The Jaipur Bench of Income Tax Appellate Tribunal ( ITAT ) rejected the 25% addition for unverifiable purchases under Section 153A of Income Tax Act, 1961 citing incorrect Gross Profit (GP) rate estimation.
The tribunal noted that the GP rates declared by the assessee were consistent with industry standards and ordered the removal of the addition for the assessment years (AY)s 1998-99 to 2003-04.
Govindam Export, the appellant-assessee, a partnership firm engaged in gemstone exports, underwent a search on 24-06-2003, which led to assessment proceedings under section 153A. The assessee filed a return on 02-01-2006, declaring the same income as in the original returns.
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In the first round, the Commissioner Of Income Tax (Appeals) [CIT(A)] reduced the additions by accepting some purchases as genuine, and the ITAT later ruled the purchases were genuine, but the Rajasthan High Court remanded the case for a fresh look.
In the second round, the Assessing Officer (AO) repeated the initial findings, and the CIT(A) upheld a 25% addition for unverifiable purchases, reducing business profit and Section 80HHC deduction. The assessee then appealed to the tribunal.
The assessee challenged the sustaining of the addition at 25% of unverifiable purchases for the AY 1998-99 to 2003-04.
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The counsel for the assessee had argued that quantitative details of purchases and sales had been submitted, and the nexus of export with purchases was demonstrated. He noted that the authenticity of purchases from Shri Mahesh Kumar Sharma (Tirupati Balaji Gems), Shri Gauri Shankar Pareek (Vinayak Overseas), Shri Umesh Kumar Saboo (M/s Shruti Gems), and Naman Gems Pvt Ltd. had been contested up to the ITAT, Jaipur Bench.
The bench reviewed the arguments and evidence, noting this was the second round of litigation. The Rajasthan High Court had previously set aside the assessment, referencing the M/s. Gems Paradise case and various Supreme Court and Gujarat High Court rulings. The court had remitted the case to the Assessing Officer for re-evaluation.
In the second round, no new evidence was introduced, and the findings of the AO and CIT(A) were the same as in the first round.
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The appellate tribunal reviewed the 25% profit estimation by the CIT(A) for bogus purchases and noted that the tribunal had incorrectly deleted the addition based on GP rates from similar industries. Following the Rajasthan High Court’s ruling in Commissioner of Income Tax (Central), Jaipur vs. M/s Clarity Gold (P) Ltd., which applied an average GP rate of 12% for the industry, profits above 12% were not refunded, while those below 12% were assessed at 12%.
The tribunal observed that the assessee’s GP chart for comparable cases showed consistent GP rates with others in the trade, and this was not disputed by the revenue. Additionally, a statement from Ramesh Manihar, a partner in the assessee firm, confirmed that the profit rate in M/s. Govindam Exports was about 50%, supporting the GP rates declared by the assessee.
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The two-member bench comprising Dr. S. Seethalakshmi (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member) decided that no additional amount should be added for unverifiable purchases and instructed the AO to remove the addition for the AYs 1998-99 to 2003-04.
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