ITO 25(3)(4), MUMBAI vs. SHAH DIAM, MUMBAI

In the cross objection, the assessee is aggrieved by the decision of Ld CIT(A) in confirming the validity of reassessment proceeding and also in partially confirming the addition.

The assessee is a trader and exporter of diamonds. The AO received information from DDIT(Inv) to the effect that a person named M/s Bhanwarlal Jain and his group of companies are engaged in providing only accommodation entries without actually supplying materials. It was noticed that the assessee has purchased diamonds to the tune of Rs.34,75,143/- from a concern named M/s Daksh Diamonds, a concern belonging to M/s Bhanwarlal Jain group. Before the DDIT, the Bhanwarlal Jain appears to have conceded that he and his group was providing only accommodation entries. Accordingly the AO re- opened the assessment and disallowed the entire purchase amount of Rs.34,75,143/-.

Before Ld CIT(A), the assessee proved that the diamonds purchased from M/s Daksh Diamonds have been exported. Hence the Ld CIT(A) took the view that the profit element embedded in the transaction alone can be added. The Ld CIT(A) noticed that a task force group of diamond industry, after considering Benign Assessment Procedure, recommended presumptive tax of 2% for trading activity and 3% for manufacturing activity. The Ld CIT(A) also took note of the fact that the Transfer Pricing wing determines the profit margin of this sector at around 1.75% to 3%. Accordingly, the Ld CIT(A) directed the AO to restrict the addition to 3% of the value of purchases made from M/s Daksh Diamonds. The revenue is aggrieved by the said order.

I heard the parties and perused the record. There is no dispute with regard to the fact that the assessee has correlated the purchase quantity with a particular sales/export, meaning thereby, the goods have reached the hands of the assessee. When the goods have reached, it may not be proper to disallow entire amount of purchases, since the assessee could not have sold the goods without purchasing the same. The Ld CIT(A) has taken the support of the decision rendered by Hon’ble Gujarat High Court in the case of Simit P Sheth (38 taxmann.com 385) and also the decision rendered in the case of Sanjay Olicake Industries (316 ITR 274) to come to the conclusion that the profit element embedded in the purchases could be assessed. Since the 3 M/s. Shah Diam purchases have been made from a group, which had taken a different stand, the Ld CIT(A) took the view that there is possibility of inflation of purchase price, from which the assessee could have made profit. The said profit was estimated at 3% on the basis of Benign Assessment procedure guidelines and the Transfer Pricing adjustments generally made.

From the foregoing discussions, I am of the view that that the decision so reached by Ld CIT(A) cannot be found fault with, in the facts and circumstances of the case. It is also pertinent to note that the assessing officer has proceeded to assess the amount of Rs.34,75,143/- on the impression that the assessee has received the above said amount from M/s Daksh Diamonds. Before Ld CIT(A), the assessee has shown that it has purchased diamonds from M/s Daksh Diamonds and has also exported the same. This fact shows that the AO, after reopening of assessment, has misguided himself during assessment proceedings. The ld CIT(A) has correctly appreciated the facts and has rendered his decision. Accordingly I uphold the order passed by Ld CIT(A) on this issue.

The assessee has challenged the validity of reopening of assessment. I notice that the AO has reopened the assessment on the basis of information received, which led him to believe that there was escapement of income. Hence I am of the view that the reopening was valid in law. The order ground raised by the assessee relates to the addition sustained by Ld CIT(A), which we have confirmed in the earlier paragraphs.

In the result, the appeal of the revenue and the cross objection of the assessee are dismissed. Order has been pronounced in the Court on 7.12.2017.