2022 (8) TMI 947 - AT - Income Tax

Estimation of income - Bogus purchases - CIT(A) restricting the disallowance made on account of bogus purchases at 12.5% - HELD THAT - We find that The report of the task group for diamond sector submitted to Department of Commerce suggested that the net profit that could be derived in the diamond manufacturing ranges from 1.5% to 4.5% and in trading activity thereof, the profitability range is 1% to 3%. This Tribunal in number of times had placed reliance on the said task force report and had estimated the profit percentage within the aforesaid range. Considering the documents submitted by the assessee and also considering the fact that assessee had not proved the veracity of the purchases beyond reasonable doubt in the instant case, we hold that estimation of profit percentage @3% of value of disputed purchases would meet the ends of justice. Accordingly, the grounds raised by the assessee are partly allowed.

Summary

Issues:
- Whether the Commissioner was justified in restricting the disallowance made on account of bogus purchases.
- Whether the profit percentage of 12.5% was justified in the case of a trading firm dealing in diamonds.

Analysis:
1. The appeals before the ITAT Mumbai involved the assessment years 2012-13 and 2014-15 arising from the order of the Commissioner of Income Tax (Appeals). The main issue was the justification of restricting the disallowance on account of bogus purchases.

2. The ITAT noted that the assessee, a partnership firm dealing in diamonds, was subjected to proceedings under section 153C of the Income Tax Act post a search operation. The Assessing Officer disallowed 100% of purchases from certain tainted parties, while the Commissioner restricted it to 12.5% profit element. The ITAT had to determine the correctness of this restriction.

3. The ITAT observed that the sales from the disputed purchases were not questioned by the Revenue. Consequently, it was deemed appropriate to tax only the profit element within the disputed purchases. However, the key issue was whether the 12.5% profit estimation was reasonable for a diamond trading business.

4. In its analysis, the ITAT considered industry standards and previous decisions. Referring to a task group report, it highlighted that diamond trading profitability typically ranges from 1% to 3%. Given the lack of conclusive evidence regarding the purchases, the ITAT concluded that a profit percentage of 3% would be more appropriate. Therefore, the ITAT partly allowed the assessee's appeal.

5. Ultimately, the ITAT decided that estimating the profit percentage at 3% of the disputed purchases would serve the interests of justice. Consequently, it partially allowed the assessee's appeals, emphasizing the need for a more realistic profit estimation in line with industry standards.

6. The judgment showcases the importance of considering industry benchmarks and the specific nature of the business while determining profit elements in disputed purchases. By aligning the profit percentage estimation with industry norms, the ITAT aimed to ensure a fair and just assessment in the case of the diamond trading firm.