2017 (7) TMI 1103 - AT - Income Tax

Estimating the profit @3% of bogus purchases - Held that - The case relates to the purchases of precious, semi-precious diamonds and gem stones and in this context the Assessing Officer as well as CIT(A) have not estimated the profit at the level which is normally done in similar cases involving products like metals, ferroalloys, etc. Reasonableness of the estimation by the CIT(A) is concerned, it is seen though she has recognized the presumptive rates recommended by the Task Force set up by the Central Government for business of manufacturing and/or trading of diamonds, but has not been fully guided by it. Considering the recommendations and the fact that there is a mix of trading as well as manufacturing in the case of the assessee, a rate of 2.5%, as recommended by the task force would be more appropriate and justified to ascertain the profit on the unsubstantiated purchases. Appeal of the assessee partly allowed.

Summary

Issues:
1. Estimation of addition based on non-genuine purchases.

Detailed Analysis:
The appeal pertains to the assessment year 2008-09 and challenges the order passed by the CIT(A) regarding the addition sustained by estimating the profit at 3% of bogus purchases made by the assessee. The Assessing Officer had initially made an addition of ?23,82,309, being 8% of the non-genuine purchases of ?2,97,78,860. However, the CIT(A) reduced this addition to 3% of the non-genuine purchases. The main contention raised by the assessee before the Tribunal was that the estimation of addition at 3% was excessive, citing the recommendations of the Task Force Group for the diamond industry, which suggested presumptive tax rates of 2% for trading activity and 3% for manufacturing activity or 2.5% across the board.

The Tribunal considered the submissions of both parties and focused on determining the appropriate profit to be estimated concerning the unsubstantiated purchases of precious stones. The Departmental Representative argued that the profit element for such cases is generally estimated higher than 3%, as upheld by the CIT(A). However, the Tribunal noted that the products involved in this case, i.e., precious, semi-precious diamonds, and gemstones, were different from other cases typically involving metals or ferroalloys. The Tribunal observed that the CIT(A) had not fully relied on the Task Force's recommendations but recognized them. Considering the mix of trading and manufacturing activities by the assessee, the Tribunal deemed a rate of 2.5% more appropriate and justified for estimating the profit on the unsubstantiated purchases. Consequently, the Tribunal partly allowed the appeal of the assessee, adjusting the profit estimation rate to 2.5% instead of 3%.

In conclusion, the Tribunal partially allowed the appeal of the assessee by adjusting the estimated profit rate on non-genuine purchases from 3% to 2.5%, based on the specific nature of the business involving precious stones and the recommendations of the Task Force Group for the diamond industry.