Facts of the Case

The assessee, M/s Shakambhari Ispat & Power Ltd., filed its return of income for Assessment Year 2019-20 declaring total income of ₹17,25,39,330 under normal provisions and ₹51,82,85,619 under Section 115JB. A search and seizure operation under Section 132 was conducted on 17.09.2021 on the Agarwal Group and its associate concerns, including the assessee. Pursuant thereto, the assessment was reopened under Section 147 by issuance of notice under Section 148 dated 06.09.2022. The Assessing Officer completed the assessment under Sections 143(3)/147 by making, inter alia, an addition of ₹29,93,22,967 on account of alleged undisclosed cash purchases of coal from the Anup Majee Group, based on documents seized during searches conducted earlier on the Anup Majee Group and related persons. The CIT(A) upheld the validity of reopening and restricted the addition by applying a gross profit rate of 8.01 percent on the alleged undisclosed purchases. Both the assessee and the Revenue filed cross appeals before the Tribunal for multiple assessment years.

Issues Involved

Whether reopening under Section 148 after a post-01.04.2021 search was valid in the absence of incriminating material found during the assessee’s search, whether reliance on seized material from third-party searches was permissible, whether the entire value of alleged undisclosed purchases could be added as income, and whether only the profit element embedded in such purchases was liable to tax.

Petitioner’s Arguments

The assessee contended that no incriminating material was found during the search conducted on it and therefore reopening under Section 148 was invalid. It was argued that the additions were based solely on documents and statements obtained from searches conducted on third parties prior to 01.04.2021 and that, at best, proceedings could have been initiated under Section 153C. On merits, the assessee submitted that there was no independent verification by the Assessing Officer, no corroborative evidence of undisclosed purchases, no rejection of books of account, and no evidence of unaccounted production or sales. It was further contended that denial of cross-examination of third parties vitiated the additions.

Respondent’s Arguments

The Revenue argued that Explanation 2 to Section 148 creates a deeming fiction whereby the Assessing Officer is deemed to have information suggesting escapement of income where a search is initiated on or after 01.04.2021. It was submitted that under the new search regime, reopening under Section 148 is mandatory for the specified assessment years irrespective of whether incriminating material is found during the assessee’s search. On merits, the Revenue contended that detailed seized material, transportation records, and statements clearly established undisclosed purchases of coal and justified the additions, though only the profit element was taxable.

Court Order / Findings

The ITAT Kolkata held that in cases of search initiated on or after 01.04.2021, Explanation 2 to Section 148 comes into operation and the Assessing Officer is deemed to possess information suggesting escapement of income, making issuance of notice under Section 148 valid even in the absence of incriminating material found during the assessee’s search. The Tribunal rejected the assessee’s challenge to the reopening and upheld the validity of proceedings under Sections 148 and 147. On merits, the Tribunal agreed with the CIT(A) that while the seized third-party material and surrounding circumstances established undisclosed purchases of coal, the entire value of such purchases could not be taxed as income. Following the binding judgment of the Calcutta High Court in PCIT vs. Subarna Rice Mill and other precedents, the Tribunal held that only the profit element embedded in the undisclosed purchases was liable to be brought to tax. The application of a gross profit rate of 8.01 percent on the alleged undisclosed purchases was held to be reasonable and justified.

Important Clarification

The Tribunal clarified that under the post-01.04.2021 search regime, reopening under Section 148 operates on a statutory deeming fiction and does not require discovery of incriminating material at the stage of issuance of notice. However, for the purpose of computation of income, settled law requires that where undisclosed purchases are detected, only the profit element embedded therein can be assessed, as corresponding sales and business operations are presumed.

Final Outcome

The appeals filed by the assessee challenging the validity of reopening were dismissed. The additions on account of alleged undisclosed purchases were sustained only to the extent of gross profit at 8.01 percent, and the balance additions were deleted. The Revenue’s appeals seeking enhancement were dismissed. Overall, the orders of the CIT(A) restricting the additions to the profit element were upheld across the relevant assessment years.

 Source Link- https://itat.gov.in/public/files/upload/1767345051-4JhUzj-1-TO.pdf

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