedural lapses.

Issue-wise Detailed Analysis

Issue 1: Validity of Addition on Account of Bogus Purchases

Relevant Legal Framework and Precedents: Section 147 of the Income-tax Act permits reopening of assessment if the A.O has reason to believe that income chargeable to tax has escaped assessment. The A.O must have tangible material to form such belief. The addition for bogus purchases is generally made when purchases are found to be fabricated or unsupported by evidence, thereby inflating expenses and reducing taxable income. Precedents require the A.O to verify the genuineness of transactions through documentary evidence, cross-examination, and verification of books and bank statements.

Court's Interpretation and Reasoning: The A.O initiated reassessment based on information from the Commercial Tax Department alleging that the assessee had taken bogus purchase bills amounting to Rs. 38,24,721/- from three concerns. The A.O disallowed 25% of this amount (Rs. 9,56,180/-) relying on a precedent where such a percentage was disallowed in similar circumstances.

The CIT(A) undertook a detailed examination of facts and submissions. It was noted that the assessee had not claimed any purchases in his return of income and had declared income from other sources only, with no business income. The CIT(A) highlighted two recognized modes of bogus purchases: (i) outright bogus purchases debited to inflate expenses, and (ii) purchases where bills are obtained from entry providers while actual material is purchased without bills. In both cases, purchases are debited in books. However, in this case, the purchases were not debited, indicating that the addition was made on a presumption unsupported by facts.

The CIT(A) further observed that the A.O failed to verify the information by not examining bank statements or issuing summons to the alleged bogus parties under sections 131 or 133(6). The A.O relied solely on information from the Commercial Tax Department without cross-verification.

Crucially, the CIT(A) found that the alleged bogus purchases were actually made by another concern, M/s Gauri Construction, in which the assessee became a partner only in the subsequent assessment year (2011-12). The bills from the three parties were in the name of M/s Gauri Construction, not the assessee. The Commercial Tax Department's information had apparently tagged the partner's PAN (the assessee's) with the transactions of M/s Gauri Construction, leading to misidentification. The CIT(A) relied on documentary evidence including notices addressed to M/s Gauri Construction, admissions by that concern, and copies of bills to conclude that the addition was wrongly made in the assessee's hands.

Key Evidence and Findings: The bills from the three parties were in the name of M/s Gauri Construction, not the assessee. The assessee's return showed no purchases. Notices and communications were addressed to M/s Gauri Construction. The assessee was a partner in the firm only from A.Y. 2011-12. The A.O did not verify bank statements or summon the alleged parties. The CIT(A) found the addition to be based on presumption rather than material evidence.

Application of Law to Facts: The A.O's addition lacked foundation as the assessee had not claimed the purchases, and the transactions pertained to a different entity. The CIT(A) correctly applied the principle that reopening and additions must be based on tangible material and not mere suspicion or unverified information. The failure to verify information and reliance on mere data from the Commercial Tax Department was held to be improper.

Treatment of Competing Arguments: The Revenue argued that the information from the Commercial Tax Department was sufficient to form belief of escapement. The assessee contended that no such transactions were entered into and that the transactions belonged to M/s Gauri Construction. The CIT(A) accepted the assessee's contentions after detailed scrutiny and rejected the Revenue's reliance on unverified information.

Conclusion: The CIT(A) rightly deleted the addition of Rs. 9,56,180/- on merits. The Tribunal upheld this view, finding no infirmity in the CIT(A)'s conclusion.

Issue 2: Legality of Reassessment Proceedings and Notices

Relevant Legal Framework: Section 147 allows reopening if there is reason to believe income has escaped assessment. Section 148 requires issuance of notice for reassessment. The A.O must have jurisdiction and must comply with procedural safeguards including issuance of notice under section 143(2) where applicable. The reopening must be based on material and not mere change of opinion.

Court's Interpretation and Reasoning: The assessee raised grounds challenging the reopening on the basis that no material existed for formation of belief, the notice was issued by a non-jurisdictional officer, and no notice under section 143(2) was issued. The CIT(A) did not adjudicate these grounds as the appeal was allowed on merits of the addition. The assessee did not press these grounds before the Tribunal.

Key Evidence and Findings: The record showed that the notice under section 148 was issued by the A.O based on information from Commercial Tax Department. The reassessment order was passed without issuance of notice under section 143(2). The jurisdictional issue and procedural lapses were raised but not pursued.

Application of Law to Facts: Since the addition was deleted on merits, the procedural and jurisdictional challenges became academic. The Tribunal noted the concession by the assessee not to press cross objections on these grounds.

Treatment of Competing Arguments: The Revenue did not specifically address these procedural issues in detail. The assessee raised them but did not press them at the Tribunal stage.

Conclusion: The procedural grounds were dismissed as not pressed and did not affect the outcome.

Significant Holdings

"The entire addition has been made based on some presumption, which does not exist in reality."

"The AO should have called for the bank statement of the appellant to check as to whether he entered into any transaction with those parties. The AO should have issued summons u/s 131 or at least notice u/s 133(6) to those tainted parties and should have collected information as to whether those parties entered into any transaction with the appellant. However, the AO did nothing and merely relied on the data from Commercial Tax Department when the appellant was showing the evidences contrary to what the information was received by the AO."

"The impugned purchases aggregating to Rs. 38,24,271/- alleged to have been made by the assessee from three parties ... were actually the purchases that were made by M/s.Gauri Construction ... when all the evidences placed before the A.O were in the name of M/s. Gauri Construction, therefore, there was no justification on the part of the A.O to have drawn adverse inferences in the hands of the assessee."

Core principles established include the necessity for the A.O to base reopening and additions on tangible, verified material rather than unverified information or presumption; the requirement to verify information through appropriate procedures; and the inadmissibility of making additions where the transactions pertain to a different legal entity.

Final determinations:

- The addition of Rs. 9,56,180/- on account of alleged bogus purchases was deleted as it was not supported by evidence and was based on mistaken identity of the assessee with another entity.

- The reassessment proceedings were upheld as valid on the limited grounds considered, with procedural objections not pressed.

- The appeal filed by the Revenue was dismissed; the cross objection filed by the assessee was also dismissed as not pressed.