The assessee, a partnership firm engaged in the diamond trade, filed an appeal against the order of the National Faceless Appeal Centre for Assessment Year 2009–10, whereby an addition of ₹49,21,400 was sustained under section 69C of the Income-tax Act, 1961 on account of alleged bogus purchases. The appeal represented the second round of litigation before the Tribunal.

The assessment was reopened based on information received pursuant to search and seizure proceedings conducted in the case of the Bhanwarlal Jain Group, wherein it was alleged that the assessee had obtained accommodation entries from M/s. Impex Gems. During reassessment proceedings, the Assessing Officer treated the amount of ₹49,21,400 as non-genuine purchases and brought the entire amount to tax.

In the first round of appellate proceedings, the Commissioner (Appeals) had treated the amount as bogus purchases and restricted the addition to 3% of the purchase value, considering the Benign Assessment Procedure prevalent in the diamond industry. However, the Tribunal had restored the matter to the file of the Assessing Officer for de novo adjudication to determine whether the amount represented accommodation loan entries or purchases of diamonds.

In the second round, despite acknowledging that the assessee had demonstrated corresponding sales against the disputed purchases, the Assessing Officer again treated the entire purchase amount as bogus. The Assessing Officer himself recorded a finding that the purchases were made from the grey market and that bills were obtained from entry providers to regularise the transactions in the books. It was further observed that in such cases, judicial precedents permit taxation only of the profit margin embedded in such transactions.

Notwithstanding these observations, the Assessing Officer proceeded to disallow the entire purchase amount. The Commissioner (Appeals) upheld the disallowance, primarily on the ground that the assessee failed to conclusively establish the genuineness of the purchases.

The Tribunal noted the inherent contradiction in the approach adopted by the Assessing Officer. Once it was accepted that corresponding sales existed and that the purchases were made from the grey market, the genuineness of the purchases as such could not be wholly rejected. Relying on the judgment of the Hon’ble Bombay High Court in PCIT v. Mohammad Haji Adam & Co., the Tribunal reiterated that in such circumstances, the disallowance must be restricted to the differential profit margin between genuine purchases and disputed purchases.

Since the working of differential profit margin was not available on record, the Tribunal set aside the matter to the file of the Assessing Officer for the limited purpose of examining and computing the appropriate profit element embedded in the disputed purchases. The appeal of the assessee was thus partly allowed.

 Source Link- https://itat.gov.in/public/files/upload/1768281541-ZbYQq8-1-TO.pdf

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