Tribunal upholds CIT(A) on profit estimation, allows additional depreciation for diamond processing.

The Tribunal upheld the CIT(A)'s decision to estimate the profit element at 5% on disallowed purchases, citing precedents that only the profit margin from purchases from questionable parties should be taxed. Additionally, the Tribunal confirmed the allowance of additional depreciation for the cutting and polishing of diamonds, as it constituted manufacturing under section 32(1)(iia) of the Act. The Tribunal dismissed both the Revenue's appeal and the assessee's Cross Objection, affirming the CIT(A)'s rulings on both issues.

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Issues Involved:
1. Estimation of profit rate on disallowed purchases.
2. Deletion of disallowance towards additional depreciation.

Detailed Analysis:

1. Estimation of Profit Rate on Disallowed Purchases:

The Revenue appealed against the order of the CIT(A), which estimated the profit rate at 5% on the purchases disallowed by the Assessing Officer (AO). The AO had disallowed the entire purchases amounting to Rs. 2.47 Crores from certain parties, as the assessee failed to furnish confirmations and produce the parties who supplied the materials. The AO rejected the Books of Accounts and brought to tax the entire purchases from M/s. Daksh Diamonds, M/s. Kailash Enterprises, and M/s. Aadi Impex. On appeal, the CIT(A) restricted the addition to 5% of the purchases, considering various judicial pronouncements and the fact that the assessee maintained quantitative details and the sales were not doubted.

The CIT(A) referenced several judicial decisions, including the Gujarat High Court's rulings in Bholanath Poly Fab Pvt. Ltd. and Sanjay Oilcake Industries, which established that only the profit margin embedded in purchases from bogus parties should be taxed, not the entire purchase amount. The CIT(A) observed that in the diamond industry, the profit margin for purchases from the grey market is generally around 5%, as supported by the AO's own assessments in subsequent years.

The Tribunal upheld the CIT(A)'s decision, finding no valid reason to interfere with the findings, and sustained the order estimating the profit element at 5% on the disallowed purchases.

2. Deletion of Disallowance Towards Additional Depreciation:

The Revenue's second ground of appeal concerned the deletion of disallowance made towards additional depreciation. The CIT(A) had allowed the additional depreciation claimed by the assessee, relying on the Tribunal's decision in the assessee's own case for the Assessment Year 2008-09, which held that the business of cutting and polishing diamonds constitutes manufacturing and production of an article or thing, thus eligible for additional depreciation under section 32(1)(iia) of the Act.

The Tribunal referenced its previous decision in the case of Flawless Diamond India Ltd., which concluded that cutting and polishing diamonds amounts to manufacturing or production of an article or thing. This decision was based on the technical process involved and the distinct nature of the finished product compared to the raw material. The Tribunal also noted that the Revenue had not rebutted the detailed process provided by the assessee.

Respectfully following the previous decisions, the Tribunal confirmed the CIT(A)'s order allowing the additional depreciation and dismissed the Revenue's appeal on this issue.

Conclusion:

In conclusion, the Tribunal dismissed both the appeal of the Revenue and the Cross Objection of the assessee, upholding the CIT(A)'s orders on both the estimation of profit rate on disallowed purchases and the deletion of disallowance towards additional depreciation.

Order Pronounced:

The order was pronounced in the open court on the 28th of September, 2018.

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