2019 (1) TMI 1922 - AT - Income Tax

Estimation of income - bogus purchases in case of a diamond trader - CIT(A) sustaining addition of 3% of bogus purchase as against 8% done by the A.O. - HELD THAT - Sales have not been doubted. No defect in purchase documentation has been noted. In identical case in the case of M/s. Choron Diamond (I) Pvt. Ltd. 2017 (11) TMI 184 - ITAT MUMBAI Sales have not been doubted. No defect in purchase documentation has been noted.Coordinate Bench while sustaining the order of the Ld.CIT(A) also considered the report of Task Group for Diamond Sector submitted to Department of Commerce wherein it was submitted that net profit in diamond manufacturing is in the range of 1.5% to 4.5% and in trading it is in the range of 1% to 3% The Task Group for Diamond Sector submitted to Department of Commerce also suggests that the profit margin in trading of goods is in the range of 1% to 3%. In the circumstance we direct the Assessing Officer to estimate the profit element from the purchases treated as non-genuine at the rate of 2% uniformly for all the Assessment Years 2007-08 2008-09 2010-11 2011-12 and 2013-14 As in the present case the ld. CIT(A) on similar reasoning has directed 3% disallowance. The A.O. himself has made similar disallowance in the subsequent years. In our considered opinion there is no infirmity in the same. Accordingly we uphold the same.

Summary

Issues:
1. Dispute over the percentage of addition of bogus purchase.
2. Comparison of profit margins in diamond trading.
3. Application of previous judgments in similar cases.

Analysis:
The appellate tribunal heard appeals by the Revenue against the order of the Commissioner of Income Tax related to assessment years 2007-08 and 2012-13. The main issue was the disagreement over the percentage of addition of bogus purchases, with the AO estimating 8% and the CIT(A) sustaining it at 3%. The case involved a partnership firm trading in diamonds. The AO found that the assessee had taken accommodation entries in the form of bogus purchases from certain parties, totaling to a significant amount. The AO estimated an additional GP margin of 8% on these purchases, considering the nature of transactions and market margins. However, the CIT(A) restricted the disallowance to 3%, citing industry recommendations and previous assessments where 3% profit margin was accepted. The CIT(A) noted that in diamond trading, the profit margin is typically around 3%. The tribunal considered previous judgments and industry standards, upholding the CIT(A)'s decision to restrict the disallowance to 3% in line with the profit margins in the diamond trading sector.

The tribunal referred to case laws and industry reports to support the decision. It mentioned the Task Group's recommendations for the diamond sector, indicating profit margins ranging from 1% to 3%. The tribunal highlighted a previous case where a 2% disallowance was upheld for bogus purchases in the diamond trading sector. The tribunal noted that the CIT(A) had directed a 3% disallowance in the present case, consistent with the AO's actions in subsequent years. Based on the industry standards and previous assessments, the tribunal found no fault in the CIT(A)'s decision and dismissed the Revenue's appeals. The judgment emphasized the importance of considering industry norms and previous judgments in determining profit margins for such cases.