ITAT Upholds 6% Profit Estimation on Alleged Bogus Diamond Purchases, Dismisses Cross Appeals [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the estimation of profit on alleged non-genuine diamond purchases and dismissed cross appeals filed by both the assessee and the Revenue. The Bench held that once sales are accepted, the entire purchases cannot be disallowed and neither can the receipts be taxed again under Section 68 of the Income Tax Act, 1961.

The ruling was delivered in the case of Rajat Diamond Exim Pvt. Ltd., a company engaged in the business of trading and processing of diamonds. The appeals pertained to assessment years 2013-14 to 2016-17, arising from reassessment proceedings initiated under Section 147. This was based on information received from the Investigation Wing alleging accommodation entries from certain entities.

The assessments were later reopened on the basis of information related to search and seizure operations that were conducted. The Assessing Officer alleged that the assessee had made bogus purchases of rough diamonds and failed to substantiate the genuineness of such transactions. He then disallowed the entire purchase amount and also treated the corresponding sales as unexplained cash credits under Section 68.

The Commissioner of Income Tax (Appeals) observed that the sales corresponding to the alleged bogus purchases were duly recorded in the books of account and formed part of the declared turnover. He held that once such sales were accepted, it was not permissible to tax the same receipts again. The CIT(A) thereby restricted the additions by estimating the profit element at 6%.

The Tribunal, comprising Amit Shukla (Judicial Member) and Arun Khodpia (Accountant Member), examined the submissions on record. It was noted that the approach adopted by the Assessing Officer was inconsistent across the assessment years, although there was no material change in facts.

The Bench reiterated the settled legal position that where sales are accepted, the corresponding purchases cannot be disallowed in full and the addition is limited to the profit element.

It was further observed that although the assessee failed to conclusively establish the identity of the suppliers, and this required estimation of income rather than wholesale disallowance. In light of all observations, the Tribunal held that the application of a uniform gross profit rate of 6% was reasonable and justified.

As a result, the Tribunal dismissed the appeals filed by both the assessee and the Revenue.

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