Tax authority limited to taxing 2% profit element on alleged bogus diamond purchases, given high declared margins

ITAT Mumbai partly allowed the assessee's appeal concerning addition on account of alleged bogus purchases from entities linked to a known accommodation entry provider. The Tribunal noted that, for AYs 2007-08 to 2010-11, the assessee had consistently disclosed gross profit rates exceeding the benchmark adopted by the Government task force for the diamond industry. Considering the already high declared margins and earlier ITAT decisions in similar matters, the Tribunal held that only a profit element was taxable and restricted the disallowance to 2% of the impugned purchases, reducing the addition made by the revenue.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Estimation of the profit element embedded in purchases treated as non-genuine from concerns of a known accommodation entry provider, where corresponding sales are accepted as genuine.

1.2 Consequence of assessee not pressing grounds challenging the reopening of assessment under sections 147/143(3).

1.3 Application of the findings on estimation of profit element to multiple assessment years on a mutatis mutandis basis.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Estimation of profit element in non-genuine purchases where sales are accepted

(a) Legal framework (as discussed)

2.1.1 The assessments were framed under section 143(3) read with section 147 based on information from a search on a group found to be providing accommodation entries of bogus purchases. Cross objections were filed under section 253(4). The Tribunal, in earlier miscellaneous applications (order dated 22.12.2022), noted the legal position that cross objections under section 253(4) are to be treated as independent appeals and must be decided on merits irrespective of the fate of the Revenue appeals, following the decision of a High Court.

(b) Interpretation and reasoning

2.1.2 The Assessing Officer treated purchases from certain group concerns as non-genuine accommodation entries, holding that the assessee had obtained only bills without actual delivery of goods and had sourced goods from the grey market, but accepted that there were corresponding sales and did not doubt the genuineness of such sales.

2.1.3 The Assessing Officer, on this basis, estimated the profit element in the questioned purchases at 8% of the purchase value and added that amount to the income. The first appellate authority, after referring to various judicial pronouncements, accepted that only the profit element needed to be taxed and restricted the disallowance to 3% of such purchases.

2.1.4 The Tribunal noted that: (i) the existence of corresponding sales against the impugned purchases was undisputed; (ii) payments were made through account payee cheques and supported by invoices, ledger accounts and bank statements; (iii) the lower authorities proceeded on the premise that the purchases were in fact made from the grey market and only bills were taken from the entry-providing group, and thus only the margin/profit element embedded in such transactions could be added.

2.1.5 The Tribunal considered coordinate bench decisions in comparable diamond trade cases where purchases from the same group or similarly placed parties were treated as non-genuine and only the profit element was estimated. In particular, it noted that in a similar case involving the same accommodation entry group, the Assessing Officer had estimated a 5% profit element which was reduced by the first appellate authority to 3%, and the Tribunal further restricted it to 2%.

2.1.6 The Tribunal also took into account a chart filed by the assessee showing the gross profit rates already declared for the relevant assessment years (5.40%, 5.24%, 5.08% and 5.08%), which were higher than the gross profit rate adopted by a governmental task force for the diamond industry. This supported the contention that the assessee had already disclosed comparatively high profits, including on the disputed purchase transactions.

(c) Conclusions

2.1.7 Accepting that only the profit element on the impugned purchases was taxable and having regard to: (i) the undisputed corresponding sales, (ii) the evidence produced, (iii) the higher gross profit already declared, and (iv) the consistent approach in comparable coordinate bench decisions, the Tribunal held it appropriate to restrict the disallowance to 2% of the value of the impugned purchases.

2.1.8 The addition was thus reduced from the rate sustained by the first appellate authority (3%) to 2% of such purchases, and the relevant grounds of the assessee were partly allowed for all the assessment years in question, applying the same reasoning mutatis mutandis.

2.2 Effect of assessee not pressing grounds challenging reopening

(a) Interpretation and reasoning

2.2.1 The assessee had raised grounds challenging the validity of reopening of assessment. At the hearing, those grounds were expressly stated to be "not pressed".

(b) Conclusions

2.2.2 The Tribunal, in view of the assessee not pressing those grounds, dismissed the grounds pertaining to reopening of assessment without adjudicating them on merits for all relevant cross objections.

2.3 Application of findings across multiple assessment years

(a) Interpretation and reasoning

2.3.1 The Tribunal found that the issues and factual matrix relating to estimation of profit element on impugned purchases, as well as the reopening grounds, were identical for assessment years 2007-08 to 2010-11.

(b) Conclusions

2.3.2 The Tribunal treated one cross objection as the lead case, applied its findings on estimation of profit element (2% of impugned purchases) and on dismissal of reopening grounds mutatis mutandis to the other assessment years, and partly allowed all cross objections accordingly.

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