There are several cases which have been reopened u/s 147 of the Income Tax Act 1961 (the “Act”) by Income Tax department based on the information received from various sources like sales tax (from list of hawala, or bill entry operator whose names were published by sales tax authorities on their website), investigation wing of Income Tax. The information mainly contains the copies of statements or affidavits given by the suppliers before sales tax department. There have been many cases where dealer have not been indulged in any malafide business with suspicious dealer (hawala entry operator) but has done genuine business transactions with such suspicious dealer however Income Tax Department is not accepting such purchases as genuine.
1. Now important question is that can Income Tax Department reopen assessment under section 147 of the Act based on the information available on sale tax website.
To understand the entire law we first need to understand what type of information is available with the Income Tax department.
Maharashtra Sales Tax Department has published ‘List of Suspicious Dealers, who have issued false bills, without delivery of goods. Such dealers have commonly referred as ‘hawala dealers’ The fact that the list purports to name only ‘Suspicious’ Dealers and not ‘confirmed hawala dealers’. Therefore, it can be presumed that even Sale Tax Department themselves is not sure whether such dealer are engaged in hawala businesses or not
However, Income Tax Department has reopened number of cases based on the said information of assessee’s who has purchased from suspicious dealers. The reasons recorded by the Assessing Officer for re-opening of assessment is that he has information from the Sales Tax Department that the assessee has obtained bogus purchase bills from suspicious dealers named on the Mahavat list. The information is generally in the form of statements of the suspicious dealers recorded by sales tax authorities to the effect that they have not done any business transactions and have only provided accommodation bills. Moreover, the statements given by the dealers are general in nature and do not specifically name any assessee.
Here it is worth mentioning that name of the dealer is placed on the Mahavat list only as a ‘suspicious dealer’. The law on reassessment is clear to the effect that an assessment can be opened only if the Assessing Officer has reasons to believe that income of the assessee has escaped assessment. The reasons must be genuine and not a pretence. The formation of this belief is a jurisdictional condition. Its absence can vitiate the reassessment proceedings. The Court would be entitled to quash the reassessment proceedings if the reasons to believe are non-existent. An assessment cannot be re-opened on mere suspicion. After all, ‘reason to believe’ is not the same thing as ‘reason to suspect’.
The Supreme Court in the case of SheoNath Singh v. AAC (1971) 82 ITR 147 is a good authority for the proposition that an assessment cannot be re-opened on the basis of mere suspicion. And as sales tax department themselves listed such dealer as suspicious dealer and not confirmed hawala dealer therefore, proceeding based solely on the basis of information from Sale Tax department cannot be the.
Further, such dealer has given a general confession without naming any particular assessee that all his transactions are bogus or that he has indulged only in bogus transactions cannot be basis for re-opening the assessment of an assessee who has transactions with this person.
Supreme Court in the case of ITO v. Lakhmani Mewal Das (1976) 101 ITR 427 (SC)has held that a general confession by a person that all his transactions are bogus or that he has indulged only in bogus transactions cannot be basis for re-opening the assessment of an assessee who has transactions with this person. This is more particularly so when the assessee has not been specifically named in the confession.
In case Calcutta High Court in the case of S. P. Agarwalla v. ITO (1983) 140 ITR 1010 (Cal.), has struck down the reassessment proceedings on the ground that such general statement cannot constitute relevant material to form a belief that income has escaped assessment by following decision of hon’ble Supreme Court in case of ITO vs Lakhani Mewal Das (Supra)
In case of CIT v. Sfil Stock Broking Ltd.  325 ITR 285 (Delhi) it was held that Where on basis of information given by Dy. Director of Income-tax (Inv.), Assessing Officer reopened assessment and from so-called reasons, it was not at all discernible as to whether Assessing Officer had applied his mind to information and independently arrived at a belief that, on basis of material which he had before him, income had escaped assessment, reopening of assessment was not justified.
Later on Delhi High Court in case of CIT v. Kamdhenu Steel and Alloys Ltd. & Ors. (2012) 248 CTR 33 /(2014) 361 ITR 220 held that AO acted mechanically on the information supplied by the Directorate of Income Tax (Investigation) without applying his own mind. He did not even care to see the apparent mistake in the particulars where three entries were repeated twice each. Almost on identical facts, a Division Bench of this Court set aside such a notice under Section 147/148 of the Act.
In case of Varshaben Sanatbhai Patel Vs ITO  64 taxmann.com 179 (Gujarat) has held that formation of belief of Assessing Officer was not based upon details available on record, rather on basis of information supplied by DGIT (Inv.) i.e. an external source, it could not be concluded that requirements of section 147 were satisfied. Therefore, impugned reassessment proceedings deserved to be set aside.
