2023 (11) TMI 1188 - AT - Income Tax

Estimation of income - bogus purchases in diamond business - assessee is engaged in the business of purchase, sale, manufacturing and trading of gold jewellery with diamond and color stones, diamond and gems stones - HELD THAT - Considering the nature of business of the assessee whether the same are at inflated or are at prevalent market rate. The sales and quantity records are not disputed. Estimating the profit @ 25 % based on the facts that the purchase is tainted - So far as the decision relied upon for estimate of the profit @ 25 % we note that there were issues as to quality of the goods and in fact in some cases observed that the goods in fact not been delivered or denied to have purchased. Not only that, the rate @ 25 estimated is related to the food and oil industries where the prices are very low and always in demand. The case of the assessee relates to the costlier jewellery items where the profit margins are very thin and thought cut competition exist and profit margin are very low. Referring to instructions no. 2/2008 dated 22.02.2008 the board clarified that the profit in this business if disclosed @ 6 % is desirable. As regards the exception we note that in the case of the assessee there is no search conducted only the information shared and it is not disputed that the assessee is in receipt of the goods. In this line of business the Board has clarified that Diamond business, if an assessee declare a sum equal or to higher than 6 % of his turnover from such business. Since this being the first year there is no opening stock. Thus, the profit as worked for this business is 5.96 % 19,01,950/- /3,19,10,125/- 5.96 % . Since, the assessee has already disclosed profit @ 5.96 % we considered deem it fit to estimate @ 6 % as against the 25 % estimated by the lower authorities. The exemption of the circular cannot be applied as the premises of the assessee is not subjected search and even the assessment is not re-opened based provision of section 153A / 153C of the Act - Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Addition of 25% of alleged bogus purchases.
2. Validity of notice issued under section 148.
3. Consideration of purchases as bogus without providing statements, material records, or cross-examination.

Summary:

Issue 1: Addition of 25% of Alleged Bogus Purchases
The assessee challenged the addition of 25% of alleged bogus purchases amounting to Rs. 35,09,770/- made from three parties. The Assessing Officer (AO) based this addition on information from the DGIT(Investigation), Mumbai, which indicated that the Bhanwarlal Jain Group provided accommodation entries for bogus purchases. The AO rejected the books of account under section 145(3) and estimated 25% of the purchase claimed as income, amounting to Rs. 8,77,442/-. The CIT(A) upheld this addition, citing the failure of the assessee to establish the existence and genuineness of the transactions. The Tribunal noted that the AO did not dispute the receipt of goods but questioned the real cost of purchase. The Tribunal found that the assessee declared a Gross Profit (GP) rate of 5.96% in the diamond trade, which was close to the 6% deemed reasonable by CBDT Instruction No. 2/2008. Thus, the Tribunal deemed it fit to estimate the profit at 6% instead of 25%.

Issue 2: Validity of Notice Issued Under Section 148
The assessee argued that the notice under section 148 was issued based on borrowed satisfaction from another wing of the department without independent verification by the AO. The Tribunal noted that the AO had issued the notice based on specific information from the DGIT(Inv.), Mumbai. The Tribunal upheld the validity of the notice, citing that the AO had sufficient information to believe that income had escaped assessment.

Issue 3: Consideration of Purchases as Bogus Without Providing Statements, Material Records, or Cross-Examination
The assessee contended that the AO did not provide the statements of the parties, material records found during the search, or allow cross-examination. The CIT(A) held that non-furnishing of statements and cross-examination did not prejudice the assessee's rights. The Tribunal agreed, noting that the AO had issued notices and the assessee had responded. The Tribunal found no violation of natural justice principles and upheld the AO's action.

Conclusion:
The Tribunal partly allowed the appeal, modifying the addition by estimating the profit at 6% instead of 25%, while upholding the validity of the notice under section 148 and the AO's consideration of purchases as bogus without providing statements or cross-examination.