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Johnson Cables Pvt. Ltd. Vs. ITO, Ward-14(1) - (Income Tax Appellate Tribunal) (16 Aug 2019)

There should be reason to believe about escapement of income for initiation of reassessment proceedings, sufficiency of material cannot be considered at that stage


Direct Taxation

Present two appeals by the assessee relating to the assessment years arise out of the common order passed by the Commissioner of Income-tax (Appeals). In facts of present case, for A.Y. 2011-12, the Assessing Officer (AO) got information from the Sales Tax Department that the assessee received fake purchase bills from Hawala dealers, to the tune of Rs. 1,28,26,897. Notice was issued under Section 148 of Income Tax Act, 1961. After entertaining objections from the assessee, the AO made addition @ 12.5% of bogus purchases amounting to Rs. 16,03,362. For the A.Y. 2011-12, the assessee was found to have received accommodation bills to the tune of Rs. 1,11,79,133. Applying the same percentage of 12.5%, the AO made addition of Rs. 13,97,391. The CIT(A) upheld the assessment orders.

In so far as the initiation of reassessment is concerned, it is clear that the AO got specific information from the Sales tax Department about the assessee being a beneficiary of fake accommodation entries from hawala dealers. The contention of the assessee that reassessment on such basis is wrong, in my considered opinion, completely unfounded.

The Hon'ble Supreme Court in Raymond Woolen Mills vs. ITO has held that, there should be reason to believe about the escapement of income at the stage of initiation of reassessment proceedings. Sufficiency or correctness of such material cannot be considered at that stage. The Hon'ble Apex Court has held in ACIT vs. Rajesh Jhaveri Stock Broker (P) Ltd. that, 'The word "reason" in the phrase "reason to believe" would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion'.

In facts of the instant case, it is seen that the AO received information from the Sales Tax Department about the beneficiaries of accommodation entries, which included the name of the assessee. There was a close nexus between report of the Sales tax Department and the formation of belief by the Assessing Officer about the escapement of income of the assessee for the year under consideration. Such information was specific, not general or vague. Thus, it is abundantly clear that such a material was sufficient enough for the Assessing Officer to initiate the reassessment. No exception can be taken to the view canvassed by the Assessing Officer in initiating the reassessment on this score. The ground taken by the assessee is thus dismissed.

With regard to challenge to the making of addition on the basis of bogus purchase bills, It is seen that the issue of bogus purchases has recently come up for consideration before the Hon'ble Bombay High Court in Pr. CIT Vs. Mohommad Haji Adam & Co. Vide its judgment, the Hon'ble jurisdictional High Court has held that, no ad hoc addition at the rate of 10% of bogus purchases is warranted. Rather the addition should be made to the extent of difference between the gross profit rate on genuine purchases and gross profit rate on hawala purchases. Such details are not readily available with the ld. AR as well to facilitate the calculation of gross profit rates of genuine and hawala purchases. Under these circumstances, the impugned order is set aside and matter remitted to the file of the AO to recompute the amount of additions. Both the appeals are partly allowed.

Relevant : Raymond Woollen Mills Ltd. vs. Income Tax Officer and Ors. MANU/SC/2045/1997, Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. MANU/SC/2389/2007


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