2017 (12) TMI 1759 - AT - Income Tax

Validity of reassessment proceeding - Bogus purchases - CIT(A) directed the AO to restrict the addition to 3% of the value of purchases - HELD THAT - No dispute with regard to the fact that the assessee has correlated the purchase quantity with a particular sales/export, meaning thereby, the goods have reached the hands of the assessee. When the goods have reached, it may not be proper to disallow entire amount of purchases, since the assessee could not have sold the goods without purchasing the same. CIT(A) has taken the support of the decision of Simit P Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT and also Sanjay Olicake Industries 2008 (3) TMI 323 - GUJARAT HIGH COURT to come to the conclusion that the profit element embedded in the purchases could be assessed. Since the purchases have been made from a group, which had taken a different stand, the Ld CIT(A) took the view that there is possibility of inflation of purchase price, from which the assessee could have made profit. The said profit was estimated at 3% on the basis of Benign Assessment procedure guidelines and the Transfer Pricing adjustments generally made. The decision so reached by Ld CIT(A) cannot be found fault with - Decided against the revenue.

Summary

Issues:
1. Validity of reassessment proceeding
2. Addition relating to bogus purchases

Analysis:

Issue 1: Validity of reassessment proceeding
The assessee challenged the validity of the reassessment proceeding, arguing that the AO had reopened the assessment based on information leading to a belief of income escapement. The Tribunal upheld the validity of the reassessment, stating that the reopening was lawful. The AO's decision to reopen the assessment was deemed justified under the circumstances. The Tribunal linked this issue to the addition sustained by the Ld CIT(A), which was confirmed earlier in the judgment.

Issue 2: Addition relating to bogus purchases
The AO disallowed the entire purchase amount of &8377; 34,75,143/- made by the assessee from M/s Daksh Diamonds, suspecting it to be accommodation entries without actual supply. However, the assessee demonstrated that the purchased diamonds were exported, indicating a genuine transaction. The Ld CIT(A) acknowledged this and decided that only the profit element embedded in the transaction should be added. Referring to industry guidelines and transfer pricing margins, the Ld CIT(A) directed the AO to limit the addition to 3% of the purchase value from M/s Daksh Diamonds. The Tribunal supported this decision, emphasizing that the goods reached the assessee, making it improper to disallow the entire purchase amount. The Tribunal cited relevant legal precedents to justify assessing only the profit element of the purchases. It noted that the AO's impression that the assessee received the entire amount from M/s Daksh Diamonds was misguided, as the assessee had purchased and exported the diamonds. Therefore, the Tribunal upheld the Ld CIT(A)'s order on this issue.

In conclusion, the Tribunal dismissed the appeal of the revenue and the cross objection of the assessee, affirming the decisions made by the Ld CIT(A) regarding the issues raised. The judgment was pronounced on 7.12.2017.