AHINSA EXPORTS,MUMBAI vs. ITO 19(1)(1), MUMBAI

I heard the parties and perused the record. The assessee is an exporter of cut and polished diamonds. The assessee filed its return of income for the year under consideration on 27.10.2007 declaring a total income of ` 18.83 lakhs. The Revenue carried out search and seizure operation in the case of Mr. Bhanwarlal Jain and its group concerns. It was noticed that they were all involved in providing accommodation entries in the form of unsecured loan, issuing of bogus sales bills etc. It was noticed that the assessee has obtained accommodation entries in the form of purchase of diamonds from three concerns belonging to Bhanwarlal Jain group. Accordingly, the Assessing Officer reopened the assessment by issuing notices u/s. 148 of the Act. The 2 Ahinsa Exports assessee had made purchases from the three concerns aggregating to ` 2,18,31,878/-. After hearing the assessee, the Assessing Officer took the view that the assessee would have purchased diamonds from grey market and not from the above said parties, since the assessee could reconcile the purchases and sales. The Assessing Officer took the view that the assessee could have made profit by purchasing diamonds from the grey market at a lower rate, which the Assessing Officer estimated at 8%. Accordingly, the Assessing Officer assessed 8% of the alleged bogus purchases which worked out to ` 17.46 lakhs as additional income earned by the assessee and added the same to the total income.

The learned CIT(A) noticed that the VAT rate applicable to diamond trade at 1% in Maharashtra and 0% in some other places like Surat. He also noticed that the task force group for diamond industries constituted by the Government of India, Ministry of Commerce and Industry, recommended presumptive tax for net profit calculated @ 2% for trading activity and @ 3% for manufacturing activity. The learned CIT(A) also ascertained that TP Wing of the Revenue is determining operating profit of diamond traders in ranging 1.75% to 3%. Accordingly, the learned CIT(A) took the view that the addition should be sustained to the extent of 3% of the purchases, as against 8% made by the Assessing Officer. Accordingly, the learned CIT(A) directed the Assessing Officer to restrict the addition to 3% of the alleged bogus purchases.

Before the learned CIT(A) the assessee also challenged the validity of reopening of assessment but the learned CIT(A) rejected the same.

Aggrieved by the order passed by the learned CIT(A), the assessee has filed this appeal before us.

First issue relates to validity of reopening of assessment. Learned AR invited our attention to the reasons recorded by the Assessing Officer and submitted that the Assessing Officer, in the initial paragraph, has mentioned about search and survey operation conducted in the case of Mr. Bhanwarlal

On the contrary, learned Departmental Representative submitted that search and seizure action conducted in the hands of Mr. Bhanwarlal Jain and Group has revealed that they are engaged in providing accommodation entries by way of bogus unsecured loans and advances and also by way of providing bogus purchase bills. The Assessing Officer has listed out actual amount of purchases made by the assessee from the above said group in paragraph 4 of the reasons and clearly stated that income chargeable to tax to the tune of ` 2.18 crores, being alleged bogus purchases, has escaped from assessment. Accordingly, the Ld D.R submitted that the Assessing Officer has reopened the assessment after recording proper reasons and hence reopening is valid in the eyes of the law.

I have heard the rival contentions on this issue and perused the record. A careful perusal of the reasons recorded by the Assessing Officer would show that the Assessing Officer has reopened the assessment in order to assess the alleged bogus purchases or any other income which has escaped assessment. In paragraph 3 of the reasons, the Assessing Officer has listed out the names of the concerns and the quantum of purchases made from them. Hence, in our view the Assessing Officer has reopened the assessment on proper reasoning. Learned AR has invited our attention to the initial paragraph of the reasons and submitted that the Assessing Officer did not mention anything about the bogus purchase bills. In my view, one has to consider the reasons recorded by 4 Ahinsa Exports the Assessing Officer in totality and then examine as to whether the Assessing Officer was having proper reasons for reopening the assessment or not. In the initial paragraph, the AO has simply mentioned about the sources of his information and only in paragraph 3, the AO records his reasons for reopening of assessment. In my view the Assessing Officer has recorded proper reasons for reopening the assessment on the basis of material available with him and hence reopening cannot be held to be invalid in law. Accordingly, I uphold the order passed by the learned CIT(A) on this issue.

The assessee has also challenged the order passed by the learned CIT(A) in partially sustaining the addition made by the Assessing Officer. As stated earlier, the Assessing Officer added 8% of alleged bogus purchases and the learned CIT(A) has reduced the same to 3%.

I heard the parties on this issue and perused the record. I noticed that the learned CIT(A) has reduced the addition to 3% of the alleged bogus purchases with the following observations :- 8.15 However AO estimated the profit margin © 8% and the reasons given are that, 'most of the traders in the market actually operate at this level of margin in the open market, this fact was identified by the GOI introducing the Benign Assessment Procedure (BAP) for the assessees who are into manufacturing and/or trading of diamonds. BAP was to be applicable for those diamond merchants, who were showing a profit margin of 8% of their turnover. Although, this BAP talks about the net profit margin (NP), for a petty dealer, operating without any establishment, the GP would be almost similar to NP. Hence, it was assumed that the margin in the market, for a petty dealer, would be 8%, which is the same margin that is now being adopted for purchases made in cash from the grey market and for which the bills are procured from the Bhanwarlal Jain group concerns'. Though I am in agreement with the reasoning of the AO for estimating of the profit percentage, I feel that the AO has not given the correct reasoning for estimation of the profit percentage @ 8% in this nature of trade. While deciding the profit element embedded in the bogus purchase cases, Gujarat High court adopted the profit @ 12.5% by taking the benefit derived out of the saving of taxes, considering the profit margin in that line of trade. In the light of the above, one has to see in the present case, who are in the manufacturing and trading of diamonds, the profit element embedded estimation @ 8% is correct or not. In diamond trade the rate of VAT is 5 Ahinsa Exports

I heard the parties on this issue and gone through the order passed by the learned CIT(A). I noticed that the learned CIT(A) has taken note of the fact that the assessee has maintained quantity details and Assessing Officer has not doubted the genuineness of the sales. Further, the learned CIT(A) has taken note of the report given by the task force group for diamond industry and accordingly restricted the addition to 3% of the purchases. Before me, the assessee could not furnish any other material which would compel me to interfere with the decision taken by the learned CIT(A). Accordingly, I uphold the order passed by the learned CIT(A) on this issue.

In the result, appeal filed by the assessee is dismissed.