1. Introduction

Reopening of assessments under section 147 of the Income-tax Act, 1961 is one of the important tools to safeguard the leakage of revenue. Since past few years, there have been plethora of re­opening of cases relating to bogus purchases. Recent trends in the Income tax department is the reopening of the assessment by the AO on the basis of the information received from the Sales Tax Department/other AO. During the re­assessment/assessment proceedings almost all the notices issued 
u/ss. 133(6)/131 of the Act sent by the AO to the supplier returned unserved. Even the assessee is unable to produce the suppliers for verification of purchases.

As tax professionals, it is our duty to make proper representation before the Assessing Officer as well as Appellate Authorities within the framework of law. Proper representation before the tax authorities becomes very important, because once the addition is confirmed by the Tribunal, the Assessing Officer will levy the concealment penalty, and once the penalty is confirmed the department may initiate prosecution proceedings. Therefore, it is imperative to make a proper representation before the Assessing Officer and in case of reopening proceedings, where proceedings are not dropped and the AO proceeds to frame a reassessment order making additions, one is required to draft proper grounds of appeal and statement of facts before Commissioner (Appeals). Many-a-times, it is observed that assessees/their representatives do not file or file inadequate and incomplete statement of facts and in the grounds of appeal even the grounds challenging the reopening proceedings is not taken.

2. Requirement of recording of proper reasons

It is the author’s experience that in almost fifty per cent of the cases, if not more, entire re-opening proceeding is held by the appellant authority – if not CIT(A) then the ITAT – to be bad in law. As a consequence, the additions made by the AO in the reassessment order fall to the ground.

As such, it becomes important that the grounds challenging the reopening proceedings are taken before the appellate authorities.

There are various judicial precedents which can be gainfully employed in an event a challenge is thrown by the assessee to the reopening of assessment. They are discussed in brief as 
under –

1. There should be direct nexus between the material coming to the notice of the AO and the formation of belief that there is escapement of income.

* Lakhmani Mewal Das 103 ITR 437 (SC).

2. If there is no material or there is no rational and intelligent connection between the reasons and belief, so that on such reasons, no one properly instructed on the facts and law could reasonably entertain the belief, the conclusion would be that the AO had no reasons to believe.

* Ganga Saran & Sons (P) Ltd. v. ITO 130 ITR 1 (SC)

3. (a) The words used in section 147 are “has reason to believe” and these words are stronger than the words “is satisfied”.

(b) The belief entertained by the ITO must not be arbitrary or irrational. It must be based on reasons which are relevant and material.

* Ganga Saran & Sons (P) Ltd. v. ITO 130 ITR 1 (SC)

* ITO v. Nawab Mir Barkat Ali Khan Bahadur 97 ITR 239 (SC)

4. The words of the statute are “reason to believe” and not “reason to suspect”.

* Bir Arjna Enterprises (P) Ltd. v. ITO 204 ITR 258 (J&K).

5. The belief must be held in good faith, it cannot be merely a pretence.

* Madhya Pradesh Industries (P) Ltd. v. ITO 77 ITR 268 (SC)

* Y. Rajan v. ITO 77 ITR 839 (AP)

* Abdul Majid v. ITO 178 ITR 616 (MP)

6. The AO may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour.

‘k Sheo Nath Singh v. CIT 82 ITR 147 (SC)

3. Direct decisions holding reopening to be bad merely on the basis of “information” as to bogus purchases/transactions

a) In a case before the Hon’ble Delhi High Court in the case of CIT vs. Shri Atul Jain 299 ITR 383, the facts were that the assessee had purchased shares of 
M/s. Globe Commercials Ltd. through M/s. Maheshwari Sons, stock and share broker. Subsequently, these shares were sold at a much higher value through another broker Satish Kumar Goel, proprietor of R. K. Aggarwal & Co. The assessee had disclosed long-term capital gains arising from the transaction. According to the AO some intra-departmental information was received by the Assessing Officer to the effect that the assessee had taken a bogus entry of long term capital gain after paying the equivalent amount in cash together with premium for the accommodation entry to Satish Kumar Goel. This information was received from the Deputy Director of Income Tax (Investigation), Gurgaon. Based on the information received, the Assessing Officer took action to issue a notice under Section 148 of the Income-tax Act, 1961 to the assessee. The AO proceeded to record ‘reasons to believe’ as under

“As per information received from DDIT (Inv.) Gurgaon, the assessee had taken bogus entry of capital gains ₹ 1,08,845/- on 22-6-1996 (A.Y. 1997-98) by paying cash along with some premium and taking cheque of same amount.”

According to the Hon’ble High Court, the reasons recorded were vague and not proper. The Assessing Officer had not even recorded his satisfaction about the correctness or otherwise of the information. The Assessing Officer did not verify the correctness of the information received by him but merely accepted the truth of the vague information in a mechanical manner. Therefore, the entire reassessment order was quashed.

b) In another case before the same High Court in the case of CIT v. SFIL Stock Broking Ltd. reported in 325 ITR 285 the facts were similar. In this case before the High Court the facts were that the assessee in his original return of income filed on 30th Nov., 1998 had shown a long-term capital gain of ₹ 40,953/-. The said return was processed under section 143(1) on 22nd March, 2002. Subsequently, by a letter dt. 17th March, 2003, the Dy. Director of IT (Inv.) informed the AO of the assessee that during the course of investigation Shri Satish Goel, proprietor of M/s. R. K. Aggarwal & Co. has stated on oath that the transactions through bank account No. 003097, of Corporation Bank were only paper transactions in which the party was intending to take bills paid in cash and issue cheques/drafts showing the said amounts as sale of shares. It was further informed that he was neither a share broker nor a member of any stock exchange and that he was doing the work of giving entries. Further information was given that the entry of ₹ 20,70,000/- in Account No. 003097, dt. 28th Feb., 1998 and 1st March, 1998 was nothing but entry taken by paying cash. Thereafter, on the basis of the aforesaid information, a notice under section 148 of the said Act was issued by the AO to the assessee, which was allegedly the beneficiary of the bogus claim of long-term capital gains shown on sale/purchase of shares.

