2022 (4) TMI 496 - AT - Income Tax

Estimation of income - bogus purchases - restricting the addition to the extent of 5% - HELD THAT - It is a settled law that in case of disputed purchases shown from such hawala dealer s only profit element embedded in such transaction is to be disallowed, to avoid the possibility of revenue leakage and not the substantial part of transaction. No doubt, the AO identified the purchases shown from hawala dealers, the assessee may have shown other transaction with some other parties. However, the assessee has offered a meagre income of ₹ 1,14,580/- for taxation, thus the assessee was shown an extremely low profit. This combination in other similar cases wherein the purchases are shown from Bhanwarlal Jain or Rajendra Jain or Gautam Jain group have restricted or enhanced the addition to the extent of 6% of such amount or disputed purchases. Therefore, taking a consistent view, the disallowance which was restricted to the extent of 5% by ld. CIT(A) are increased to 6% of the impugned purchases of ₹ 7.66 Crores. In the result, the grounds of appeal raised by the Revenue is partly allowed resultantly, the ground No. 2 of assessee s appeal is dismissed

Issues Involved:
1. Justification of the CIT(A) in partly allowing the appeal of the assessee and estimating disallowance at 5% of bogus purchases.
2. Appropriateness of CIT(A) relying on the case of M/s Mayank Diamonds Pvt. Ltd. for estimating disallowance.
3. Validity of reopening the case under section 148 of the Income Tax Act.
4. Confirmation of addition of ?38,32,473/- being 5% of alleged bogus purchases.
5. Condonation of delay in filing the appeal by the assessee.

Issue-wise Detailed Analysis:

1. Justification of the CIT(A) in partly allowing the appeal of the assessee and estimating disallowance at 5% of bogus purchases:
The Revenue challenged the CIT(A)'s decision to estimate disallowance at 5% instead of the 25% made by the Assessing Officer (AO). The AO had disallowed 25% of purchases based on the suspicion that the assessee was a beneficiary of bogus accommodation entries from M/s Rajan Gems, managed by Gautam Jain Group. The AO argued that these entries were used by the assessee to suppress profit margins by increasing the cost of items purchased. However, the CIT(A) restricted the disallowance to 5% by referring to various decisions, including that of the Jurisdictional High Court in Mayank Diamonds Pvt. Ltd., which considered a 5% gross profit rate as average in the diamond industry. The Tribunal concluded that a 6% disallowance was more appropriate, considering the low profit margin shown by the assessee.

2. Appropriateness of CIT(A) relying on the case of M/s Mayank Diamonds Pvt. Ltd. for estimating disallowance:
The Revenue contended that the CIT(A) erred by relying on the case of M/s Mayank Diamonds Pvt. Ltd., which was distinct from the present case. The AO had based his disallowance on the decision in Vijay Proteins Ltd., where 25% of purchases were disallowed. The Tribunal noted that the facts in Mayank Diamonds were at variance, and the disallowance should be based on the specific circumstances of each case. The Tribunal ultimately decided to increase the disallowance to 6%, aligning with similar cases involving purchases from hawala dealers.

3. Validity of reopening the case under section 148 of the Income Tax Act:
The assessee contested the reopening of the case under section 148. The AO had reopened the case based on information from the DGIT (Investigation) Mumbai, which indicated that the assessee was a beneficiary of bogus accommodation entries provided by Gautam Jain Group. The CIT(A) upheld the validity of the reopening, referencing the Supreme Court decision in Purushottam Das Bangur and the Jurisdictional High Court decision in Pushpak Bullion (P) Ltd., which supported the sufficiency of information from the Investigation Wing for reopening. The Tribunal dismissed the assessee's appeal on the grounds related to reopening, as the assessee's representative did not press these grounds.

4. Confirmation of addition of ?38,32,473/- being 5% of alleged bogus purchases:
The assessee's cross-appeal challenged the confirmation of the addition of ?38,32,473/-, which was 5% of the alleged bogus purchases. The AO had initially disallowed 25% of the purchases from M/s Rajan Gems, suspecting them to be accommodation entries. The CIT(A) reduced this disallowance to 5%, considering it reasonable based on industry standards. However, the Tribunal found that a 6% disallowance was more appropriate, given the low profit margin shown by the assessee and the nature of the transactions.

5. Condonation of delay in filing the appeal by the assessee:
The assessee's appeal was filed three days late. The assessee explained that the delay was due to the need for the appellant's signature on documents, which were posted through courier. The Tribunal condoned the delay, emphasizing that substantial justice should prevail over technical considerations. The delay was deemed neither intentional nor deliberate.

Conclusion:
The Tribunal partly allowed the Revenue's appeal and dismissed the assessee's appeal. The disallowance of bogus purchases was increased from 5% to 6%, considering the specific circumstances and industry practices. The validity of reopening the case under section 148 was upheld, and the delay in filing the appeal was condoned.

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