MINI DIAMONDS (INDIA) LTD.,MUMBAI vs. ITO 5 (2)(3), MUMBAI

The common issue raised by the assessee in all these appeals is against the confirmation of addition to the tune of 8% of the alleged bogus purchases by the learned CIT(A) as against the addition made by the AO @12.5% of the bogus purchases.

Brief facts of the case are that the assessee is engaged in the business of manufacturing and export of cut and polished diamonds. The assessee filed returns of income which were processed under Section 143(1) of the Income Tax Act, 1961 (hereinafter "the Act") for all these years. Subsequently the assessments were reopened under Section 147 of the Act by issuing notices under Section 148 of the Act after receiving information from the DGIT (Inv) that the assessee is beneficiary of hawala

In the appellate proceedings the learned CIT(A) restricted the addition at 8% of the bogus purchase after taking into consideration the submissions of the assessee. The learned CIT(A), while passing the order, followed the decision of the Mumbai Benches in the case of M/s. Dhaddha Gems Ltsd. Vs. ITO in to 7314/Mum/2016.

The learned A.R. submitted before the Bench that since the assessee is in the trade of manufacturing and dealing in cut and polished diamonds the margin of profit in assessee’s trade is very meagre and even the Government of India has recognised the fact by bringing out circular to this effect that the profits range between 2 to 6 percent. The learned A.R. submitted that the addition as made by the AO and confirmed by the learned CIT(A) is bad in law and against the facts on record. The learned A.R. submitted that the assessee has filed all necessary evidences, namely stock tally, inward purchases and outward sales, evidence of payments through banking channels, confirmation from parties, bills and invoices, etc. along with delivery challans. Under these circumstances such a huge addition as confirmed by the CIT(A), would lead to unrealistic and 3 M/s. Mini Diamonds (India) Ltd./Income Tax Officer-5(2)(3) hypothetical G.P. in the case of diamond trade. The learned A.R. relied upon the following decisions in defence of his arguments: -

After hearing the rival contentions and perusing the record we observe that the assessee is engaged in the business of manufacturing and export of cut and polished diamonds. The assessee is undoubtedly beneficiary of hawala purchases from the group related to Bhanwarlal Jain on whom search was conducted and it was candidly accepted during the search that the whole group is engaged in providing bogus billings. Under these circumstances we partly agree with the view taken by the authorities below that only a rate can be applied to bring the profit element in the bogus purchases to tax. Pertinent to mention that the assessee has filed evidences to prove that the purchases were made and consequent to this the AO has rightly applied the rate on bogus purchases. However, the quantum of rate applied is excessive and unreasonable in view of the trade of the assessee. Under the present facts and circumstances and considering the rate of profit prevalent in assessee’s trade we are of the view that it would be reasonable if a rate of 3% is applied to the alleged

In the result, the appeal filed by the assessee is partly allowed.