Bogus purchases in diamond business: profit estimation reduced from 25% to 6% following Board instruction 2/2008

ITAT Jaipur allowed the assessee's appeal partly in a case involving bogus purchases in diamond business. The lower authorities estimated profit at 25% on tainted purchases, but ITAT reduced it to 6% considering the nature of diamond jewellery business where profit margins are thin due to competition. The tribunal noted that Board's instruction No. 2/2008 clarified 6% profit as desirable for diamond business. Since the assessee already disclosed 5.96% profit and no search was conducted, ITAT deemed 6% estimation appropriate against the lower authorities' 25% estimate.

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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.

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