The Income Tax Appellate Tribunal (ITAT), Surat Bench while restricting the addition to 6% held that AO not be justified in disallowing 100% of purchases in absence of proper investigation of purchases.
The assessee, Shree Deepak Banwarilal is a proprietor of M/s Kaushal Exports, engaged in the business of trading in diamonds. The assessee filed his return of income for AY 2008-09 on29.09.2008 declaring income of Rs.6,10,770/-. Initially the return was processed under section 143(1) without making any variation in the return of income.
Subsequently, the case was reopened on the basis of information received from the Director of Income Tax (Investment.) Mumbai, wherein it was informed that the investigation wing carried out a search and seizure operation under section 132 of the Act against Praveen Kumar Jain Group Mumbai, who was indulging in providing accommodation entries through its various benami concerns for providing bogus bills of sales are purchases of diamonds without delivery of actual goods.
The assessee in appeal for A.Y. 2012-13 submitted that the disallowances sustained to the extent of @ 5% is excessive and the disallowance may be restricted to a reasonable profit, the profit in the business of the assessee is very low. The assessee has shown reasonable profit and the profit on alleged non-genuine purchases could be at most be brought to the tax only to that extent.
The coram of Dr. Arjun Lal Sahani and Pawan Singh have held that the AO is not justified in disallowing the 100% of purchases in absence of proper investigation of such purchases. No doubt the disallowance made by the CIT(A) is also on an estimated basis.
“We are of the view that the disallowance restricted by CIT(A) is on the lower side. Hence, we modify the order of the CIT(A) and restrict the addition of the disputed purchases to the extent of 6% and direct the AO to re-compute the disallowances accordingly. In the result, the grounds of appeal raised by the revenue are partly allowed.
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