2024 (1) TMI 1065 - AT - Income Tax

Bogus diamond purchases under Section 69C reduced from 100% disallowance to 2% gross profit taxation

AS Motiwala Jewellers Pvt. Ltd. (Formerly Known as Ghazi Gems & Jewellers Pvt. Ltd) Versus ITO-12 (2) (1), Mumbai

ITAT Mumbai-AT partially allowed assessee's appeal against addition u/s 69C for bogus diamond purchases from M/s. Mohit Enterprises. The tribunal found ... Estimation of income - Addition u/s 69C - bogus purchases of diamonds - HELD THAT:- We find force in the contention of the assessee that the Ld. CIT(A) erred in sustaining the 100% disallowance of purchases from M/s. Mohit Enterprises and thus, erred in confirming the addition u/s 69C of the Act. Therefore, as per the ratio laid down in Nitin Ramdeoji Lohia [2022 (11) TMI 480 - BOMBAY HIGH COURT] profit embedded in the transaction only need to be brought to tax particularly when the tax authorities have not disturbed the sales declared by the assessee in this year as well as balance shown as closing stock. And since we have noted that the assessee had itself offered gross profit of 3.95% this year and 17.59% in AY. 2014-15, therefore, in this year only profit element of gross profit @ 2% of the purchases from M/s. Mohit Enterprises would be just and reasonable and it is ordered accordingly. Appeal of the assessee is partly allowed. Issues Involved:1. Sustaining the addition on merits under Section 69C of the Income Tax Act, 1961.2. Disallowance of purchases from M/s. Mohit Enterprises as bogus.3. Validity of the evidence provided by the assessee to substantiate the genuineness of the purchases.4. Appropriate tax treatment for the profit element embedded in the alleged bogus purchases.Summary:1. Sustaining the addition on merits under Section 69C of the Income Tax Act, 1961:The assessee challenged the order of the Ld. CIT(A) sustaining the addition of Rs. 59,53,440/- under Section 69C of the Income Tax Act, 1961, which was based on the disallowance of the entire purchases of diamonds from M/s. Mohit Enterprises, alleged to be a bogus concern managed by Shri Bhanwarlal Jain.2. Disallowance of purchases from M/s. Mohit Enterprises as bogus:The AO received information from the Investigation Wing, Mumbai, that M/s. Mohit Enterprises was a concern providing accommodation entries without actual delivery of goods. Despite the assessee providing various documents to establish the genuineness of the purchases, the AO disallowed the entire amount, concluding that the purchases were bogus and aimed at reducing true profits by inflating expenses.3. Validity of the evidence provided by the assessee to substantiate the genuineness of the purchases:The assessee provided several documents, including bills, sales details, bank statements, and audited statements, to substantiate the genuineness of the purchases. However, the AO rejected these documents, citing the admission by Shri Bhanwarlal Jain that his concerns provided only accommodation bills. The Ld. CIT(A) upheld the AO's decision, which was then challenged by the assessee.4. Appropriate tax treatment for the profit element embedded in the alleged bogus purchases:The Tribunal noted that the AO did not disturb the sales of diamonds or reject the books of accounts. It was observed that the diamonds purchased from M/s. Mohit Enterprises were sold in the subsequent assessment year, showing a gross profit. The Tribunal relied on the decision of the Hon'ble Bombay High Court in PCIT Vs. Nitin Ramdeoji Lohia, which held that only the profit embedded in the transaction should be brought to tax. Consequently, the Tribunal concluded that a gross profit rate of 2% on the purchases from M/s. Mohit Enterprises would be just and reasonable, rather than disallowing the entire amount.Conclusion:The Tribunal found merit in the assessee's contention and concluded that the Ld. CIT(A) erred in sustaining the 100% disallowance of purchases. The appeal of the assessee was partly allowed, with the Tribunal directing that only the profit element of gross profit at 2% of the purchases should be brought to tax. The order was pronounced in the open court on 12/12/2023.