2019 (3) TMI 692 - AT - Income Tax

Bogus purchases - 100% disallowance for the purchases said to be bogus when sales are not doubted - HELD THAT - Assessee has provided the documentary evidence for the purchase. Adverse inference has been drawn as per the A.O. that the assessee has not produced the day-wise stock register and books produced for verification are not in working conditions. What is the meaning of the observation is not clear. A.O. has primarily relied upon the findings in Rajendra Jain group search. A.O. has not even issued notice to these parties said to be bogus. We find that in this case the sales have not been doubted. It is settled law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from the Hon ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises 2014 (7) TMI 559 - BOMBAY HIGH COURT as upheld 100% allowance for the purchases said to be bogus when sales are not doubted. However, in that case all the supplies were to the government agency. In the present case, the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation, in our considered opinion, on the facts and circumstances of the case, 3% disallowance out of the bogus purchases meets the end of justice, as reasoned done by the CIT(A) above. - Decided against revenue.

Summary

Issues:
1. Consideration of Hon'ble Supreme Court order in similar case
2. Justification of sustaining 3% profit rate on non-genuine purchases
3. Direction to restrict profit estimation at 3% instead of 100% on non-genuine purchases

Analysis:

Issue 1:
The appeal by the Revenue challenges the order of the CIT(A) for the assessment year 2007-08, questioning the failure to consider the Hon'ble Supreme Court's order in a similar case. The Revenue argues that the CIT(A) should have taken into account the apex court's ruling, which was already the law of the land at the time of the CIT(A)'s decision. The contention revolves around the relevance and impact of the Supreme Court's decision on the present case involving bogus purchases.

Issue 2:
The dispute centers on whether the CIT(A) was justified in upholding a 3% profit rate on total purchases of a significant amount made from four parties, despite the failure to prove the genuineness of these purchases by the assessee. The AO treated the purchases as non-genuine, alleging that the assessee engaged in fraudulent transactions to suppress profits. The CIT(A) reasoned that estimating the profit percentage on such purchases is the appropriate approach to determine the income tax liability, considering the nature of the diamond trading sector and the likelihood of grey market dealings.

Issue 3:
The direction to restrict the profit estimation at 3% instead of 100% on the non-genuine purchases is a key aspect of the judgment. The CIT(A) highlighted the difference between doubting the genuineness of purchase parties and the overall purchase transactions. By referencing industry recommendations and profit margins in the diamond trading sector, the CIT(A) concluded that a 3% disallowance on the total non-genuine purchases from the four parties would align with justice. This decision was based on the premise that sales were genuine, indicating a need to balance the tax treatment of the disputed purchases.

In conclusion, the ITAT Mumbai upheld the CIT(A)'s decision, dismissing the Revenue's appeal. The judgment delves into the intricacies of profit estimation, genuineness of transactions, and the interplay between sales and purchases in the context of grey market dealings in the diamond trading sector. The legal analysis considers precedents, industry practices, and the specific circumstances of the case to arrive at a reasoned determination on the tax treatment of non-genuine purchases.