2023 (2) TMI 166 - AT - Income Tax

Estimation of income - Bogus purchases from benami concerns - HELD THAT - Admittedly assessee in this case has engaged in bogus purchase entries while sales have not been doubted. When sales are not doubted purchases alone cannot be disallowed at 100%. Making purchases through grey market gives the assessee benefits at the expense of exchequer. The assessee is engaged in the business of diamond trading. As per the report of task force of diamond sector constituted by Ministry of Commerce Industry, after considering capital BAP (Benign Assessment Procedure), net profit was prevalent at 1% to 3% in case of trading of diamonds and 1.5% to 4% for those who engaged in manufacturing of diamonds. As per the facts of the present case, it is clear that this is a case of trading in diamonds and sales have not been doubted. AO has made no enquiry whatsoever. The prevalent net profit as noted above was at 1% to 3%. The net profit declared by the assessee as per tax audit report is 1.24% for both the years. Although the net profit declared falls within the range recommended, in our considered opinion, the interest of justice would be served if the rate of net profit is taken at 2% of sales, Hence bringing to tax, difference between 1.24% net profit shown and the 2% net profit recommended by the above Task Force will, in our considered opinion, serve the ends of justice - Appeal of revenue partly allowed.

Issues Involved:
1. Reopening of assessment.
2. Addition on account of bogus purchases.
3. Genuineness of transactions and evidence provided.
4. Net profit estimation and adjustment.

Issue-wise Detailed Analysis:

1. Reopening of Assessment:
The Revenue contended that the reopening of the assessment was justified based on new information from the Investigation Wing regarding bogus transactions by M/s. Bhanwar Lal Group. The CIT(A) upheld the reopening, noting that the information was specific and categorical, and was not available during the original assessment. The CIT(A) referenced the Supreme Court ruling in ALA Firm vs. CIT, which allows reopening of cases based on new information post-assessment. The Tribunal found no argument from the assessee against the reopening, thus treating the cross appeals as infructuous.

2. Addition on Account of Bogus Purchases:
The AO added Rs. 2,87,58,745/- to the assessee's income, alleging bogus purchases from benami concerns managed by Bhanwar Lal Jain. The assessee argued that these were genuine transactions, supported by account payee cheques and recorded in the stock register. The AO, without further enquiry, relied on the investigation report to treat the purchases as bogus. The CIT(A) deleted the addition, stating that the transactions were through banking channels, and the assessee provided all necessary documents, including stock registers and purchase bills. The CIT(A) emphasized that the AO did not reject the books of account or allow the assessee to cross-examine the third party.

3. Genuineness of Transactions and Evidence Provided:
The assessee provided detailed submissions, including audited accounts, stock registers, and bank statements, to substantiate the genuineness of the purchases. The CIT(A) noted that the AO failed to point out any defects in these records. The CIT(A) referred to various case laws, including CIT vs. M K Brothers and CIT vs. Sunrise Tooling System Private Limited, which held that purchases cannot be deemed bogus merely based on third-party statements without cross-examination. The CIT(A) concluded that treating purchases as bogus without disturbing the sales was not justified.

4. Net Profit Estimation and Adjustment:
The Tribunal observed that while the assessee engaged in bogus purchase entries, the sales were not doubted. Referring to the Task Force report on the diamond sector, which suggested a net profit range of 1% to 3%, the Tribunal noted that the assessee's declared net profit was 1.24%. The Tribunal deemed it just to take the net profit at 2% of sales, thereby adjusting the difference between the declared 1.24% and the recommended 2%. This approach aligned with the ruling in CIT vs. Bholanath Poly Fab (P.) Ltd., where only the profit margin embedded in bogus purchases was taxed.

Conclusion:
The Tribunal partly allowed the Revenue's appeals by adjusting the net profit to 2% of sales and treated the assessee's cross appeals as infructuous due to the lack of arguments against reopening. The order was pronounced on February 3, 2023.

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