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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI S. RIFAUR RAHMAN, HONBLE & MS. KAVITHA RAJAGOPAL, HONBLEShri Himanshu Gandhi Shri P.D. Chougule
O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 21.07.2023 for the A.Y.2012-13.
(A.Y: 2012-13) M/s. KA International 2. Briefly facts of the case are, assessee filed return of income on 24.09.2012 declaring income of ₹.50,47,000/- for the A.Y.2012-13 and the return was processed u/s. 143(1) of Income-tax Act, 1961 (in short “Act”). The case was reopened u/s. 147 of the Act by issue of notice u/s.148 of the Act after recording the reasons. Notices u/s. 143(2) and 142(1) of the Act were issued and served on the assessee. In response Authorised Representative of the assessee attended and submitted the relevant information as called for.
Assessee is engaged in the business of trading and manufacturing in diamonds. A search and survey action was conducted in the case of Shri Bhanwarlal Jain group by DGIT (Investigation) Mumbai. Subsequently, Assessing Officer received information from the DGIT(Inv.,), Mumbai about the accommodation entries provided by various dealers operated by the Shri Bhanwarl Jain group and assessee was also one of the beneficiary from those dealers. The assessment was reopened u/s. 147 of the Act based on the information received from DGIT (Inv.,), Mumbai, that the assessee has availed accommodation entries from various dealers who are said to be providing accommodation entries without there being transportation of any goods. In the reassessment proceedings, the assessee was asked to prove the genuineness of the (A.Y: 2012-13) M/s. KA International purchases made from various dealers as referred in Assessment Order. In response assessee furnished details of the purchases made from the concerns along with the invoices, Tax Audit Report, stock book, VAT Audit Report, Reconciliation of purchases with the VAT Audit Report and profit and loss Report, list of sundry creditors and sundry debtors and submitted that the purchases made are genuine.
During the assessment proceedings, Assessing Officer issued notice u/s. 133(6) of the Act to the parties in order to verify the genuineness of the purchases made by the assessee and the notice was returned unserved by the Postal Authorities with remark “left”. Not convinced with the submissions of the assessee the Assessing Officer treated the purchases as non-genuine and he was of the opinion that assessee had obtained only accommodation entries without there being any transportation of materials and the assessee might have made purchases in the gray market. It is the finding of the Assessing Officer that assessee failed to produce the parties for verification to establish the genuineness of the purchases. Therefore, Assessing Officer treated ₹.1,72,25,025/- as non-genuine and added to the total income of the assessee.
(A.Y: 2012-13) M/s. KA International 5. Aggrieved with the above order, assessee preferred appeal before the Ld.CIT(A) and filed detailed submissions. After considering the submissions of the assessee and also relying on various case law, Ld.CIT(A) restricted the addition to the extent of 12.5% of non-genuine / disputed purchases.
Aggrieved with the above order, assessee is in appeal before us raising following grounds in its appeal: - “1. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming reassessment proceeding under section 147 which is bad in law and require to be quashed.
On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming addition of Rs. 21,53,128 (Being 12.5% of alleged purchases of Rs. 1,72,25,025) under section 69C of the Income Tax Act, 1961 by treating the same as non-genuine.
3. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming addition made in assessment order without furnishing the material, evidenced and opportunity of cross examination to the appellant inspite of the request is in gross violation of principal of Audi Alteram Partem rendering the order to be bad in law liable to be quashed.
4. Appellant craves leave to add further grounds or to amend or alter the existing grounds of appeal on or before the date of hearing.”
7. At the time of hearing, Ld. Counsel for the assessee reiterated the submissions made before the Ld.CIT(A). Ld. AR submitted that payments were made through banking channels and the sales were accepted by the department. He submitted that once that sales were accepted the (A.Y: 2012-13) M/s. KA International purchases cannot be treated as non-genuine. Further, Ld. Counsel for the assessee submitted that assessee is in the business of Diamonds and the profit percentage in the diamond manufacturing business ranges from 1.5% to 4.5%. Ld. AR brought to our notice Page No. 79 which is the finding of the Assessing Officer in assessee’s own case for the A.Y.2008- 09 in which Assessing Officer himself restricted the addition to 3% of the non-genuine purchases. Similarly, in Page No. 88 of the Paper Book for the A.Y. 2014-15, in assessee’s own case the Assessing Officer has restricted the addition to 3%. Ld.AR of the assessee submitted that the profit percentage sustained by the Ld.CIT(A) is on higher side and prayed that the reasonable percentage may be adopted.
On the other hand, Ld. DR relied on the orders of the authorities below.
