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Facts
The assessee, engaged in the diamond business, filed an appeal against the order of the CIT(A) concerning the assessment year 2012-13. The appeal challenged the addition for alleged bogus purchases. The Assessing Officer (AO) reopened the assessment based on information that the assessee availed accommodation entries for bogus purchases from M/s. Mayank.
Held
The Tribunal held that if the purchases were bogus, the corresponding sales would also have to be bogus for the transaction to be completed. However, if the sales were genuine, the purchases could not be entirely bogus. Thus, only the profit element in the alleged bogus purchases should be assessed. The Tribunal found that the gross profit rate in the diamond trading business is approximately 3%, and since the assessee had declared 1.42%, the addition should be restricted to the difference.
Key Issues
Whether the addition for bogus purchases should be restricted to the profit element, and if so, what is the appropriate profit rate to be applied in the diamond trading business.
Sections Cited
148, 1004
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Income Tax Appellate Tribunal, Mumbai “D” Bench, Mumbai.
Before: Justice (Rtd.) C.V. Bhadang & Shri B.R. Baskaran (AM)
The assessee has filed this appeal challenging the order dated 17.8.2023 passed by the learned CIT(A), National Faceless Appeal Centre, Delhi and it relates to A.Y. 2012-13. The assessee is aggrieved by the decision of the learned CIT(A) in partially confirming the addition relating to alleged bogus purchases. The assessee has also raised a ground challenging the validity of reopening of assessment.
The facts relating to the case are stated in brief. The assessee is in diamond business. The assessee had filed return of income for the year under consideration on 29.9.2012 declaring a total income of Rs. 8,97,530/-. Subsequently the Assessing Officer received information from DGIT(Investigation), Mumbai that the assessee has availed accommodation entries in the form of bogus purchases from a concern named M/s. Mayank belonging to Rajendra Jain Group. The Investigation report stated that 2 M/s. Diajewel Rajendra Jain Group is involved in providing accommodation entries without actually supplying goods. Hence the AO re-opened the assessment by issuing notice u/s 148 of the Act.
During the year under consideration, the assessee has purchased diamonds from M/s. Mayank to the tune of Rs.4,22,34,640/-. Though the assessee has furnished certain details before the Assessing Officer, yet the Assessing Officer took the view that the above said purchases made from M/s. Mayank are bogus in nature and accordingly disallowed 100% of the value of purchases mentioned above.
The learned CIT(A), however, took the view that the addition should be restricted to the gross profit computed at the average rate of gross profit of three years. The average rate of gross profit of A.Y. 2011-12 to 2013-14 worked out to 16.45%. Accordingly, the learned CIT(A) directed the Assessing Officer to restrict the addition to 16.45% of the value of alleged bogus purchase. Still aggrieved the assessee has filed this appeal before the Tribunal.
The Learned AR submitted that the assessee has purchased 398.44 carats of diamonds from M/s. Mayank Impex by way of three bills on 10.10.2011 to 12.10.2011. The entire quantity of diamonds has been sold to Gunjan Export on 13.10.2011. He submitted that the assessee has furnished copies of purchase bills and also copy of sales bill to the AO and they are also placed in the paper book. He submitted that the payment for purchases has been made through banking channel. Similarly, the sale consideration has also been received through banking channel only. Accordingly he submitted that the Assessing Officer was not justified in making disallowance of 100% of value of alleged bogus purchases, since the assessee could not have sold the goods without purchasing them. For this proposition, the Ld A.R placed his reliance on the decision rendered by Hon’ble Bombay High Court in the 3 M/s. Diajewel case of Nitin Ramdeoji Lohia (145 taxmann.com 546)(Bom). He submitted that the learned CIT(A) was in principle right in holding that only the profit element involved in the alleged bogus purchases should be assessed to tax. He submitted that the Ld CIT(A) was not justified in adopting average rate of profit of three years in determining the rate of gross profit at 16.45%, which is very much on the higher side. The Learned AR submitted that the gross profit in diamond business has been estimated by the Tribunal @ 3%. He submitted that the assessee has already declared profit from the above said purchases at 1.42%. Accordingly, he submitted that the addition, if any, may be restricted to 1.58% ( 3% less 1.42%). In this regard, he also placed reliance on the decision rendered by Hon’ble Bombay High Court in the case of Mohammed Haji Adam & Co (Income tax appeal no.1004 of 2016 dated February 11, 2019).
