M/S SETHIA JEWELLERS,MUMBAI vs. DY CIT 23 (3), MUMBAI

Briefly the facts are, the assessee is a partnership firm stated to be engaged in sale, purchase, import, export, manufacturing, brokerage, commission etc. of gem, diamond, precious and semi precious stones and gold jewellery. For the assessment year under dispute, assessee filed its return of income on 26.09.2012 declaring total income of Rs. 44,17,730/-. In course of assessment proceedings, the Assessing Officer (AO) called upon the assessee to prove purchases worth Rs. 8,78,84,111/- claimed to have been made during the year from six parties. Though, the assessee furnished certain documentary evidences to prove the purchases, however, the AO was not convinced. He found that as per the information received from DGIT (Inv.), Mumbai, in course of search and seizure operation carried out in group cases of Rajendra Jain, Sanjay Chowdhary and Dharmichand Jain group, it was found that concerned parties and their group entities are providing accommodation entries by way of non-genuine purchases. After deliberating upon the facts available on record, the AO ultimately disallowed 25% out of the purchases, alleged to be non- genuine and added back an amount of Rs. 2,19,71,028/-. Being aggrieved, assessee contested the disallowance before learned Commissioner (Appeals). Partly accepting the submissions of the assessee, learned Commissioner (Appeals) restricted the disallowance to 3% of the alleged non-genuine purchases.

We have considered rival submissions and perused the material on record. It is an admitted factual position, though, the AO has treated certain purchases to be non-genuine, however, ultimately he has restricted the disallowance to the profit element embedded in such purchases by estimating at 25%. Further, as could be seen from the reasoning of learned Commissioner (Appeals) in paragraph 5.12 of the appeal order, he has relied upon CBDT Instruction No. 2/2008 dated 22.02.2008 as well as the report of the Taskforce for diamond sector under the aegis of the Department of Commerce, Assessment Year: 2012-13 Government of India. Undisputedly, in the report of the Taskforce referred to by learned Commissioner (Appeals), it has been suggested that the net profit ratio in diamond manufacturing is in the range of 1.5% to 4.5% and in diamond trading varies between 1% to 3%. As rightly observed by learned Commissioner (Appeals), in a number of cases of similar nature, involving alleged non-genuine purchase of diamond, the Tribunal has restricted the disallowance to the profit element estimated between 2 to 6%. Keeping in view these facts, we hold that the decision of learned Commissioner (Appeals) in restricting the disallowance to 3% is fair and reasonable, since, the disallowance made at 25% by the AO is without any reasonable basis. Accordingly, grounds raised