2018 (9) TMI 1235 - AT - Income Tax

Addition of bogus purchases - G.P. rate estimation - assessee is engaged in the business of trading and export of diamonds - Held that - Keeping in view the fact that no discrepancies have been found in the account books maintained by the assessee in the due course of business; that AO has not disputed the purchase of diamonds but only disputed that the bogus bills were procured to avoid the payment of VAT and the fact that profit margin in the diamond business is around 2 to 3% and as has been held by the coordinate bench of Tribunal in the case of M/s. Naitik Gems (2017 (11) TMI 1708 - ITAT MUMBAI), we are of the considered view that in addition to the gross profit already declared by the assessee in assessment year 2012-13 and 2013-14 further addition of 3% in the GP rate on the bogus purchases is ordered to be made. The AO is directed to restrict the addition of GP to 3% of the disputed purchases over and above the GP rate already declared by the Assessee.

Summary

Issues:
Jurisdiction to initiate proceedings u/s 147, validity of proceedings based on received information, addition of alleged bogus purchases, rejection of books of account u/s 145(3), interest charges u/s 234B and 234C, estimation of Gross Profit (GP) on bogus purchases, applicability of GP rate in jewelry business, comparison of declared GP rates with estimated GP rates, legal precedents on additional profit estimation, discrepancies in account books, disputed procurement of bogus bills for VAT avoidance, determination of fair additional profit, restriction of GP addition to 3% of disputed purchases.

Analysis:
The judgment concerns appeals by M/s. Ganpati Diamond Palace challenging the order passed by the Commissioner of Income Tax (Appeals) for assessment years 2012-13 and 2013-14. The key issues raised include challenging the jurisdiction of the Assessing Officer (AO) to initiate proceedings u/s 147, contesting the validity of proceedings based solely on received information without verification, disputing the addition of alleged bogus purchases, and criticizing the rejection of books of account u/s 145(3). The appellant also questioned the approval of the AO's action in making additions without proper adjudication of interest charges u/s 234B and 234C.

The case involved the reopening of the assessee's case under section 147 due to a search and seizure operation in another group. The AO estimated the GP on alleged bogus purchases from M/s. Nice Diamonds Ltd. @ 25%, leading to additions in the total income for both assessment years. The appellant challenged the uniform application of 25% GP rate, highlighting discrepancies in the account books and the fact that the AO did not dispute the purchase of diamonds but only the procurement of bogus bills for VAT avoidance.

The judgment referenced a coordinate bench decision in a similar case, where it was held that an additional profit estimation of 3% on disputed purchases was fair. Considering the facts and legal precedents, the tribunal ordered a restriction on the GP addition to 3% of the disputed purchases, in addition to the already declared GP rates by the assessee. The judgment emphasized the importance of fair estimation and the specific circumstances of the diamond business sector in determining the additional profit.

Ultimately, the appeals filed by the assessee were partly allowed, with the tribunal directing the AO to restrict the GP addition to 3% of the disputed purchases. The judgment highlighted the significance of maintaining accurate records, fair estimation practices, and adherence to legal precedents in tax assessments related to alleged bogus transactions in the jewelry business.