The Hon’ble High Court had once again no hesitation in holding the reassessment order as invalid on the basis of improper reasons recorded i.e., without applying his mind to the information and without independently arriving at a belief.

c) In yet another case which was before the Hon’ble Gujarat High Court in the case of Varshaben Sanatbhai Patel v. ITO (unreported decision), where the reopening was done on the basis of alleged information in regard to alleged bogus purchases made by the assessee, the reasons recorded were as under –

“On verification of details available on records, it is noticed that assessee has made bogus purchases of ₹ 30,65,639/- during the financial year 2008-09 i.e. A.Y. 2009-10. By claiming bogus purchases in the trading and P&L A/c as an expense, the assessee has shown less profit to the extent of the amount of bogus purchases.”

The reopening proceedings were challenged before the High Court by filing a writ petition. The Court again quashed the reopening by giving the following reasoning –

“It is settled legal position as held by a catena of decisions that the substratum for formation of belief that income liable to tax has escaped assessment has to form part of the reasons recorded. In the present case, the substratum for formation of belief, as indicated in the order rejecting the objections as well as the affidavit­ in reply, is the information given by the DGIT (Inv.), Mumbai, which got no relation with the reasons recorded, which are stated to be based upon the material available on record. Under the circumstances, the Assessing Officer, on the basis of the material on record, could not have formed belief that there was any escapement of income chargeable to tax so as to validly assume jurisdiction under section 147 of the Act.”

d) In another case before the Delhi Tribunal in the case of Unique Metal Industries v. ITO, Order dtd. October 28, 2015, reopening once again was solely on the basis of information received from another AO that the assessee has booked bogus bills but without independent application of mind of the AO of the assessee to the information. Such re­openimg was held to be invalid.

4. Following decisions may be gainfully employed in case of normal scrutiny proceedings where AO alleges bogus purchases

a) Sagar Bose v. lncome-tax Officer 56 ITD 561 (Cal.)

“The assessee had furnished all the details and particulars of purchase and sales item­ wise, bill-wise, amount-wise, quantity-wise, date-wise, stock folio-wise and had established the linkage and correlation between the purchases and sales. The assessee had explained that goods were purchased, materials were consumed and thereafter respective sales were effected but the Assessing Officer had rejected this contention only on the ground that as seller was non-existent, there could not have been any purchases. The Assessing Officer had not analysed data and figures of production with reference to the stock register and purchases, production and sales, etc., in order to correlate the purchases and production on one hand and the sales and stock on the other. Whether such correlation and linkage existed between purchase and production on one hand and sales on the other was completely ignored by the Assessing Officer.”

b) Deputy Commissioner of Income-tax v. Adinath Industries 252 ITR 476 (Guj.)

“Where Assessing Officer observed that purchases made by assessee from ‘GI’ were fake and latter was only a billing agent, its S.T. Registration had been cancelled and payments made by bearer cheques to party were withdrawn on same day, assessee, however, submitted all details like bills, gate pass, receipt note, weight note, laboratory report, sample report, truck number, etc., and the Assessing Officer had himself accepted existence of ‘GI’ in another case. Held, since assessee had produced all relevant materials to show purchase of materials and their use in production, Tribunal was justified in deleting addition made”.

c) When purchases are recorded in the books (and evidence of use is there), it cannot be added Shivalik Loha Mills 126 Taxman 101 (Chdg.)(Mag.)

d) Bogus loss in shares.

Where payment by account payee cheque is not disputed and also the existence of the booker is not in dispute the claim of loss cannot be denied even if after the issue of summons, the booker does not appear.

CIT vs. Carbo Industrial Holdings Ltd. 244 ITR 422 (Cal.)

e) Non-production of the share broker by the assessee (if other conditions as above are satisfied) but all the details of purchase and sale of shares are furnished – loss claimed is genuine.

CIT v. Emerald Commercial Ltd. & Ors. 250 ITR 539 (Cal.)

f) Pijush Ghana v. ITO, ITA No. 1646 /K/ 09, ‘A’ Bench order dated 18th May, 2010.

The AO added the undisclosed purchase and further estimated the gross profit relatable to this undisclosed purchase.

Held, since the AO has estimated the gross profit on the undisclosed purchase, there is no justification for separate addition of undisclosed purchase treating it as unexplained expenditure of the assessee u/s. 69C of the Act.

g) Where purchaser could not be verified but were supported by bills, entries were made in books of account and payment was made by cheque, no addition can be made.

CIT v. Nangalia Fabrics (P) Ltd. [Guj.] 40 taxmann.com 206

h) Investment in undisclosed purchases cannot be added on estimate basis

– Goodwill Impex, New Delhi v. assessee dated 15th January, 2016

ITA No. 2151/Del/2009 & CO No. 199/Del/2009

– India Seed House v. Assistant Commissioner of Income-Tax 116 Taxman 40 (Delhi)(Mag.) (TM)

[Source : Article printed in souvenir of National Tax Conference held on 2nd & 3rd September, 2017 at Kolkata]

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