2021 (7) TMI 667 - AT - Income Tax

Estimation of income - Bogus purchases of diamonds - HELD THAT - It is apparent that the assessee has made parallel entries in his books of accounts with respect to the bogus purchases identified at the time of search in the case of Bhanwarlal Group of concerns wherein similar entries were also recorded in their books of accounts. Assessee has also conceded that the payments were made to Bhanwarlal Group of concerns by cheque for purchases of diamonds. Also revealed from the search conducted in the case of Bhanwarlal group of concerns that the assessee had paid cheque to Bhanwarlal Group of concerns for purchase of diamonds though actually diamonds did not exist. It is also apparent that the assessee has not maintained proper stock recorded corroborating the opening stock of diamonds and purchase of diamonds with the corresponding sale of diamonds and closing stock. In this circumstance, the amount debited in the P L Account of the assessee towards purchase of diamonds is nothing but bogus claim of deduction in order to reduce the profit of the assessee. It will not be proper to estimate the income of the assessee on the basis of presumption that the assessee would have sold the diamonds when the so-called diamonds said to have been purchased by the assessee never existed ab-initio. - Decided against assessee. Estimation of income - bogus purchase of diamonds at 5% of the alleged bogus purchases - HELD THAT - This is a case where the assessee has claimed bogus purchases of diamonds as its expenditure when the diamonds did not exist at all - assessee has neither disclosed the sale of these diamonds in its P L Account nor shown the unsold diamonds as closing stock. Therefore, the corresponding revenue from sale of diamonds and the stock position is not disclosed in the P L Account. There is evidence received by the Revenue that the entire purchases made by the assessee is bogus i.e., the assessee has not received any diamonds though it has debited the purchase value of diamonds in his books of accounts. This fact is not disproved. When no diamonds are received by the assessee there is no possibility of those diamonds being sold. Hence estimation of profit on sale of diamonds which never existed is not appropriate. For the above stated reasons, we do not find any merit in the order of the Ld. CIT (A) on this issue. Accordingly, we hereby reinstate the order of the Ld. AO. Appeal of the Revenue is allowed.

Summary

Issues Involved:
1. Validity of reopening assessment under Section 147 versus Section 153C.
2. Addition on account of bogus purchases of diamonds for AY 2007-08.
3. Addition on account of bogus purchases of diamonds for AY 2008-09.

Issue-wise Detailed Analysis:

1. Validity of Reopening Assessment under Section 147 versus Section 153C:
The assessee argued that the reopening of the assessment should have been under Section 153A or 153C due to the search and seizure operations conducted on the Bhanwarlal Jain group. However, it was concluded that reopening under Section 147 was valid as the information received indicated the assessee obtained bogus invoices from the Bhanwarlal Jain group. The reopening was justified even beyond four years as there was a failure on the part of the assessee to disclose all material facts fully and truly. The notice under Section 153C was deemed unnecessary since none of the assessee's belongings were found during the search.

2. Addition on Account of Bogus Purchases of Diamonds for AY 2007-08:
The assessee was engaged in the business of trading in jewelry and had obtained bogus purchase bills from the Bhanwarlal Jain group. The AO made an addition of ?84,25,604/- based on evidence from the search indicating that the group provided accommodation bills without actual stock. The CIT(A) upheld this addition, noting that the assessee failed to disprove the findings or provide evidence of genuine purchases. The Tribunal confirmed this addition, emphasizing that the bogus purchases were recorded to reduce the profit and the diamonds never existed. Therefore, the entire amount was added back as bogus purchases.

3. Addition on Account of Bogus Purchases of Diamonds for AY 2008-09:
The Revenue's appeal concerned the addition of ?1,55,76,364/- for bogus purchases from the Rajendra Jain group. The AO treated the entire amount as accommodation entries, rejecting the assessee's explanations. The CIT(A) had directed the AO to adopt a 5% estimation of bogus purchases as income, similar to the subsequent assessment year. However, the Tribunal found this inappropriate, reiterating that the entire amount should be disallowed as the diamonds did not exist. The Tribunal reinstated the AO's original addition, emphasizing that no diamonds were received or sold, and hence, the estimation of profit was not applicable.

Conclusion:
The assessee's appeal for AY 2007-08 was dismissed, and the Revenue's appeal for AY 2008-09 was allowed. The Tribunal confirmed the additions for bogus purchases in both years, emphasizing the lack of genuine transactions and the failure of the assessee to maintain proper stock records. The reopening of assessments under Section 147 was deemed valid based on the information received from the investigation wing.