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Facts
The assessee, Sai Diamonds, challenged an order by the CIT(A) that dismissed their appeal against an assessment order. The assessment order, passed under Section 143(3) read with Section 147, involved reassessment proceedings and an addition of Rs. 20,32,692/- for alleged bogus purchases from M/s. Kalash Enterprises.
Held
The Tribunal held that the reassessment proceedings were valid. Regarding the addition for bogus purchases, the Tribunal noted that while the purchases were doubted, the corresponding export sales were accepted. Relying on previous judgments and instructions, the Tribunal decided to restrict the addition to the estimated profit element embedded in the bogus purchases.
Key Issues
Whether the reassessment proceedings under Section 147 were validly initiated? Whether the addition of Rs. 20,32,692/- for alleged bogus purchases from M/s. Kalash Enterprises under Section 68 was justified, and if not, to what extent should the addition be restricted?
Sections Cited
147, 148, 143(3), 68, 143(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, G BENCH, MUMBAI
Per contra, the Ld. Departmental Representative placed reliance 9. upon the order passed by the Assessing Officer and the CIT(A) and submitted that during the assessment proceedings, the Assessing Officer has informed the Appellant that M/s Kalash Enterprises was (Assessment Year: 2012-13) merely a paper concern and no goods had been supplied to the Appellant. The transaction was undertaken to generate paper trail only. No stock of diamonds was found by the Investigation Wing during the search conducted in various companies/concerns. Therefore, the onus of proving the transaction was genuine was squarely upon the Appellant. The Appellant was, therefore, asked to file confirmations of the said transactions and demonstrate/correlate that the said purchases resulted in genuine sales. The documents furnished by the Appellant were self serving documents that did not inspire confidence and were, therefore, rejected by the Assessing Officer. The CIT(A) also confirmed the findings of the Assessing Officer in this regard.
We have heard the rival submissions and perused the material on 10. record. We note that the identical facts and circumstances while deciding Cross-Objections filed by an assessee in appeals preferred by the Revenue in the case of M/s Decent Diamonds for the Assessment Years 2007-08 to 2010-11 (CO No. 123 to 126/Mum/2021), the Tribunal has, vide common order, dated 28/02/2023, held as under:
“5. Heard both the sides and perused the material on record. Without reiterating the facts as elaborated above in this order it is undisputed fact that assessing officer had accepted the fact that assessee has made corresponding sales against the impugned purchases made from the group concern of Rajendra Jain group. During the course of assessment the assessee submitted the copies of ledger account, copy of bank statement, purchase invoices and evidences of payment made by account payee cheques etc. It is evident from the findings of the lower authorities that the genuineness of the sales made in corresponding of purchases were not doubted. In fact the assessing officer has categorically pointed out that assessee has been benefitted by margin of actually making purchases in the grey market against bills obtained from the concern of Rajendra Jain without supplying of any material. These facts were also upheld by the Id. CIT(A) in his (Assessment Year: 2012-13) finding by restricting the addition to the extent of 3% of such purchases.
During the course of appellate proceedings before us the Id. Counsel has referred the decision of ITAT, Mumbai in the case of Perry Impex Vs. ACIT 19(2) vide dated 22.08.2022 and the decision of ITAT in the case of Star Brillion Vs. ITO 19(3)(4) vide ITA No. 1551 & 1552/Mum/2020 dated 12.07.2022. The facts and circumstances in the aforesaid cases are similar to the case of the assessee and in those cases the parties were engaged in dealing in diamond. In the case of Star Brillion similarly purchases were made from Shri Rajendra Jain group and the A.O held that the purchases made by the assessee were not proved beyond the reasonable doubt as the supplier belong to Rajendra Jain group. Accordingly, the assessing officer estimated the profit element embedded in the value of such disputed purchases at 5%, however, the ld. CIT(A) has reduced the same to 3% and therefore the ITAT has estimated the profit percentage embedded in the value of disputed purchases @ 2%. In the case of the assessee the Id. Counsel has filed summary of chart on 13.02.2023 showing that in the assessment year 2007-08 to 2010-11 the assessee had already declared gross profit at 5.40%, 5.24%, 5.08% and 5.08% respectively in the different assessment year. From these facts the assessee has demonstrated that they have already reported higher profit on the purchase transaction made from the group concern of Rajendra Jain as against gross profit rate adopted by the task force formed by the Government of India (Ministry of Commerce and Industry, Department of Commerce) for diamond industry.
Considering the above facts and the percentage of gross profit already shown by the assessee after following the decision of ITAT as referred above we consider it appropriate to restrict the addition to the extent of 2% of the impugned purchases. Accordingly, we restrict disallowance to the extent of 2% of such purchases. Therefore, the ground no. 3 of the assessee is partly allowed.
The ground No. 1 & 2 pertaining to reopening of assessment was not pressed, therefore, the same stand dismissed.” (Emphasis Supplied) On perusal of above, it is clear that in identical facts and 11. circumstances, the Tribunal had accepted the contention of the ITA No. 3165/Mum/2023 (Assessment Year: 2012-13) assessee that in case the genuineness of the sales of diamonds corresponding to the alleged bogus purchases of diamonds are not doubted by the Assessing Officer, the additions on account of such alleged bogus purchases had to be restricted to the profit element embedded in such bogus purchases. We note that the Appellant had filed financial statements, purchase ledger, sales ledger, ledger account of M/s Kalash Enterprises along with purchase invoice, stock statement and copy of export invoice along with break-up of quantity/carats of diamonds exported giving the details of the corresponding purchases. On perusal of the documents placed at page 3 to 30 of the paper-book that the Appellant has been able to show nexus between the alleged bogus purchases from M/s Kalash Enterprises and the corresponding export sales to M/s Clarks Diamond Limited, UK. Thus, addition of entire amount of alleged bogus purchases cannot be sustained. In the case of M/s Decent Diamonds (supra) taking into account the profit of around 5% already disclosed by the assessee, the Tribunal had restricted the addition to 2% of the alleged bogus purchases. Thus, taking the effective profit rate to around 7%. However, we note that the Appellant has also placed reliance in some other judicial precedents wherein a reference has been made to Instruction No. 2/2008, dated 22/02/2008, dealing with the Benign Assessment Procedure for assessees engaged in diamond manufacture and trading industry for the purpose of estimating embedded profit element. In the aforesaid instruction rate of 6% has been specified as acceptable gross profit margin. Keeping in view the overall facts and circumstances of the present case, we adopt the rate of 6% as fair estimate of the profit element embedded in alleged bogus purchases and accordingly, direct the Assessing Officer to restrict the disallowance to 6% of bogus purchases as reduced by the gross profit margin already (Assessment Year: 2012-13) declared by the Appellant in respect of alleged Bogus Purchases of INR 20,32,692/- made from M/s Kalash Enterprises after verification. For the purpose of the aforesaid verification, the Appellant is directed to provide to the Assessing Officer the computation of gross profit margin already declared in respect of the aforesaid alleged Bogus Purchases of INR 20,32,692/-. In terms of the aforesaid, Ground No. 3 raised by the Appellant/Assessee is partly allowed while Ground No. 2 raised by the Appellant/Assessee is dismissed.
In result, the present appeal preferred by the Assessee is partly 12. allowed.
Order pronounced on 25.01.2024.