Therefore, in view of the above decisions, it is possible to take a stand that by virtue of a general statement (without naming the assessee whose case is proposed to reopen u/s 147 of the Act) given by a seller that ‘all’ his transactions were bogus or that he was indulged only in giving accommodation bills or based on information provided by other agencies and without application of mind, assessment cannot be re-opened u/s 147.
2. Once assessment is reopened u/s 147 of the Act or assessment proceeding initiated u/s 143(2)/ 143(3).
a) Onus is on assesses to prove genuineness of the transactions.
A Minimum document which assessee must produce before AO :
– Books of accounts showing purchases;
– Purchase bills/invoices;
– Bank statements/ bank passbook showing payment for purchases.
Additional documents which can be produce
– Fortradersand/or manufacturers
– Stock register;
– Delivery challans;
– Transporter Bills;
– Confirmation from Broker;
– Quantity tally – One to one co-relation of receipt of goods with sales;
– Payment evidence;
– Octroi/ LBT payments, wherever applicable;
– Confirmations from third parties including brokers/ transporters;
– Third party assessment orders;
– Assessment under state VAT laws – of self and third parties
– Other Statutory records, if any.
– Any expert valuation Certificate.
– Valuation report by Bank where in CC or OD facility is provided.
b) Once assessee discharge its onus then onus shifted on the Department to prove otherwise
Once assessee discharges its onus by providing aforesaid documents/information then onus is shifted on the Department to show how assessee has taken accommodative/hawala entries without actual delivery of goods.
Some of the important judgments/decisions which can help assessee in representing his case are as under:
– ITO Permanand  107 TTJ 395 ITAT
The satisfaction of the Assessing Officer himself is of prime importance while making assessment of an income and these duties cannot be performed by substituting satisfaction of someone else. The assessee did pay for the purchases he made from the above two parties through cheque as was evident from the record. The statements or even the affidavits of the sellers could not be utilized against the assessee, unless an opportunity was given to him to confront the said statement by way of cross-examination, etc. Admittedly, no such opportunity was given to the assessee to confront the above sellers in the instant case. Further, the assessee had also discharged the primary onus cast on him by section 69 by showing the purchases, their entries in the books of account, payments by way of account payee cheque and producing the vouchers of sales of the goods.
– ITO VsKarsan Nadu [ 2017] 77 taxman.com 275 (Mumbai Tribunal) dated 30.11.2016
The Assessing Officer has noted that certain information has been received from the DGIT, Mumbai that assessee has taken accommodation entries from the seven parties. It is also the case of revenue that the Assessing Officer has made independent enquiries also by issuing notices under section 133(6) to the seven parties which reveal that the notices were returned unserved by the postal authorities with remarks ‘not known’, ‘left’, ‘unclaimed’, etc. Therefore, Assessing Officer to treat the purchases of Rs. 37 lakhs from the said seven parties as bogus transactions.
ITAT held that asssessee has furnished copies of purchase bills, evidence of having made payments by account payee cheques, copies of bank statements, etc. Assesse has not been given opportunity to cross examination of person who has given statement, even when assesse specifically asked for. Non-service of notices issued under section 133(6). In fact, non-service of notices issued under section 133(6) by itself cannot be a conclusive proof that transactions with the parties are bogus because there was enough material before the Assessing Officer to show that payments have been made to the said parties through banking channels.
To hold the transactions as mere accommodation entries and not real purchases is quite different from saying that the sources of expenditure for the purchases from the seven parties have not been explained in the context of section 69C. Therefore, order deserved to be set aside.
– ACIT Vs Shri Mahesh K Shah ITA no 5194/Mum/2014(Mumbai Tribunal) dated 31.01.2017
Purchases cannot be treated as bogus merely on the basis of the statements and affidavits filed by the alleged vendors before the sales-tax department. The said statements cannot be relied upon without cross-examination of the parties. The fact that the parties did not respond to the s. 133(6) notices is not relevant if the assessee filed copies of purchase invoices, extracts of stock ledger showing entry/exit of materials, copies of bank statements to evidence that payments for these purchases were made through normal banking channels, etc to establish genuineness of the aforesaid purchases.
– CIT v. Nikunj Eximp Enterprises (P.) Ltd. (2013) 216 Taxman 171 (High Court of Bombay)
Books of Accounts of the respondent-assessee have not been rejected. There were confirmation letters filed by the suppliers, copies of invoices for purchases as well as copies of bank statement all of which would indicate that the purchases were infact made. sales not doubted, merely because suppliers not appeared before the Assessing Officer or Commissioner (Appeals), purchases cannot be disallowed.
