ITAT Jaipur strikes down reassessment for borrowed satisfaction and breach of natural justice

Background of the dispute

The Jaipur Bench of the ITAT, in the case of Rajendra Prasad Choudhary Vs ACIT, dealt with reassessment proceedings under Section 147 for Assessment Years 2012-13 and 2013-14. The appeals arose from orders passed by the ld. CIT(A)-I, Jaipur dated 09/11/2018, confirming reassessment completed under Section 143(3) read with Section 147 of the Income Tax Act 1961.

The assessee’s assessments were reopened on the basis of information from the office of DGIT (Investigation), Mumbai, alleging that certain concerns were “accommodation entry providers” and that the assessee had allegedly made purchases aggregating to ₹1,81,71,990 from such entities. The Assessing Officer (“AO”) treated 25% of these purchases as non-genuine and made additions accordingly.

While the ld. CIT(A) upheld the reopening, he substantially scaled down the addition by estimating profit at 8.5% in one year and 9.5% in the other year, instead of the 25% disallowance made by the AO.

The assessee carried the matter in appeal before the ITAT challenging:

The very assumption of jurisdiction under Section 147, and
The additions sustained by the ld. CIT(A) on merits.

Grounds of appeal

For A.Y. 2012-13, the assessee challenged:

The action of the ld. CIT(A) in estimating gross profit at 8.5% and sustaining an addition of ₹4,04,772/- (modified figure in that context) as against the higher addition originally made by the AO in respect of alleged unverifiable diamond purchases, despite the fact that the assessee had already declared a reasonable gross profit comparable with historical trends.

The assessee also raised additional grounds to the effect that:

The ld. CIT(A) erred in not holding that the AO’s assumption of jurisdiction under Section 147 was invalid as the preconditions laid down in the Act for reopening were not complied with.
The ld. CIT(A) erred in not holding that the AO violated principles of natural justice by relying on third-party statements without granting the assessee a right of cross-examination.

The grounds for A.Y. 2013-14 were on identical lines, and the Tribunal treated both years on the same legal and factual footing.

Basis of reopening – information from Investigation Wing

Information received from DGIT (Investigation), Mumbai

The AO received a communication from DGIT (Investigation), Mumbai, stating that certain firms were allegedly engaged in providing accommodation entries. According to this information, the assessee had made purchases of ₹1,81,71,990 from such entities.

On the strength of this intimation alone, the AO recorded reasons to believe that income chargeable to tax had escaped assessment and initiated reassessment proceedings by issuing notice under Section 148.

In the reassessment order, the AO disallowed 25% of the purchases in question (₹45,42,998) treating the same as bogus or unverifiable, and added this amount to the assessee’s income.

Findings of ld. CIT(A)

The ld. CIT(A):

Accepted the validity of reopening under Section 147;
However, considered the 25% disallowance excessive;
Reworked the addition by estimating profit on such disputed purchases at 8.5% for A.Y. 2012-13 and 9.5% for A.Y. 2013-14, thus granting substantial relief but still sustaining part of the addition.

The assessee remained aggrieved and preferred appeals before the ITAT.

Assessee’s challenge to the reopening

Borrowed satisfaction and absence of independent enquiry

The assessee’s primary contention was that the AO had reopened the assessments purely on “borrowed satisfaction” based on the DGIT (Investigation), Mumbai report, without forming an independent opinion or conducting any verification of facts.

The assessee highlighted the reasons recorded for reopening, which showed that:

ITAT Jaipur on reopening under Section 147 and denial of cross-examination in alleged bogus purchase cases