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Income Tax Appellate Tribunal, DELHI BENCH: ‘A/SMC’, NEW DELHI
Before: SH. N.K. BILLAIYA & SH. KULDIP SINGH
Assessee by Sh. C.S. Anand, Adv. Department by Sh. D.S. Rawat, Sr.DR Date of hearing 28.08.2018 Date of pronouncement 31.08.2018 ORDER PER KULDIP SINGH, J.M.: Since common questions of law and facts have been raised in both the interconnected appeals, the same are being disposed of by way of consolidated order to avoid the repetition of discussion.
The appellant, M/s. Ganpati Diamond Palace, Delhi (hereinafter referred to as ‘the assessee’) by filing the present appeals sought to set aside the consolidated impugned order dated 26.05.2017 passed by learned Commissioner of Income Tax (Appeals)-17, New Delhi, for assessment years 2012-13 and 2013-14 respectively on the grounds, inter alia, that: “1. That the assumption of jurisdiction by the learned A.O. to initiate proceedings u/s 147, is bad on various factual & legal grounds.
2. That the proceedings initiated u/s 147 by the learned A.O. merely on the basis of an information received, without applying his own mind and also without making any verification of such information, are illegal and thus, deserves to be quashed.
That on the facts of the case and under the law, the learned CIT(A) has erred in approving the learned A.O.’s action of making an addition of Rs.7,98,506/- (by applying profit rate of 25% on the alleged bogus purchases of Rs.31,94,022/- made by the assessee from M/s. Nice Diamonds), without appreciating that the learned A.O.’s action of rejecting the books of account u/s 145(3) was untenable.
That on the facts of the case and under the law, the learned CIT(A) has erred in not properly adjudicating the ground of appeal
relating to charging of interest u/s 234B as well as u/ 234C.”
3. Briefly stated facts necessary for adjudication of the controversy at end are the case of the assessee was reopened under section 147 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) for assessment year 2012-13 on the ground that a search and seizure operation was carried out in the case of Sh. Bhanwar Lal Jain group on 03.10.2013. Sh. Bhanwar Lal Jain admitted that he has provided accommodation entries to various beneficiaries and the assessee has also procured bogus purchases of Rs.31,94,022/- (Rs.15,79,812, dt. 06.01.2012 and Rs.16,14,210/-, dt. 10.03.2012). The notice under Section 142(1) of the Act, dated 10.02.2016 issued and assessee was called upon to produce persons, who came and sold goods in Delhi, to produce Karigar who have manufactured jewellery and identify the jewellery sold made from the diamonds purchased from M/s. Nice Diamonds Ltd. to which the assessee expressed his inability to produce them. M/s. Nice Diamonds Ltd. has not even responded to the notice issued under section 133(6) of the Act, declining the contention raised by the assessee. Then the Assessing Officer (AO) proceeded to conclude that on the basis of investigation conducted by Investigation Wing, it is proved that parties are engaged in the business of providing accommodation entries only and have been issuing bill without any physical stock and this fact has been admitted before the Income Tax Authorities by Sh. Bhanwar Lal Jain. The assessee has not shown the exact sale of diamond jewellery alleged to have been purchased from M/s. Nice Diamond Ltd. Consequently, the AO estimated the Gross Profit (GP) on bogus purchases made from M/s. Nice Diamonds Ltd. @ 25%, as against the declared GP of 18.82% by the assessee, of purchase of Rs.31,94,022/-, i.e., Rs.7,98,506/- and made addition thereto to the total income of the assessee for assessment year 2012-13. 3.1 Similarly, for assessment year 2013-14 the AO estimated the GP on bogus purchases made by the assessee from M/s. Nice Diamond Ltd. @ 25% of the bill of Rs.5,13,400/-, i.e., Rs.1,28,350/- as against 21.88% GP declared by the assessee.
3.2 The assessee carried the matter before the learned CIT(A) by way of filing the appeals who have confirmed the addition by dismissing the same.
Ground No.1 of (for AY: 2012-13) 4. Ground no.1 is general in nature, hence needs no separate adjudication.
Ground No.2 of (for AY: 2012-13) 5. This ground has not been pressed by the learned Authorized Representative for the assessee who has preferred to argue the case on merits.
Ground No.3 of (for AY:2012-13) and Ground No.1 of (for AY: 2013-14).
Undisputedly, the assessee has shown GP rate @ 18.18% and 21.88% for assessment years 2012-13 & 2013-14 respectively. It is also not in dispute that the diamonds have been purchased by the assessee for manufacturing the jewelery but has obtained bogus bills to avoid the payment of VAT from some other bogus bill entry providers. It is also not in dispute that the AO has applied uniform GP rate of 25% on the said bogus purchases of Rs.31,94,022/- for assessment year 2012-13 and on bogus purchase of Rs.5,13,400/- for assessment year 2013-14.
