Ram Kishan Bindal vs. ITO, Faridabad: Dispute Over Bogus Purchases for AY 2011-12

Case Summary

The case of Ram Kishan Bindal, a proprietor of M/s. Bindal Trading Co. in Faridabad, against the Income Tax Officer, Ward-2(2), Faridabad, revolves around the assessment year 2011-12. The central issue is the alleged bogus purchases amounting to Rs.1,74,97,450/- and the validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.

Background

Ram Kishan Bindal, engaged in the business of trading in dye blocks, filed his return for the assessment year 2011-12, which was processed under Section 143(1) of the Income Tax Act. The case was later reopened by the Assessing Officer (AO) based on information from the Investigation Wing, suggesting that certain purchases made by the assessee were non-genuine and amounted to accommodation entries.

The AO issued a notice under Section 147, reopening the assessment and subsequently called upon the assessee to substantiate the genuineness of the purchases worth Rs.1,74,97,450/- made during the year. Despite the submissions made by the assessee, the AO was unconvinced and treated the purchases as bogus, disallowing 10% of the total purchase amount, which resulted in an addition of Rs.17,49,745/- to the assessee’s income.

Proceedings and Arguments

The assessee, represented by his legal counsel, challenged both the validity of the reopening of the assessment and the merits of the addition made by the AO. The primary contention was that the reopening was based solely on information received from the Investigation Wing without independent verification or application of the AO’s own mind. Furthermore, the assessee argued that no adverse material was confronted, and no opportunity for cross-examination of the parties involved was provided, which undermined the basis for reopening the assessment.

On the merits, the assessee maintained that he had provided a quantitative tally of purchases and sales, and the AO had not questioned the sales figures. Therefore, the addition made on an ad-hoc basis was argued to be unsustainable.

Tribunal’s Findings

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, presided over by Judicial Member Shri Saktijit Dey, examined the contentions of both parties. On the issue of reopening the assessment, the ITAT noted that since the original return was processed under Section 143(1) and not under scrutiny, the AO had a valid basis to reopen the assessment upon receiving tangible information indicating potential income escapement.

The Tribunal emphasized that at the stage of reopening, the AO only needs to form a prima facie belief of income escapement, and a definitive conclusion is not required until the assessment proceedings. In this case, the ITAT found that the AO had tangible material to justify the reopening under Section 147, thus dismissing the challenge against the reopening.

Decision on Merits

However, when it came to the merits of the addition, the Tribunal found that the AO had failed to independently verify the claims and merely relied on the information from the Investigation Wing. The AO did not conduct any inquiry to corroborate the findings of the Investigation Wing or to verify the authenticity of the alleged bogus purchases through notices under Section 133(6) of the Act. Furthermore, the AO did not express any doubts about the sales reported by the assessee.

Moreover, the Tribunal pointed out that the AO’s decision to disallow only 10% of the purchases indicated an implicit acceptance that the purchases were, in fact, made, even if they were not entirely genuine. Given that the AO did not substantiate the basis for the 10% disallowance and considering that the sales figures were not questioned, the Tribunal found the addition unsustainable.

Conclusion

In conclusion, the ITAT partially allowed the appeal, upholding the validity of the reopening of the assessment but deleting the addition of Rs.17,49,745/- made by the AO. The Tribunal’s decision highlights the importance of independent verification and substantiation of claims by the AO, especially when making significant additions to an assessee’s income based on information from external sources.

This case underscores the necessity for Assessing Officers to conduct thorough inquiries and to base their assessments on concrete evidence rather than on presumptive or uncorroborated information. The decision also illustrates the Tribunal’s role in ensuring that assessments are conducted fairly and in accordance with the principles of natural justice.

Ram Kishan Bindal vs. ITO, Faridabad: Dispute Over Bogus Purchases for AY 2011-12