– Multitex Filtration Engg. (P.) Ltd. v. Dy. CIT  13 SOT 208 (Delhi)
The second basis on which the AO disallows the alleged bogus purchases is the non-appearance of the suppliers before the AO to verify the purchases. Many Benches of ITAT and Hon’ble High Courts have held that when purchases are supported by sufficient documentary evidences then merely because the suppliers have not appeared before the AO, one cannot conclude that the purchases were not made by the assessee.
– Shri Rupesh Chimanlal Savla Vs ITO ITA no 6179-6182/Mum/ 2016 (Mumbai Tribunal) dated 30.12.2016
Simply because the Assessee could not produce the dealers, the entire purchases cannot be treated as bogus purchases. The Assessing Officer could have made further investigations to ascertain the genuineness of the transactions. Specifically when the Assessee submitted Xerox copies of bills of purchases from the above parties and further submitted that all the purchases are made within the local limits and the delivery has been done by hand, therefore, no transport, octroi and delivery challans are submitted.
However, in view the nature of business of the Assessee and the fact that the assessee is making local purchases without any transportation bills, delivery challans etc., the possibility of the Assessee making purchases in grey market on cash cannot be ruled out. Therefore, keeping in view the facts and circumstances of the case, we direct the Assessing Officer to disallow 2% of the above purchases to meet the anomalies.
– CIT v. Bholanath Poly Fab Pvt. Ltd. (2013)355 ITR 290 (High Court of Gujarat)
The Tribunal was of the opinion that the purchases were made from bogus parties, but the purchases themselves were not bogus as entire quantity of opening stock, purchases and the quantity manufactured during the year under consideration were sold by the assessee. In that view of the matter, the Tribunal was of the opinion that not the entire amount, but the profit margin embedded in such amount would be subjected to tax.
– CIT v. Simit P Sheth (2013) 356 ITR 451 (High Court of Gujarat)
Assessee is in the business of trading in steel segments. His some purchases are held to be bogus purchases. Court has held that estimation of profit is only held to be added to the income.
– CIT v. President Industries (2002) 258 ITR 654 (High Court of Gujarat)
The sales only represent the price received by the seller of the goods for the acquisition of which it has already incurred the cost.Only profits embodied on sale proceeds can be taxed
– Ganpatraj A. Sanghvi v. ACIT, ITA No. 2826/M/2013, (Mumbai Tribunal ) dated 5/11/2014
Addition based on surmise is liable to be quashed. Further, Purchases cannot be treated as bogus solely on the ground that suppliers are not traceable if the assessee has paid by a/c payee cheques and produced the income-tax and sales-tax documents and bank statements of the suppliers.
– G. Diamond International v Dy. CIT (2006) 104 TTJ 809 (Mum.) (Trib.)
The purchases are duly recorded in the books of account, Payments are made by cheque to the immediate purchasers. Parties from whom assessee had purchased goods had confirmed transaction and also in response to notice under section 131 had appeared, fact that they did not exist at given address could not be reason for rejection of their confirmation. To hold otherwise, there should be some evidence in the possession of the Revenue. Suspicion, however strong, cannot take the place of evidence and that alone cannot be the criteria for deciding the matter.
– CIT v. J. M. D. Communications P. LTD  180 Taxman 485 Delhi High Court
The Tribunal made a particular note of the fact that the statement of Shri Ashok Kumar, who is the brother of Shri T.R. Chadda, the source from which the Revenue had received information about bogus purchases by the assessee had evidently made a statement on 26th Feb., 2002 admitting therein that he was carrying on the business of issuing bogus accommodation bills on commission basis with the assessee, which was not put to the assessee, for rebuttal or cross-examination. High Court held no substantial question of law.
– Kishinchand Chellaram v. CIT (1980) 125 ITR 713 (SC)
Though the proceedings under the Income-tax Act are not governed by the strict rules of evidence, the department is bound to afford an opportunity to controvert and cross examine the evidence on which the department places its reliance. Opportunity of cross examination must be given. But before the income-tax authorities could rely upon any statement, they were bound to produce it before the assessee so that the assessee could controvert the statements contained in it by asking for an opportunity to cross examine the person with reference to the statements made by himThe consequence of breach of natural justice is that either the addition is void or matter may have to be to be remanded to lower authorities.
– CIT vs Ashish International ITA 4299 of 2009 (Bombay High Court)
A statement by the alleged vendor that the transactions with the assessee are only accommodation entries and that there are no sales or purchases cannot be relied upon by the AO unless the assessee is given the opportunity to cross-examine the vendor.
