2024 (3) TMI 1198 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - Since there is allegation of getting accommodation bills, it is possible that the assessee could have purchased goods from someone else, while the purchase bills were obtained from some body else. In that case, there is a possibility that the assessee could have made some profit, which can be assessed by the AO What could be assessed by the AO is only the profit element involved in the alleged bogus purchase transactions The gross profit rate in respect of trading of diamonds may be taken at 3%. In the instant case, the assessee has sold the alleged bogus purchases and hence it was a trading transaction. Since the assessee has already declared gross profit rate of 1.42%, we are of the view the addition should be restricted to 1.58% (3% less 1.42%). Accordingly, we modify the order passed by Ld CIT(A) and direct the AO to restrict the addition to 1.58% of the value of alleged bogus purchases. Appeal filed by the assessee is partly allowed.

Summary

Issues:
The issues involved in the judgment are challenging the order of partial confirmation of addition relating to alleged bogus purchases and questioning the validity of reopening of assessment.

Challenge to Partial Confirmation of Addition:
The assessee, engaged in the diamond business, challenged the decision of the learned CIT(A) regarding the addition of alleged bogus purchases. The Assessing Officer reopened the assessment based on information received regarding accommodation entries from a concern named M/s. Mayank. The AO disallowed 100% of the value of purchases made from M/s. Mayank, amounting to Rs. 4,22,34,640. The CIT(A) restricted the addition to the average rate of gross profit of three years, which was 16.45%. The assessee contended that the addition should be limited to the profit element involved in the alleged bogus purchases, citing relevant legal precedents. The Tribunal agreed with the assessee, considering the gross profit rate in the diamond trading business to be around 3%. Consequently, the addition was reduced to 1.58% of the value of the alleged bogus purchases.

Validity of Reopening of Assessment:
The assessee also raised a ground challenging the validity of the reopening of assessment. The AO reopened the assessment under section 148 of the Act based on information received regarding accommodation entries from M/s. Mayank. The Tribunal did not delve into this issue in detail as the main focus was on the challenge to the addition related to alleged bogus purchases.

Conclusion:
The Tribunal partially allowed the appeal filed by the assessee, modifying the order passed by the CIT(A) and directing the AO to restrict the addition to 1.58% of the value of alleged bogus purchases. The judgment highlighted the importance of considering the profit element in such transactions and the relevance of gross profit rates in the diamond trading business.