2019 (12) TMI 314 - AT - Income Tax

Bogus purchases - Estimation of profit percentage - CIT(A) directed the AO to restrict the addition by estimating profit percentage at the rate of 3% on bogus purchases - HELD THAT - The issue is decided in appellant own case POPATLAL N. SHAH 1802 VERSUS ACIT 19 (2) , INCOME TAX OFFICE, MUMBAI AND VICE-VERSA 2017 (11) TMI 1816 - ITAT MUMBAI , where it was held that CIT(A) had rightly appreciated that the addition in the hands of the assessee was liable to be restricted only to the extent of the profit element which was embedded in making of purchases from the open/grey market. Following the said decision, it can be safely concluded that the restriction placed by CIT(A) that the addition by estimating profit percentage at the rate of 3% on bogus purchases, is correct. Appeal of the assessee dismissed.

Summary

Issues:
- Appeal against CIT(A)'s order restricting addition by estimating profit percentage at 3% on bogus purchases.

Analysis:
1. The only issue in this appeal pertains to CIT(A)'s direction to the AO to limit the addition by estimating profit percentage at 3% on bogus purchases made by the assessee.

2. The facts reveal that the assessee, engaged in diamond trading, was found to have made purchases from hawala parties providing bogus bills. The AO added the entire amount of unproved purchases to the assessee's income due to failure in establishing the genuineness of the purchases.

3. The CIT(A) restricted the disallowance to 3% of the bogus purchases, citing precedents and industry norms. Notably, the CIT(A) considered the profit margin in the diamond trading sector, recommended presumptive tax rates, and past assessments to arrive at the 3% estimation.

4. The Tribunal, in a previous year's case involving the same assessee, upheld the 3% profit rate for similar bogus purchases. The Tribunal emphasized the failure to substantiate the purchases' genuineness and the need to restrict the addition to the profit element embedded in the purchases.

5. Ultimately, the Tribunal in the current appeal, following its previous decision and considering the facts presented, dismissed the assessee's appeal. The Tribunal found agreement with the CIT(A)'s reasoned approach and upheld the 3% profit rate restriction on the bogus purchases.

6. The Tribunal's decision was based on the assessee's inability to prove the legitimacy of the purchases, industry norms indicating lower profit margins, and consistent application of the 3% profit rate in similar cases. The dismissal of the appeal affirmed the CIT(A)'s order and the 3% profit estimation on the bogus purchases made by the assessee.

7. The judgment highlights the importance of substantiating transactions, industry-specific profit margins, and adherence to past rulings in determining additions related to unproved purchases, providing clarity on the assessment and appellate process in such cases.