– DCIT v. Shri Rajeev G. Kalathil, ( ITA No. 6727/M/2012) (Mumbai Tribunal)
Fact that alleged supplier is not traceable and has been termed a “hawala dealer” by the VAT authorities is not sufficient to treat the purchases as “bogus”.The Tribunal observed that this was a good starting point for making further investigation and to take it to its logical end. But, the AO left the job at initial point itself. It was further held that suspicion of highest degree cannot take place of evidence.
– Shri Madhukant Gandhi v. ITO ITA no 1950 /M/2009 (Mumbai Tribunal)
ITAT restricted the disallowance to 5% only in respect of the disputed purchase.
– DCIT v. Shri Jitendra S. Motani , ITA Nos. 3024 to 3028
The estimation of GP was ultimately confirmed at 3% on the tainted purchases.
– CIT .v. Nangalia Fabrics P. Ltd.(2014) 220 Taxman 17 (Guj)(HC)
Assessing Officer found that purchases made by assessee could not be verified as parties were untraceable – Accordingly, he made addition to assessee’s income – However, Tribunal held that since purchases were supported by bills, entries were made in books of account and payment was made by cheque, addition should have to be deleted.
– Balaji Textile Industries (P.) Ltd. v. ITO (1994) 49 ITD 177 (Mumbai Tribunal)
Summons issued to parties were returned unserved. The appellant cannot be held responsible for non-service of the summons upon them and return of the same. However, the appellant explained that the traders from whom the textile goods were purchased were small traders and they might have left the place. Payments were made through crossed cheque -There is no allegation that the amount was received back by assessee. No sales were likely to be effected if there were no purchases. A sale could be made if the goods were available with the seller. Entries of sale and adjustment are made cannot be discarded merely by saying that they are not genuine entries though neither the Assessing Officer nor the CIT(A) opined anything in respect of those entries.. In view of aforesaid addition was deleted by ITAT .
– Rajesh P. Soniv. ACIT(2006) 100 TTJ 892 (Ahmedabad Tribunal )
Held that purchases were recorded in the regular books of account maintained. The purchases were supported by proper bills/vouchers. The assessee filed the necessary details regarding names, addresses, sales-tax numbers. The payments were made through banking channels. Thus, the sales against the purchases were not doubted. It was not the case of Assessing Officer that amounts paid for purchases had come back to the assessee. When purchases were supported with authenticated purchase bills, having sales-tax numbers and payment through cheques, the addition could not be made under section 69 or 69A.
– ACIT vs M/s G V Sons ITA 2239/Mum/2012 & 2240 /Mum/2012 (Mumbai Tribunal)
Merely because a party has admitted to indulging in sham/ accommodation transactions does not mean that all his transactions with the assessee should be treated as sham. ITAT held that we cannot accept a bald statement made by the AO that any transaction/business done with a party would be sham, simply because the opposite party besides doing regular business was also indulging in providing accommodation entries. Simply on the basis of statement given by the third party, that they were also providing accommodation entries as well, the conduct of the assessee cannot be doubted and held to be sham.
Therefore, based on various decision given by hon’ble ITAT’s, High Court and Supreme court of India, reopening of assessments on the basis of information received from sales Tax Department or/& on the basis of statement given by any party before sales tax department but without actually verifying such information and without applying his own mind on such information AO cannot reopen assessment u/s 147 of the Income Tax Act 1961.
Further, AO has to consider all the information submitted by assessee like copy of bill, copy of bank statements, Confirmation of the parties, delivery challan, stock register, excise register, transporter bills, octroi payment receipt, LBT payment receipt, certificate from expert valuer, third party assessment records, one to one relation of quantity etc.
AO is duty bound to consider all the documents provided by assesse even if assessee could not produce dealer for whatever reason or notices issued under section 133(6) were returned unserved, he cannot reject the claim of an assessee by making bald statement that purchases are liable to be treated as bogus because assessee has not produced dealer or notice issued u/s 133(6) have been returned un served. It was incumbent upon him to cause further inquiries in the matter in order to ascertain the genuineness of the transactions.
Further, if AO wants to rely on the statement of any person then he shall give proper opportunity to assessee to file its objection and/or to afford assesse an opportunity to cross examine the said person whose statement AO want to use against the assesse. The consequences of breach such opportunity is that either the addition is void or matter may have to be to be remanded to lower authorities.
However, even if AO wants to treat purchase as bogus purchase, it would be a good proposition to say that when a sale (in case of trader) is accepted by the income tax department, it must also accept the corresponding purchases.
(Author can be reached at [email protected] or 9773450180)
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(Republished with Amendments by Team Taxguru)