INCOME TAX OFFICER 21(1)(5), MUMBAI vs. SHRI ISAAC ANTHONY MENDONCA, MUMBAI

These cross appeals are arising out of order of the Commissioner of Income Tax (Appeals)]-32, Mumbai [in short CIT(A)], in Appeal No. CIT(A)-32/IT-231/ITO 21(1)(5)/2016-17 vide dated 26.03.2018. The Assessment was framed by the Income Tax Officer, Ward-21(1)(5), Mumbai (in short ITO/ AO) for the A.Y. 2013-14 vide order dated 21.03.2016 under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).

The only issue in theses appeals of Revenue in is against the order of CIT(A) directing the AO to restrict the addition by estimating profit percentage at the rate of 6% on bogus purchases.

Briefly stated facts are that the assessee engaged in the business of trading in imitation diamond jewellery and related goods. The AO received information from DGIT (Investigation), who in turn received information from Sales Tax Department, Mumbai that the assessee has made purchases from hawala parties, as listed in hawala dealers by the Maharashtra Sales Tax Department who are providing bogus bills of purchase amounting to ₹2,05,44,220/- as admitted by these hawala dealers in their deposition before the authorities.

The AO issued noticed under section 133(6) to the eight parties which returned back with the remark as “left” except one M/s Bharat Corporation stated that they have not done any transactions with assessee and assessee failed to produce these parties. During the course of assessment proceedings and during appellate proceedings, the assessee submitted all the documentary evidences such as inward register, stock register, payment received against such sales, receipt of material purchases, account payee cheque. According to the AO, the assessee failed to establish the genuineness of the purchase for the reasons that the assessee is not maintain stock register and not keeping stock register and there no proof of transportation of goods. Accordingly, he made addition of whole amount as unproved purchase at ₹2,05,44,220/- to the return income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who restrict the disallowance at the rate of 6% of the bogus purchases by observing in Para 5 as under: - “5. ………………………………………….. Thus, respectfully following the judicial decisions cited supra, I hold that the disallowance of entire disputed purchase cannot be sustained and only the income on disputed purchase could be sustained. Accordingly, it is considered 4 | P a g e 4198/Mum/18&1695/Mum/19 Shri Isaac Anthony Mendonca appropriate to estimate the profit embedded in such purchases. As regards estimation of profits, Ld. AR relied on CBDT instruction no 2 of 2008 dated 22/02/2008 wherein the procedure of benign assessment of diamond manufacturing and trading business is prescribed. The CBDT had considered the profit @6% in diamond business as reasonable. Accordingly, it would be fair and reasonable to estimate the profit on disputed purchase @6% that would take care of leakage of the revenue. Accordingly, I direct AO to sustain the disallowance of purchase @6% of disputed purchase of ₹2,05,44,220/- at ₹12,32,653/- and delete the balance disallowance of purchase made in assessment order. Accordingly, Ground No.2 to 4 are partly allowed.” Now, Revenue as well as assessee both are in appeal before Tribunal.