2020 (7) TMI 492 - AT - Income Tax

Bogus purchases - Addition @3% - estimation of profit from alleged bogus purchases - HELD THAT - As in the case of CIT vs Simith P.Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT had considered a similar issue and held that at the time of estimation of profit from alleged bogus purchases no uniform yardsticks could be adopted, but it depends upon facts of each case. The ITAT, Mumbai, in number of cases had considered an identical issue and depending upon facts of each case, directed the Ld.AO to estimate gross profit of 10% to 15% on total alleged bogus purchases. In this case, considering the nature of business of the assessee the Ld. AO has made 100% additions, whereas the Ld.CIT(A) has scaled down addition to 3% gross profit on total alleged bogus purchase. Although, both authorities have taken different rate of profit for estimation of income from alleged bogus purchase, but no one could support said rate of gross profit with necessary evidences or any comparable cases. CIT(A) has taken a fair view and estimated 3% gross profit on alleged bogus purchases to settle dispute between the parties in respect of purchases from all parties.

Issues Involved:
1. Legitimacy of treating 3% of alleged bogus purchases as taxable income.
2. Justification of restricting the addition made by the AO on account of bogus purchases to 3%.
3. Onus of proving the genuineness of the purchases by the assessee.

Detailed Analysis:

1. Legitimacy of treating 3% of alleged bogus purchases as taxable income:
The assessee, engaged in the diamond import and export business, filed a return declaring a total income of ?42,09,210/-. The case was reopened based on information from a Search & Seizure operation on the Bhanwarlal Jain Group, which revealed that the assessee had taken accommodation entries of purchases amounting to ?5,97,06,315/-. The AO estimated the profit margin at 100% on these purchases, determining the total income at ?6,39,15,530/-. The CIT(A), however, scaled down the additions to 3% profit on total purchases from the parties involved, referencing judicial precedents such as the Gujarat High Court's decision in Simith P. Sheth (2013) 35 taxmann.com 385, which held that only the profit element embedded in bogus purchases should be taxed.

2. Justification of restricting the addition made by the AO on account of bogus purchases to 3%:
The CIT(A) reasoned that the AO's estimation of a 100% profit margin was not justified, as the facts of the case differed from those in the N.K. Proteins Ltd. case, which the AO had relied upon. The CIT(A) noted that the AO did not dispute the genuineness of sales or point out discrepancies in the books of accounts. The CIT(A) also considered the profit margins in the diamond trading industry, referencing the Taskforce Group for Diamond Industry's recommendation of a presumptive tax rate of 2-3%. Consequently, the CIT(A) directed the AO to restrict the addition to 3% of the total purchases as the profit element embedded in such purchases, which was deemed fair and just.

3. Onus of proving the genuineness of the purchases by the assessee:
The assessee contended that the purchases were genuine and supported by necessary evidence, including purchase bills and proof of payment via account pay cheques. However, the AO argued that the assessee failed to provide conclusive evidence, as notices issued to the parties under section 133(6) were returned unserved. The Tribunal found that both parties failed to conclusively prove their cases with necessary evidence. The Tribunal noted that in cases of alleged bogus purchases, only the profit element embedded in those purchases should be taxed, citing various High Court and Tribunal decisions. The Tribunal upheld the CIT(A)'s decision to estimate a 3% gross profit on the alleged bogus purchases, considering it a fair and reasonable resolution of the dispute.

Conclusion:
The Tribunal dismissed both the assessee's and the revenue's appeals, upholding the CIT(A)'s decision to restrict the addition to 3% of the total purchases as the profit element embedded in the alleged bogus purchases. This decision was pronounced in the open court on 18/06/2020.

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