2022 (11) TMI 657 - AT - Income Tax

Bogus purchase of cut and polished diamonds in his business - HELD THAT - The assessee at the same time has filed all possible evidences to prove genuineness of the purchase, giving quantitative details of stock, purchases and consumption and sale of the said type of diamonds, bills, bank statements showing payment made for purchases and also evidence showing utilization of the said purchase in making jewellery. As noted from the audited financial statements that the assessee has returned higher net profits in the impugned year, Rs.18.83 lacs net profit against turnover of Rs. 246.65 lacs, being 7.6% of turnover ,as against that in the preceding year of Rs.4.6 lacs net profit against turnover of Rs.204.82, making it 2.24 % of turnover. Moreover in the succeeding year the Ld.CIT(A) restricted identical purchase of bogus diamonds to the extent of 25% of the purchases. No reason to disallow the entire purchases when the facts as above suggest the possibility of the assessee having not probably purchased diamonds of the said worth from Mayank Impex, but from some other party. The consistent decisions of the coordinate benches of the ITAT in similar facts and circumstances, relied upon by the Ld.Counsel for the assessee, holding disallowance of profit element only embedded in such purchases as reasonable, as also the decision of the Ld.CIT(A) in the case of the assessee itself in the succeeding year restricting disallowance of similar bogus purchases to 25%, warrant no different view being taken in the present case before me. The said decisions we have noted have dealt with the Hon ble Apex Court decision in the case of N K Proteins 2017 (1) TMI 1090 - SC ORDER heavily relied upon by the Revenue before me. Direct restricting addition in the present case to the extent of 25% (twenty five percent) of the purchases found bogus, as done in the succeeding year in the case of the assessee. The ground of appeal of the assessee is allowed.

Summary

Issues:
1. Reopening of assessment based on third-party information.
2. Addition of Rs. 6,80,400 on account of bogus purchase of diamonds.

Analysis:

Issue 1: Reopening of assessment based on third-party information
The appeal was filed against the order passed by the Commissioner of Income Tax (Appeals) confirming the reopening of the assessment by issuing a notice under section 148 of the Income Tax Act, 1961. The appellant contended that the assessment was reopened based on information from a third party regarding bogus purchase transactions. The appellant argued that the assessment should have been quashed as it was not based on valid grounds. However, the counsel for the appellant later stated that ground no. 1 was not pressed and was dismissed as not pressed.

Issue 2: Addition of Rs. 6,80,400 on account of bogus purchase of diamonds
The main contention revolved around the addition of Rs. 6,80,400 made on account of bogus purchases of cut and polished diamonds. The appellant challenged the entire addition and also presented an alternative plea to tax only the profit embedded in the purchases, not the entire amount. The Commissioner of Income Tax (Appeals) dismissed the appellant's alternative plea, noting that the purchases were admitted to be bogus by the parties involved. The Commissioner held that the appellant failed to prove the genuineness of the purchases, as evidenced by the absence of concrete evidence and lack of reflection of the purchases in sales records. The Commissioner relied on legal precedents to support the disallowance of entire bogus purchases.

The appellant argued that they provided sufficient evidence to prove the purchases of diamonds, including audited financial statements, tax audit reports, and bills for making ornaments with the purchased diamonds. The appellant contended that the ITAT had consistently held that only the profit element embedded in bogus purchases should be added to the assesses' income. The appellant also highlighted a previous case where the CIT(A) had restricted additions on similar grounds to 15%.

After considering the facts and circumstances, the Tribunal found that there was no justification to disallow the entire purchases of Rs. 6,80,400. The Tribunal noted the possibility that the purchases might have been made from a different party than the one identified as bogus. Relying on previous decisions and the CIT(A)'s decision in the succeeding year, the Tribunal directed the addition to be restricted to 25% of the bogus purchases. The Tribunal allowed the appellant's appeal partially, directing the restriction of the addition to 25% of the disputed amount.

In conclusion, the Tribunal's decision provided relief to the appellant by restricting the addition on account of bogus purchases to 25% of the disputed amount, based on the evidence presented and legal precedents cited during the proceedings.