2022 (11) TMI 131 - AT - Income Tax

Estimation of income - bogus purchases - As per CIT 5% disallowance is quite reasonable keeping in view the profit margin in the diamond industry is very low - 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 Assessing Officer 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 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 - In the result, the grounds of appeal raised by the Revenue is partly allowed resultantly,

Summary

Issues:
1. Reopening of assessment under section 147 of the Income Tax Act, 1961
2. Addition of unverifiable purchases by the Assessing Officer
3. Appeal against the order of the learned Commissioner of Income Tax (Appeals)-1, Surat

Reopening of assessment under section 147 of the Income Tax Act, 1961:
The case involved the reopening of assessment for the Assessment Year 2008-09 based on information received from DGIT (Investigation) Mumbai regarding a search and seizure action on Gautam Jain and his Group. The Assessing Officer formed the opinion that income of the assessee had escaped assessment due to accommodation entries provided by Gautam Jain Group. Despite objections from the assessee, the Assessing Officer proceeded with the reopening, resulting in a detailed and speaking order dated 22/03/2016 rejecting the objections.

Addition of unverifiable purchases by the Assessing Officer:
The Assessing Officer disallowed 100% of purchases amounting to Rs. 4,08,64,674/- shown from certain entities managed by Gautam Jain Group, deeming them as bogus entries to suppress true profit. The assessing officer rejected the books of account of the assessee and made the addition based on the search conducted on Gautam Jain. The ld. CIT(A) later restricted the addition to 5% of the amount of bogus purchases, citing precedents and the reasonableness of the profit margin in the diamond industry.

Appeal against the order of the learned Commissioner of Income Tax (Appeals)-1, Surat:
Both the Revenue and the Assessee filed appeals against the order of the ld. CIT(A). The Revenue challenged the reduction of the addition to 5%, arguing that the entire amount of bogus purchases should be disallowed. The Assessee supported the 5% disallowance, emphasizing the low profit margin in the diamond industry. The Tribunal partially allowed the Revenue's appeal, increasing the disallowance to 6% of the impugned purchases, resulting in the dismissal of the Assessee's appeal.

This detailed analysis of the judgment covers the issues of reopening of assessment, addition of unverifiable purchases, and the subsequent appeals filed against the order of the ld. CIT(A) in a comprehensive manner, highlighting the key arguments and decisions made by the authorities involved in the case.