2021 (5) TMI 118 - AT - Income Tax

Estimation of income - Bogus purchases - statement of key person of assessee group i.e. Shri Saket Sudhir Mehta was recorded u/s 132(4) wherein he was directed to explain the modus operandi of purchases made by various group concerns since there were allegations that the assessee group indulged in accepting accommodation entries of bogus purchases - HELD THAT - The basic onus to establish the genuineness of the purchase remained un-discharged. At the same time, the assessee was in possession of purchase invoices and the payment to the suppliers was through banking channels. The ledger confirmation as well as PAN of suppliers was placed on record. The import as well as exports was certified by the custom authorities - complete quantitative tally of stock was provided along with correlation of purchases with corresponding sales. There could be no sale without actual purchase of material keeping in mind the fact that the assessee was engaged in trading activities - this make it a fit case for estimation of profit element embedded in these purchase transactions to plug the possible leakage of revenue. The approach of Ld. CIT(A) in estimating the profit could not be faulted with. Estimation made by Ld. CIT(A) - As under similar facts and circumstances, the coordinate bench of this Tribunal, in the cited order of M/s Sur Gem (an associated concern of the assessee) has estimated profit rate of 6% of bogus purchases minus GP already declared by the assessee. The said estimation is in accordance with CBDT instruction no.2 of 2008 dated 22/08/2008 wherein the CBDT has directed all the AOs to accept profit of 6% in diamond business. The assessee, in the present case, has reflected GP rate in the range of 3% to 3.5% in AYs 2012-13 2013-14 as is evident from its financial statements. Therefore, following the cited decision of Tribunal and for ease of computations, we direct Ld. AO to make addition of 3% (net) of tainted purchases without any further benefit. The same works out to be ₹ 14,11,982/- (3% of ₹ 4,70,66,091/-) for AY 2012-13 and ₹ 4,81,103/- (3% of ₹ 1,60,36,782/-) for AY 2013-14. The addition to that extent stand confirmed in both the years. Disallowance of labour charges - AO, going by the material as well as admission made during search operations, formed an opinion that the assessee group booked bogus labour expenditure - HELD THAT - It is evident that the assessee imported rough diamonds and exported polished diamonds during the year. The conversion of rough diamonds into polished diamond would certainly require certain labour / job work as rightly noted by Ld. CIT(A). In whole of the year, the assessee has claimed labour charges of ₹ 42,445/- only which has been fully disallowed. We further find that the payment to the labour contractor is though account payee cheques after deduction of tax at source. Therefore, the additions on mere suspicion, in our opinion, could not be sustained in the eyes of law. On different reasoning, would not require any interference on our part. The ground raised by the revenue stand dismissed. The revenue s appeal for AY 2013-14 stand dismissed.

Summary

Issues Involved:
1. Condonation of delay in filing cross-objections.
2. Addition on account of alleged bogus purchases.
3. Disallowance of labor charges.

Detailed Analysis:

1. Condonation of Delay in Filing Cross-Objections:
The assessee's cross-objections for AYs 2012-13 and 2013-14 were delayed by 53 days. The delay was attributed to the Covid-19 pandemic, which hindered office operations and employee coordination. Despite opposition from the Ld. CIT-DR, the tribunal found reasonable cause for the delay and condoned it in the interest of justice.

2. Addition on Account of Alleged Bogus Purchases:
- Material Facts: For AY 2012-13, the assessee, part of a group engaged in diamond import and export, was assessed under sections 143(3) and 153A following a search on 18/11/2015. Allegations were made that the group indulged in accepting accommodation entries of bogus purchases from concerns operated by Shri Bhanwarlal Jain group, which was also subjected to a search on 03/10/2013. Despite providing purchase invoices, quantitative details, bank statements, and other documents, the Ld. AO disallowed purchases amounting to ?470.66 Lacs.
- Before CIT(A): The assessee argued that the purchases were genuine, supported by customs certification and a quantitative tally in the Tax Audit Report. The CIT(A), however, noted that the suppliers were not found at the given addresses, and the basic onus to prove the genuineness of the purchases was not discharged. The CIT(A) estimated the profit element in these transactions at 15%, following precedents from the Gujarat High Court and other decisions.
- Tribunal's Decision: The tribunal found that the assessee was in possession of purchase invoices and made payments through banking channels. Given the complete quantitative tally and correlation of purchases with sales, the tribunal deemed it fit to estimate the profit element to prevent revenue leakage. Following a coordinate bench's decision in a related case, the tribunal directed the AO to make an addition of 3% of the tainted purchases, resulting in additions of ?14,11,982 for AY 2012-13 and ?4,81,103 for AY 2013-14. The assessee's cross-objection was partly allowed, and the revenue's appeal was dismissed.

3. Disallowance of Labor Charges:
- AY 2013-14: The assessee paid labor charges of ?42,445 to M/s H.S. Enterprises, whose rubber stamp was found during the search. Despite the assessee's defense that the charges were for converting rough diamonds into polished ones and were paid after TDS deduction, the Ld. AO disallowed the charges. The CIT(A) noted the necessity of labor charges for the business and deleted the disallowance based on the ratio of labor charges to imported diamond value in AY 2016-17.
- Tribunal's Decision: The tribunal upheld the CIT(A)'s decision, noting that the conversion of rough diamonds to polished ones necessitated labor charges. The payment was made through account payee cheques after TDS deduction. The tribunal found no basis for disallowing the charges on mere suspicion and dismissed the revenue's appeal.
- AY 2015-16: Similar disallowance of ?29.65 Lacs was made for labor charges paid to three entities. The CIT(A) confirmed an addition of ?12.95 Lacs based on the ratio from AY 2016-17. The tribunal reiterated that labor charges vary based on several factors and cannot be assumed constant. The tribunal found no concrete material to support the disallowance and deleted the addition, allowing the assessee's appeal.

Conclusion:
The revenue's appeals were dismissed, the assessee's appeal was allowed, and the assessee's cross-objections were partly allowed. The order was pronounced on 3rd May 2021.