2021 (4) TMI 40 - AT - Income Tax

Estimation of income - Non genuine purchases of diamond - Commissioner (Appeals) submitted, disallowance at 5% is most reasonable as in some other cases the Tribunal has upheld disallowance at 8% of the non genuine purchases - reasonableness of the disallowance made at 5% of the non genuine purchases - HELD THAT - On a perusal of the report of the Task Group for Diamond Sector under the aegis of Ministry of Commerce and Industry, Department of Commerce, Government of India, New Delhi in the year 2013, it is noticed that as per the benign assessment procedure (BAP) introduced in the budget presented in 2007-08, the threshold net profit rate was fixed at 8% which was subsequently revised to 6% as per CBDT Instruction No.2/2008 dated 22-02-2008. The task group has stated that the rate of 6% so fixed is nowhere reflective of the reality in the diamond manufacturing and trading industry, which operates on profit margin in the range of 1% to 3% only. Also in case of ITO vs Dhawal Exim P Ltd 2018 (11) TMI 1840 - ITAT MUMBAI assessee, the first appellate authority himself has sustained addition @3% of the non genuine purchases under more or less identical facts and circumstances - thus disallowance at 3% of the alleged non genuine purchases would be fair and reasonable. Accordingly, direct the assessing officer to do so. Ground is partly allowed.

Summary

Issues: Disallowance of alleged non genuine purchases of diamond for the assessment year 2011-12.

Analysis:
1. The assessing officer reopened the assessment under section 147 of the Act based on information received during search and seizure operations in a related case, suspecting accommodation entries in the form of unsecured loans and bogus purchase bills. The assessing officer called upon the assessee to prove the genuineness of purchases made from specific parties within the group. Despite providing evidence like purchase invoices, sale invoices, and bank statements, the assessing officer concluded that the purchases were accommodation entries. However, he acknowledged that the goods entered the stock register and corresponding sales were shown, leading to a disallowance of 5% of the alleged non genuine purchases, adding back an amount to the total income of the assessee.

2. The Authorized Representative argued that the assessing officer solely relied on third-party information to treat the purchases as non genuine, rejecting the provided evidence without proper reasoning. It was highlighted that the assessing officer accepted the physical presence of the diamond in the assessee's stock and corresponding sales. The representative proposed that the disallowance should be reduced to 3% of the alleged non genuine purchases, citing industry reports and a precedent case to support the argument.

3. The Departmental Representative supported the assessing officer's decision, emphasizing that disallowance at 5% was reasonable and citing instances where the Tribunal upheld disallowance at 8% in similar cases.

4. The Tribunal observed that the assessing officer doubted the source of purchase, not the purchase itself, and disallowed 5% of the alleged non genuine purchases. After reviewing industry reports and a precedent case, the Tribunal deemed a 3% disallowance fair and reasonable, considering the profit margins in the diamond industry. Consequently, the Tribunal directed the assessing officer to make the disallowance at 3% of the alleged non genuine purchases, partially allowing the appeal.