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2017 (11) TMI 184 - AT - Income TaxBogus purchases - G.P. determination - assessee before us submitted that he is into 100% exports of trading of cut and polish diamonds - The Task Group for Diamond Sector submitted to Department of Commerce also suggests that the profit margin in trading of goods is in the range of 1% to 3% - Held that - In the circumstance we direct the Assessing Officer to estimate the profit element from the purchases treated as non-genuine at the rate of 2% uniformly for all the Assessment Years 2007-08, 2008-09, 2010-11, 2011-12 and 2013-14. The grounds raised by the Revenue for the Assessment Years 2007-08, 2008-09 and 2011-12 and the grounds raised by the assessee for the Assessment Years 2008-09, 2010-11, 2011-12 and 2013-14 on this issue are dismissed and ground raised by the assessee on this issue for the Assessment Year 2007-08 is partly allowed. Disallowance made u/s. section 14A r.w. Rule 8D - Held that - We direct the Assessing Officer to restrict the disallowance u/s. 14A r.w. Rule 8D to the extent of dividend income of ₹.38,380/- and ₹.11,180/- received for the Assessment Year 2008-09 and 2013-14 respectively and compute the income accordingly.
Issues Involved:
1. Disallowance of purchases as non-genuine. 2. Reopening of assessments based on information from DGIT(Investigation). 3. Estimation of profit element in non-genuine purchases. 4. Disallowance under section 14A read with Rule 8D. Detailed Analysis: 1. Disallowance of Purchases as Non-Genuine: The assessee challenged the disallowance of purchases by the Ld.CIT(A) at 4% for AY 2007-08 and 3% for AYs 2008-09, 2010-11, 2011-12, and 2013-14. The Revenue also filed appeals against the Ld.CIT(A)'s decision to restrict the disallowance to these percentages. The Assessing Officer (AO) treated the entire purchases as non-genuine for AY 2007-08 and 12.5% as non-genuine for other years, based on statements from key persons in the Rajendra Jain group, who admitted to providing accommodation entries without real business transactions. The Ld.CIT(A) upheld the AO's action but estimated the profit element in the purchases at lower percentages, citing the Gujarat High Court decisions in CIT v. Bholanath Polyfab Pvt. Ltd. and CIT v. Simit P. Seth. 2. Reopening of Assessments Based on Information from DGIT(Investigation): The assessments were reopened under section 147 based on information that the assessee was a beneficiary of bogus purchases from entities managed by the Rajendra Jain group. The group admitted to providing accommodation entries and not engaging in real trading. The AO, not convinced by the assessee's submissions and lack of delivery challans, concluded that the purchases were bogus and made in the gray market. 3. Estimation of Profit Element in Non-Genuine Purchases: The AO estimated a 12.5% Gross Profit Margin on the non-genuine purchases for AYs 2008-09, 2010-11, 2011-12, and 2013-14, while treating the entire purchases as non-genuine for AY 2007-08. The Ld.CIT(A) reduced the profit element to 4% for AY 2007-08 and 3% for the other years, considering the CBDT Instructions and various case laws. The Tribunal further directed the AO to estimate the profit element at 2% uniformly for all the years, considering the Task Group for Diamond Sector's report, which suggested a profit margin of 1% to 3% in diamond trading. 4. Disallowance Under Section 14A Read with Rule 8D: For AYs 2008-09 and 2013-14, the assessee contested the disallowance under section 14A r.w. Rule 8D, arguing it should not exceed the dividend income earned. The Tribunal, following the decisions of the Punjab and Haryana High Court and the Delhi High Court, directed the AO to restrict the disallowance to the dividend income of ?38,380 and ?11,180 for the respective years. Conclusion: The appeals of the assessee for AYs 2007-08, 2008-09, and 2013-14 were partly allowed, while those for AYs 2010-11 and 2011-12 were dismissed. The Revenue's appeals for AYs 2007-08, 2008-09, and 2011-12 were dismissed. The Tribunal's decision emphasized the need for a reasonable estimation of profit elements in non-genuine purchases and adherence to judicial precedents in disallowance under section 14A.
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