Learned DR, on the contrary, supported the order passed by the learned CIT(A).
We heard rival contentions and perused the record. We notice that the assessee could reconcile the purchases made from M/s Mayank Impex with the sales. The assessee could not have sold the goods without actually purchasing the same. Hence, if the AO accepts the genuineness of sales, then the purchases could not be doubted. Since there is allegation of getting accommodation bills, it is possible that the assessee could have purchased goods from someone else, while the purchase bills were obtained from some body else. In that case, there is a possibility that the assessee could have made some profit, which can be assessed by the AO. In this regard, we may refer to the observations made by the Hon’ble jurisdictional Bombay High Court in the case of Nitin Ramdeoji Lohia (supra):-
“7. From the above facts it is thus clear that the CIT (Appeals) partially allowed the appeal of the assessee on the ground that the A.O. had not disputed the sales and, therefore, this was not a case of bogus purchases,
4 M/s. Diajewel inasmuch as if the purchase was bogus, it would not be possible for assessee to complete the transaction by way of sale, unless it could be shown from the record that the corresponding sale was also a sham transaction. We are in agreement with the view expressed by the CIT (Appeals) that, if the purchases are bogus, it would be impossible for the assessee to complete the business transaction and that if the purchase is bogus, the corresponding sale also must be bogus or else the transaction would be impossible to complete and as a necessary corollary, unless the corresponding sale is held to be bogus, the purchase also cannot be held to be bogus, rather it would be a case of purchase from bogus entities/parties. That view has been upheld by the Tribunal in principal while dismissing the appeal of the Revenue.”
Hence, what could be assessed by the AO is only the profit element involved in the alleged bogus purchase transactions.
The rate of gross profit declared by the assessee on sale of alleged purchases was 1.42%. From the order passed by Ld CIT(A), we notice that the Ld CIT(A) has tabulated the gross profit rated declared by the assessee at page 49 of his order. We notice that the assessee has declared G P rate of 39.55% in the preceding year and 7.60% in the succeeding year. However, it has declared G P rate of 2.20% only. The Ld A.R submitted that the profit rate is high in the case of manufactured items, while in respect of trading of diamonds, it is around 3% only. We notice that above said submissions of ld A.R gets support from the decision rendered by the co-ordinate bench in the case of Oopal diamond vs. ACIT (144 taxmann.com 184)(Mum), wherein it was observed as under:- “4.2. The only issue that arises before us is as to whether the estimation on profit element made by the ld. CIT(A) at 3% is just and fair. It is pertinent to note that against the order of the ld. CIT(A), the Revenue had not preferred any appeal before us. As per the report of the Task Force for Diamond Sector constituted by the Ministry of Commerce and Industry after considering the BAP (Benign Assessment Procedure) scheme, the Task Force recommended that the net profit prevailing in the Diamond Industry engaged in the business of trading would be in the range of 1% - 3% and those engaged in the business of manufacturing would be in the range of 1.5% - 4.5%. We find that the Tribunal has been consistently taking the stand by estimating the profit element on the basis of reliance placed on the aforesaid report of the Task Force. In the instant case, the 5 M/s. Diajewel
assessee is engaged in the business of both trading as well as manufacturing of diamonds. Considering the same, we find that the ld. CIT(A) was duly justified in estimating the profit percentage at 3% on which we do not deem it fit to interfere. In other words, the estimation of profit percentage at 3% by the ld. CIT(A) is just and fair and does not require any interference.”
Hence the gross profit rate in respect of trading of diamonds may be taken at 3%. In the instant case, the assessee has sold the alleged bogus purchases and hence it was a trading transaction. Since the assessee has already declared gross profit rate of 1.42%, we are of the view the addition should be restricted to 1.58% (3% less 1.42%). Accordingly, we modify the order passed by Ld CIT(A) and direct the AO to restrict the addition to 1.58% of the value of alleged bogus purchases.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on 26.2.2024.