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2021 (9) TMI 1116 - AT - Income TaxEstimation of income - Bogus purchases - CIT- Restricted 3% disallowance - HELD THAT - AO himself has made similar disallowance in the subsequent years. In our considered opinion, there is no infirmity in the same. See ITO vs. M/s. Dinal Diamonds 2019 (3) TMI 796 - ITAT MUMBAI - Accordingly, we uphold the same.
Issues Involved:
1. Computation of profit for the purpose of section 28 of the IT Act, 1961, considering bogus bills. 2. Restriction of addition on account of bogus purchases. 3. Presumption of purchases made from unknown parties. 4. Clarification on the application of section 69 of the IT Act, 1961. 5. Consideration of the Supreme Court order in the case of N K Protein Ltd. regarding bogus purchases. Issue-wise Detailed Analysis: 1. Computation of Profit Considering Bogus Bills: The Revenue contended that the learned Commissioner of Income Tax (Appeals) [Ld.CIT(A)] erred in computing the profit for the purpose of section 28 of the IT Act, 1961, by considering bogus bills against which no goods were received. The Assessing Officer (AO) initially determined the total income by estimating a 100% profit margin on such purchases, concluding that the purchases were made from undisclosed entities in the grey market, thus benefiting from additional Gross Profit (GP) margin. The Ld.CIT(A) acknowledged the surrounding evidence suggesting bogus purchases but noted that the AO did not conduct an independent inquiry. 2. Restriction of Addition on Account of Bogus Purchases: The Revenue argued against the Ld.CIT(A)'s decision to restrict the addition to 3% of the total purchases, amounting to ?17,44,48,759/-, as the profit element embedded in these purchases. The Ld.CIT(A) reasoned that the AO's estimation of a 100% profit margin was not appropriate for the diamond trade, where the profit margin is typically around 2-3%. The Ld.CIT(A) directed the AO to restrict the addition to 3% of the total purchases, considering the lower profit margins in the diamond industry and the absence of tax levies in places like Surat. 3. Presumption of Purchases from Unknown Parties: The Revenue contended that the Ld.CIT(A) erred in presuming that the purchases were made from unknown parties while the bills were received from accommodation entry providers. The AO held that the goods mentioned in the paper transactions were likely purchased from undisclosed entities in the grey market, as the sales made by the assessee were confirmed, indicating that purchases had indeed taken place. 4. Clarification on the Application of Section 69 of the IT Act, 1961: The Revenue argued that if the Ld.CIT(A) presumed that purchases were made from unknown parties, it should have clarified the mode of payment and the applicability of section 69 of the IT Act, 1961. The Ld.CIT(A) did not explicitly address the mode of payment or the applicability of section 69 in the judgment. 5. Consideration of the Supreme Court Order in N K Protein Ltd.: The Revenue contended that the Ld.CIT(A) erred in not considering the Supreme Court's order in the case of N K Protein Ltd., which dealt with a similar issue of bogus purchases. The Ld.CIT(A) distinguished the facts of the present case from the N K Protein Ltd. case, noting that the search had taken place at the premises of Rajendra Jain/Bhanwarlal Jain Group and not at the appellant's premises. The Ld.CIT(A) also highlighted that the AO's reliance on the N K Protein Ltd. case to estimate a 100% profit margin was not appropriate given the different circumstances and lower profit margins in the diamond industry. Judgment: The Income Tax Appellate Tribunal (ITAT) upheld the Ld.CIT(A)'s order, agreeing that the AO's estimation of a 100% profit margin was not justified. The ITAT noted that the assessee had provided documentary evidence for the purchases, and the sales were not doubted. The ITAT cited previous decisions, including those in the cases of M/s. Dinal Diamonds and M/s. Shailesh & Co., where similar issues were addressed, and a 3% disallowance was deemed appropriate. The ITAT concluded that a 3% disallowance out of the bogus purchases met the ends of justice, considering the lower profit margins in the diamond industry. Consequently, both the appeals by the Revenue and the assessee were dismissed.
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