2018 (5) TMI 2039 - AT - Income Tax

Bogus purchases - AO received information that one Shri Praveen Kumar Jain and his group of companies were engaged in providing only accommodation bills without actually supplying materials - assessee has purchased diamonds from a concern named M/s Mohit International belonging to Praveen Kumar Jain group - HELD THAT - In the instant case, the assessee has exported the jewellery and the AO has not doubted the said export also. In this kind of situation, what is required to be taxed is the profit element, if any, involved in the purchases and hence there is no justification in disallowing entire amount of purchases. When the assessee is able to reconcile the purchases with sales, the argument of the assessing officer that the accommodation bills have been taken by the assessee only to reduce the profits would fail. As noticed earlier, the disallowance of purchases would give a G.P ratio of 68.55%, which is unheard of in the diamond trade. This factual position also does not support the argument of the AO. Under these set of facts, we are of the view that the ld CIT(A) was not justified in confirming the disallowance of entire amount of purchases. There is no doubt that the responsibility to prove the purchases claim is placed upon the assessee. In the instant case, the assessee has not produced the supplier before the AO. AO also could not serve notice u/s 133(6) of the Act to the supplier. The proprietor of M/s Mohit International, Shri Nilesh Parmar has admitted that he has only provided accommodation entries, but the said statement was later retracted by him. All these facts show that there is a possibility that the assessee might have sourced the diamonds from some other source also. In that event, there is a possibility that the assessee might have made some profit. In that case, we are of the view that the issue agitated before us may be resolved by estimating profit element embedded in the purchases. Assessee has accepted for an addition of 5% and the Ld A.R also submitted the same as his alternative contention. We find merit in the said contentions, since the purchases and sales have been reconciled. Accordingly we set aside the order passed by Ld CIT(A) and direct the AO to restrict the addition to 5% of the value of alleged bogus purchases made from M/s Mohit International. Appeal of the assessee is partly allowed.

Summary

Issues:
1. Non-issuance of notice u/s 143(2) of the Act.
2. Addition of ?35.28 lakhs related to alleged bogus purchases.

Analysis:
1. The appeal was against the order passed by Ld CIT(A)-42, Mumbai for the assessment year 2007-08. The Ld A.R did not press the ground regarding the non-issue of notice u/s 143(2) of the Act, which was then dismissed. The remaining grounds focused on the addition of ?35.28 lakhs concerning alleged bogus purchases.

2. The assessing officer reopened the assessment upon discovering that the assessee purchased diamonds from a concern known for providing only accommodation bills. Despite the assessee's efforts to prove the genuineness of purchases through various documents, the AO disallowed the entire purchase amount of ?35.45 lakhs from the concerned supplier, citing lack of proof and failure to maintain a stock register.

3. The Ld CIT(A) upheld the AO's decision, refusing to accept additional evidence and contentions from the assessee. However, the Ld A.R argued that the assessee had fulfilled the burden of proof by providing necessary documents and reconciling purchases with sales, indicating legitimate use of the purchased diamonds in manufacturing and exporting jewelry.

4. The ITAT Mumbai, after considering the reconciliation statement and the fact that the diamonds purchased were indeed used and sold, concluded that disallowing the entire purchase amount was unjustified. The tribunal noted that the assessing officer's argument of accommodation bills reducing profits was not supported by the evidence presented.

5. Acknowledging the responsibility of the assessee to prove purchases and the inability to produce the supplier before the AO, the ITAT suggested estimating the profit element embedded in the purchases. Ultimately, the tribunal directed the AO to restrict the addition to 5% of the value of the alleged bogus purchases from the concerned supplier, partially allowing the appeal.

This detailed analysis of the judgment highlights the key legal issues, arguments presented by both parties, and the tribunal's decision, providing a comprehensive understanding of the case.