Reopening of assessment on suspected bogus purchases upheld; embedded profit on disputed purchases limited to 2.5% for computation.

Reopening of assessment was sustained because information from investigation authorities identifying suspected dealers matched the assessee's books, giving the AO a reason to believe income escaped assessment; this finding was upheld on appeal. For additions treated as bogus purchases, the tribunal reduced the estimate of embedded profit from the AO's 3% to 2.5% and directed recalculation of income for the relevant assessment years applying the 2.5% rate to non genuine purchases.

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Issues: (i) Whether the reassessment proceedings and notices issued under section 148 read with section 147/section 143(3) of the Income-tax Act, 1961 were validly initiated (including contention that notice was issued to a non-existent entity); (ii) Whether the addition/disallowance in respect of alleged bogus/accommodation entry purchases should be computed at 5%, 3% or another rate of the embedded profit for A.Y. 2009-10 and A.Y. 2011-12.

Issue (i): Validity of reassessment proceedings initiated under section 148 read with section 147/section 143(3) of the Income-tax Act, 1961 (including notice issued to alleged non-existent entity).

Analysis: The Tribunal examined the material relied upon by the Assessing Officer, including information from the Directorate General of Income-tax (Investigation) and corroboration with the assessee's books of accounts. It noted that the assessee acknowledged and responded to notices and did not inform the AO of any change of entity status; the PAN remained active. The Tribunal considered whether the AO had a bona fide reason to believe that income had escaped assessment and whether due procedure for reopening was followed.

Conclusion: The reassessment notices and proceedings under section 148 read with section 147/section 143(3) of the Income-tax Act, 1961 were validly initiated and the challenge that the notice was issued to a non-existent entity is dismissed. The initiation of reassessment is upheld.

Issue (ii): Correctness of the rate (%) of disallowance to be applied to alleged bogus/accommodation entry purchases for computation of embedded profit for A.Y. 2009-10 and A.Y. 2011-12.

Analysis: The Tribunal considered the facts, the nature of the assessee's diamond manufacturing and trading business, the Task Force/Departmental guidance on typical profit ranges in the diamond sector, and precedent authorities of coordinate benches and High Courts limiting the taxable element to a margin rather than entire purchases. The CIT(A) had reduced the AO's 5% addition to 3% by reference to such guidance and precedents; the Tribunal reviewed these authorities and the sectoral profit ranges and found them persuasive. The Tribunal further considered comparable orders and the mixed nature (manufacturing and trading) of the assessee's activities before selecting an appropriate rate.

Conclusion: The AO's addition at 5% is excessive; the CIT(A)'s 3% is also reduced. The Tribunal directs the AO to estimate and compute the embedded profit on the non-genuine purchases at the rate of 2.5% for both A.Y. 2009-10 and A.Y. 2011-12, and restricts disallowance accordingly. The ground is partly allowed.

Final Conclusion: The Tribunal upholds the validity of the reassessment proceedings but moderates the quantum of addition for alleged bogus purchases by directing the AO to compute the taxable embedded profit at 2.5% of disputed purchases for the relevant assessment years, resulting in the assessee's appeals being partly allowed and the Revenue's cross-appeals being dismissed.

Ratio Decidendi: Where departmental intelligence is corroborated with accounting records giving the AO a reason to believe that income has escaped assessment, reassessment under section 147/148 is valid; however, when purchases are shown to relate to genuine sales records, only the profit element embedded in accommodation-entry purchases may be taxed and that element should be estimated in accordance with sectoral profit norms and relevant precedents (here fixed at 2.5%).

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