Reassessment under section 147 valid on credible information; bogus purchase addition limited to 5% of total amount

ITAT Surat upheld the validity of reassessment proceedings under section 147 initiated based on credible information from DGIT (Inv.), Mumbai regarding bogus purchases by the assessee. The tribunal held that prima facie material was sufficient to commence proceedings, and the assessee cannot escape liability after making false statements during original assessment. However, regarding income estimation from bogus purchases, the tribunal restricted the addition to 5% of total bogus purchases instead of the entire amount, following precedent from Mayank Diamonds case and considering industry profit margins. The appeal was partly allowed with reduced addition sustained.

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Issues Involved:
1. Reopening of assessment u/s 147 of the Act.
2. Rejection of books of account and addition based on bogus purchases.
3. Estimation of net profit at 5% of total purchases.
4. Deletion of addition by estimating income at 5% of total purchases.

Summary of Judgment:

Issue 1: Reopening of Assessment u/s 147 of the Act
The case was reopened based on credible information from the Investigation Wing, Mumbai, which indicated that the assessee had taken accommodation entries from bogus concerns operated by Shri Praveen Kumar Jain. The Tribunal upheld the reopening of the assessment, stating that the AO had tangible material to form a reason to believe that income chargeable to tax had escaped assessment. The Tribunal referenced several case laws, including Phoolchand Bajranglal v. ITO [1993] 203 ITR 456 (SC) and Dishman Pharmaceuticals & Chemicals v. DCIT [2012] 346 ITR 228 (Gujarat), to support its decision.

Issue 2: Rejection of Books of Account and Addition Based on Bogus Purchases
The AO treated the entire purchases of Rs. 8,78,00,035 as bogus based on the statement of Shri Pravin Kumar Jain, who admitted to providing accommodation entries. The CIT(A) upheld the rejection of books of account, observing that the assessee failed to produce supporting documents and stock registers. The Tribunal noted that the purchases were made through banking channels and were reflected in the audited accounts. However, the Tribunal found that the assessee could not substantiate the purchases by producing the parties in question.

Issue 3: Estimation of Net Profit at 5% of Total Purchases
The CIT(A) estimated the net profit at 5% of total purchases, relying on the average profit margin in the diamond trade. The Tribunal agreed with this estimation, referencing the Hon'ble Gujarat High Court in Mayank Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003] which observed a net profit margin between 3% to 7%. The Tribunal found it reasonable to apply a 5% net profit rate on the bogus purchases.

Issue 4: Deletion of Addition by Estimating Income at 5% of Total Purchases
The Tribunal restricted the addition to 5% of the total bogus purchases, amounting to Rs. 43,90,000, and deleted the balance addition. The Tribunal referenced several decisions, including Deluxe Diamonds v. ITO [I.T.A. No. 1396/Ahd/2017] and DCIT v. J. B. Brothers [I.T.A. No. 3661/Ahd/2015], which supported the estimation of profit on bogus purchases rather than the entire purchase turnover.

Conclusion:
The appeal of the assessee was partly allowed, restricting the addition to 5% of the bogus purchases, while the appeal of the Revenue was dismissed. The Tribunal upheld the validity of the reopening of assessment and the estimation of net profit at 5% of the bogus purchases. The order was pronounced in the open Court on 18.07.2019.

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