2017 (10) TMI 1013 - AT - Income Tax

Addition @ 3% profit rate on total purchases - bogus purchases - Held that - We are of the considered view that the CIT(A) had rightly appreciated that the addition in the hands of the assessee was liable to be restricted only as regards the profit element which was embedded in making of purchases by the assessee from the open/grey market. We find that the CIT(A) though was not oblivious of the fact that in respect of bogus purchases made in a normal business, the courts had consistently estimated the profit margin involved in making of purchases from the open/grey market at 12.5% of the value of the bogus purchases, but then, not loosing sight of the fact that unlike those cases, in the trade line of diamond business the profit margin that would be involved would not exceed 3%, thus for the said reason had restricted the addition in the hands of the assessee @ 3% of the aggregate value of the bogus purchases made by the assessee. We have given a thoughtful consideration to the facts of the case and are persuaded to be in agreement with the view so taken by the CIT(A). We thus being of the considered view that the CIT(A) had fairly concluded that the addition in respect of the purchases which were claimed by the assessee to have been made from the aforementioned parties, viz. (i) Prime Star; (ii) Rajan Diamonds; (iii) Mayur Exports; and (iv) Parvati Exports was liable to be restricted to 3% of the aggregate value of the purchases, therefore, find no reason to dislodge the well reasoned order of the CIT(A). We thus, in the backdrop of our aforesaid observations, finding ourselves as being in agreement with the view taken by the CIT(A), therefore, uphold his order.

Summary

Issues Involved:
1. Sustaining an addition at a 3% profit rate on total purchases made from certain parties.
2. Whether the Assessing Officer (A.O) was justified in disallowing the entire amount of purchases.
3. The genuineness and veracity of the purchase transactions.
4. The burden of proof for substantiating the genuineness of purchases.
5. The appropriate profit margin to be applied to the purchases from the grey market.

Detailed Analysis:

Issue 1: Sustaining an Addition at a 3% Profit Rate on Total Purchases
The main issue in all the appeals was whether the CIT(A) was justified in sustaining only an addition at a 3% profit rate on total purchases made from certain parties. The CIT(A) concluded that although the purchases were not made from the parties claimed by the assessee, the goods were indeed purchased from the grey market. Therefore, the entire purchase amount could not be disallowed, and only the profit element embedded in such purchases should be added back to the income.

Issue 2: Justification of Disallowing the Entire Amount of Purchases
The A.O disallowed the entire amount of purchases on the grounds that the transactions were bogus. The A.O based this decision on information from the DGIT (Inv.), Mumbai, and statements recorded under oath from dummy directors/partners/proprietors of bogus concerns managed by Shri Bhanwarlal Jain. The A.O concluded that the purchases were merely accommodation entries and not genuine transactions.

Issue 3: Genuineness and Veracity of Purchase Transactions
The A.O and CIT(A) both agreed that the assessee failed to substantiate the genuineness and veracity of the purchases. The CIT(A) noted that the assessee did not provide sufficient documentary evidence like delivery challans to prove the genuineness of the transactions. However, the CIT(A) acknowledged that the goods were recorded in the stock register and corresponding sales were also accounted for, indicating that the purchases were made, albeit from the grey market.

Issue 4: Burden of Proof for Substantiating Genuineness of Purchases
The CIT(A) emphasized that the burden of proof to substantiate the genuineness of the purchases lay with the assessee. The assessee's failure to produce primary evidence or the suppliers for verification led to the conclusion that the transactions were not genuine.

Issue 5: Appropriate Profit Margin to be Applied
The CIT(A) considered various factors, including VAT rates, recommendations by the task force for the diamond industry, and consistent practices by A.O.s in similar cases, to determine that a 3% profit margin was appropriate for the purchases from the grey market. The CIT(A) noted that the operating profit in the diamond trading industry typically ranged between 1.75% to 3%.

Conclusion:
The ITAT upheld the CIT(A)'s decision to restrict the addition to 3% of the aggregate value of the purchases. The tribunal agreed that the purchases were made from the grey market and not from the claimed parties, and that the profit margin embedded in such purchases should be added back to the income. The appeals for AY 2007-08, 2009-10, and 2012-13 were dismissed, affirming the CIT(A)'s order.

Separate Judgments:
The tribunal applied the same reasoning and conclusions to the appeals for AY 2009-10 and 2012-13, as the facts and issues were identical to those in AY 2007-08. The appeals for all three assessment years were dismissed in terms of the observations made for AY 2007-08.