Estimation of income from bogus purchases in diamond trade using a 2% sectoral profit benchmark to quantify taxable income

Estimation of income for alleged bogus purchases in diamond trade relied on sectoral profitability benchmarks. The task group report for the diamond sector identified manufacturing net-profit between 1.5%-4.5% and trading profit between 1%-3%; the tribunal applied a 2% profit rate as the embedded profit in disputed purchases to quantify taxable income. The tribunal considered this sector-based benchmark appropriate and partly allowed the assessee's grounds by adopting the 2% estimate for both years.

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Issues: Whether the disallowance of purchases as bogus and the estimation of the profit element embedded in such disputed purchases for A.Y. 2009-10 and A.Y. 2013-14 is justified.

Analysis: The assessee produced books of account, confirmations, sale invoices, bank statements showing payments by account payee cheques, stock registers and affidavits to establish the genuineness of purchases. The Assessing Officer doubted the transactions because suppliers were linked to a group subject to search and estimated a profit element of 5% on disputed purchases. The Commissioner (Appeals) reduced that estimate to 3%. The Tribunal examined the sectoral task group report for the diamond industry indicating typical net and trading profit ranges and, applying those industry benchmarks, considered a lower estimation appropriate. The Tribunal therefore substituted the earlier estimates with a 2% profit element embedded in the disputed purchases.

Conclusion: The appeals are partly allowed in favour of the assessee by reducing the estimated profit embedded in the disputed purchases to 2% for both assessment years.

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