2017 (11) TMI 1708 - AT - Income Tax

Bogus purchases - profit estimation - assessee is engaged in the business of trading and export of diamonds - Held that - Considering the fact that the profit margin in this sector is around 2 to 3 percent and the taxes saved is also around 1%, it is of the considered opinion that if the addition is sustained to the extent of 3% of the disputed purchases, the same will meet the ends of justice. Thus, after considering the totality of facts the addition made by the AO is restricted to 3% of the disputed purchases.

Summary

Issues Involved:
Challenge to addition of bogus purchases in assessment year 2009-10.

Analysis:
The appellant, a partnership firm dealing in trading and export of diamonds, challenged the addition of bogus purchases made in the assessment year 2009-10. The assessing officer reopened the assessment based on information that the appellant availed accommodation entries in the form of diamond purchases from certain entities. The AO estimated a profit of 6% on the value of purchases, which was partially sustained by the Ld CIT(A) at 3%. The appellant contested this decision, leading to the current appeal.

The Ld CIT(A) reduced the profit rate to 3% after a detailed analysis. The AO's assertion that the appellant procured diamonds from other sources was based on the lack of physical delivery from the identified dealers. The Ld CIT(A) highlighted that the purchases were likely made from the grey market without proper bills, with corresponding exports shown against these purchases. The judgment emphasized the need to tax the profit element embedded in such transactions, considering the market practices and profit margins in the diamond trade sector.

The Ld CIT(A) justified the reduction to 3% from the initial 6% based on industry practices and tax recommendations specific to the diamond business. The judgment cited precedents where 3% was considered a fair additional profit on disputed purchases in the diamond sector. The decision to limit the addition to 3% of the disputed purchases was deemed appropriate, aligning with the profit margins and tax implications prevalent in the diamond industry. The judgment concluded that the AO's adoption of 6% as additional profit was not justified, and the 3% addition was deemed fair and in line with industry standards.

The judgment highlighted the proper reasoning provided by the Ld CIT(A) for adopting the 3% profit rate instead of the initial 6%. The appellate tribunal found no grounds for interference with the Ld CIT(A)'s decision, ultimately dismissing the appeal filed by the assessee. The order was pronounced on 2nd November 2017, affirming the partial confirmation of the addition related to bogus purchases in the assessment year 2009-10.