In the backdrop of the aforesaid undisputed facts and circumstances, the learned Authorized Representative for the assessee by relying upon the decision rendered by the coordinate bench of Tribunal in (AY: 2009-10) (in the case of M/s. Natik Gems Vs. Income Tax Officer) contented that at the most, GP rate in the case of jewellery business may be enhanced by 3% of the said bogus purchases.
For ready perusal, operative part of the order passed by the coordinate bench of Tribunal in the case of M/s. Naitik Gems (supra), is extracted below:
“3.5 There is merit in the arguments of the AO as given above and following such arguments it is held that the A.O. was right in estimating additional profit on unproved/non-genuine purchases. The A.O. has fairly conceded in para 9.1 of his order that the appellant had incurred expenditure on such purchases, but such expenditures remain unexplained. Thus, some disallowance out of the disputed purchases will have to be made, but the question remains whether disallowance at the rate of 6% of the unproved purchases is fair or not. The main reason for adopting six percent as fair additional profit was because the AO thought that instruction no. 2 of 2008 dated 22.02.2008 will be applicable to this case. However, from a plain reading of instruction no. 2 of 2008 it is seen that this instruction was meant to be applicable for assessments made during FY 2008-09. Clearly, the assessment of the appellant has not been made during FY 2008-09. Further, the clause E of the said instruction states "the rate of profit as a percentage of turnover would be reviewed annually on the basis revenue generation and results of scrutiny assessment, searches and surveys made during the year". Thus, the benign assessment procedure (BAP) or the percentage mentioned in the instruction no. 2 of 2008 cannot be applied across the board in all cases of assessees engaged in diamond business. In diamond trade the rate of VAT is stated to be 1% and in some places like Surat the same is stated to be fully exempt. The task force group for. diamond industry constituted by the Government of India, Ministry of commerce and Industry, after considering the BAP scheme, recommended presumptive tax for net profit calculated ©2% of M/s.Naitik Gems trading activity and 3% for manufacturing activity or @ 2.5% across the board. It is also stated that the operative profit in case of diamond trading for computation of ALP by the TP wing is consistently in the region of around 1.75% to 3%. It is also brought to my notice that in similar cases of diamond business, some CIT(A)'s have taken a view that 3% of the disputed purchases should be considered as fair additional profit. In view of the above and also since the profit margin is lesser in this sector, adopting 6% as the additional profit by the AO, is not based on correct or footing. Considering the fact that the profit margin in this sector is around 2 to 3 percent and the taxes saved is also around 1%, I am of the considered opinion that if the addition is abstained to the extent of 3% of the disputed purchases, the same will meet the ends of justice. Thus, after considering the totality of facts the addition made by the AO is restricted to 3% of the disputed purchases. Thus 3% of Rs. 6,92,82,349/- which is Rs. 20,78,470/- is taken as profit of the appellant on purchases that are not fully and properly explained. Addition of Rs. 20,78,470/- is accordingly confirmed out of an addition of Rs.41,56,941/- and the balance is deleted. Grounds of appeal No. 1 is therefore partly allowed."
When we examine the assessment order, it has come on record that the AO has applied 25% uniform GP on the said bogus purchases of Rs.31,94,022/- for assessment year 2012-13 and Rs.5,13,400/- for assessment year 2013- 14, ignoring the fact that on the said bogus purchases the assessee has already declared the GP rate at 18.82% and 21.88% for assessment years 2012-13 and 2013-14 respectively and, at the most, difference between 18.82% and 21.88% should have been estimated and added to assessee’s income.
However, keeping in view the fact that no discrepancies have been found in the account books maintained by the assessee in the due course of business; that AO has not disputed the purchase of diamonds but only disputed that the bogus bills were procured to avoid the payment of VAT and the fact that profit margin in the diamond business is around 2 to 3% and as has been held by the coordinate bench of Tribunal in the case of M/s. Naitik Gems (supra), we are of the considered view that in addition to the gross profit already declared by the assessee in assessment year 2012-13 and 2013-14 further addition of 3% in the GP rate on the bogus purchases is ordered to be made. The AO is directed to restrict the addition of GP to 3% of the disputed purchases over and above the GP rate already declared by the Assessee.
Ground no. 4 of (for AY: 2012-13) 11. Ground no. 4 is consequential, hence needs no specific adjudication. 12. In view of what has been discussed above, the present appeals filed by the assessee are partly allowed.
Order is pronounced in the open court on 31st August, 2018.