2021 (4) TMI 799 - AT - Income Tax

Estimation of income - bogus purchases - assessee is engaged in the business of trading in cut and polished diamonds - HELD THAT - It is not in dispute that the assessee is engaged in the business of trading in cut and polished diamonds. The report of the task group for diamond sector submitted to Department of Commerce suggested that the net profit that could be derived in the diamond manufacturing ranges from 1.5% to 4.5% and in trading activity thereof, the profitability range is 1% to 3%. As average of gross profit for each of the years works out to only 0.6% for the assessee. But it is pertinent to note that assessee had made purchases in the instant case from grey market thereby having saving in VAT as well as incidental profit element thereof. Considering the totality of these facts and circumstances and also considering the report of the task force submitted to Department of Commerce, we deem it fit and appropriate to estimate the profit percentage at 1% of value of purchases in the peculiar facts and circumstances of the instant case. The ld. AO is accordingly directed to make addition only to the extent of 1% of value of tainted purchases for each of the assessment years under consideration. Accordingly, the ground raised by the assessee in this regard is partly allowed.

Summary

Issues:
Validity of re-assessment, Justification of profit addition on ingenuine purchases

Validity of Re-assessment:
The appeals before the Appellate Tribunal ITAT Mumbai involved challenges to the validity of re-assessment for different assessment years. The ground challenging the validity of re-assessment was not pressed by the assessee for certain years. The Tribunal decided to dispose of the appeals together due to identical issues for the sake of convenience.

Justification of Profit Addition on Inginenue Purchases:
The primary issue in the appeal was whether the Commissioner of Income Tax (Appeals) was justified in upholding the estimated profit addition made on the value of ingenuine purchases. The assessee, engaged in trading cut and polished diamonds, had made purchases from parties listed as tainted dealers. The revenue did not dispute the corresponding sales made from these purchases. The assessee provided various documents to prove the legitimacy of the purchases, including PAN/AO details, ledger accounts, purchase bills, and more.

The Assessing Officer (AO) disregarded the provided documents and made an estimated profit addition of 8% on the value of purchases for each assessment year, a decision upheld by the Commissioner of Income Tax (Appeals). However, the Tribunal noted that the industry standards and profitability ratios disclosed by the assessee in earlier years indicated lower profit margins than the estimated 8%. The Tribunal referred to a report suggesting net profit ranges in the diamond sector and decided to estimate the profit percentage at 1% of the value of purchases due to the peculiar circumstances of the case.

Considering the savings in indirect taxes from purchases in the grey market, the Tribunal directed the AO to make profit additions only at 1% of the value of tainted purchases for each assessment year. As a result, the ground raised by the assessee was partly allowed, and the appeals were partly allowed in favor of the assessee.

In conclusion, the Tribunal's decision addressed the validity of re-assessment and the justification for profit additions on ingenuine purchases, providing detailed reasoning based on the facts and circumstances of the case and industry standards.