Considered the rival submissions and material placed on record and perused the orders of the authorities below. It is not in dispute that sales have been accepted as genuine from out of these purchases. When the sales have been accepted as genuine the entire purchases cannot be treated as non-genuine. The Hon'ble Gujarat High Court in the case of Bholanath Polyfab Pvt. Ltd [355 ITR 290] held that when the assessee
(A.Y: 2012-13) M/s. KA International made purchases and sold the finished goods as a natural corollary not the entire amount covered under such purchases would be subject to tax but only the profit element embedded therein. Similar view has been taken by the Hon'ble Gujarat High Court in the case of CIT v. Simit P. Seth [38 taxman.com 385]. Simply because the parties were not produced the entire purchases cannot be added as held by the Bombay High Court in the case of CIT v. Nikunj Eximp [216 Taxman.com 171]. We agree with the view of the lower authorities that there should be an estimation of profit element from these purchases and should be estimated reasonably as the assessee could not conclusively prove that the purchases made are from the parties as claimed, especially in the absence of any confirmations from them.
On similar facts, the Coordinate Bench in the case of M/s. Star Brillian v. Income Tax Officer in & 1552/Mum/2020 dated 12.07.2022 estimated the profit percentage embedded in the value of disputed purchases @2% and observed as under: - “3.1. We have heard rival submissions and perused the materials available on record. The assessee is an importer, exporter and manufacturer of diamonds and dealer in diamonds, precious stones and jewellery. During the course of assessment proceedings, the assessee produced the books of accounts and records containing details of purchases, sales, bank statements and creditors before the ld. AO. The confirmation from all the creditors were called for which were also duly filed before the ld. AO. The ld. AO observed that assessee had made certain purchases from certain parties belonging
(A.Y: 2012-13) M/s. KA International to Shri Rajendra Jain group and that during the course of search conducted in the case of Shri Rajendra Jain Group on 03/10/2013, it revealed that certain parties were indulged in providing accommodation entries of purchases at the behest of Shri Rajendra Jain group. Since, the assessee had made certain purchases from those parties, the ld. AO proceeded to examine the veracity of the purchases made thereon. It is not in dispute that assessee had indeed made payments for those purchases to the concerned suppliers by account payee cheques. It is not in dispute that assessee had furnished the details of corresponding sales made out of disputed purchases by producing the relevant sale invoices, ledger copy of the parties, bank statement showing payments made through account payee cheques, stock register, copy of affidavits of persons confirming the transactions with the assessee, confirmation from parties confirming sales made to assessee alongwith their copy of ITR, their bank statements, PAN, their affidavit confirming the genuineness of transactions etc., Despite all these facts, the ld. AO observed that the purchases made by the assessee were not proved beyond reasonable doubt as the suppliers belong to Shri Rajendra Jain group. Accordingly, the ld. AO proceeded to estimate the profit element embedded in the value of such disputed purchases at 5% and brought the same to tax in both the years under consideration. This profit percentage was reduced to 3% by the ld. CIT(A) for both the years. It is only an estimation of profit that had been made by both the lower authorities in the instant case. The report of the task group for diamond sector submitted to Department of Commerce suggested that the net profit that could be derived in the diamond manufacturing ranges from 1.5% to 4.5% and in trading activity thereof, the profitability range is 1% to 3%. Considering the same, we deem it fit to estimate the profit percentage embedded in the value of disputed purchases @2% which, in our considered opinion, would meet the ends of justice. Accordingly, the grounds raised by the assessee in this regard for both the years are partly allowed.”
We observe that in assessee’s own case the Assessing Officer for the A.Y. 2008-09 restricted the addition to 3% of the non-genuine purchases observing as under: - “9.8. In such a scenario, wherein there is a circumstantial evidences of obtaining of bills from Shri Bhanwarlal Jain and his group concerns, but having GP margin in such instances which is even more than the normal GP of the assessee, the benefit obtained by the assessee would not be more than 3% of the purchase cost debited
(A.Y: 2012-13) M/s. KA International against Shri Bhanwarlal Jain and his group concerns. This should take care of the margin earned by the assessee to indulge into such transaction. The reason, why this margin looks practical is that most of the traders in the market actually operate at this level of margin in the open market. In fact, this fact was also identified in the Report of the Task Group constituted by Department of Commerce in 2013, in which the margin in diamond trading was accepted to be in the range between 1 to 3%. Hence, the margin for a petty dealer in the market would not be more than 3%, which is the same margin that is now being adopted for purchases of Rs. 62,04,293/- made from such dealers by assessee and for which the bills are procured from the Shri Bhanwarlal Jain and his group concerns. Accordingly, the profit margin embedded in these transactions is taken at 3% of the value of the purchases made from Rare Diamonds Pvt. Ltd., Nice Diamonds and Millenium Stars and the said amount is added to the total income of the assessee for the assessment year under consideration. Accordingly 3% of purchases of Rs. 62,04,293/- which comes to Rs. 1,86, 129/- is hereby added to the income of the assessee.
Further, we observe that in assessee’s own case the Assessing Officer for the A.Y. 2014-15 restricted the addition to 3% of the non- genuine purchases observing as under: - “11.9 In such a scenario, wherein there are circumstantial evidences of obtaining of bills from Bhanwarlal Jain group concerns, but having GP margin in such instances which is even more than the normal GP of the assessee, the benefit obtained by the assessee would not be more than 3% of the purchase cost debited against Bhanwarlal Jain group concerns. This should take care of the margin earned by the assessee to indulge into such transaction. The reason, why this margin looks practical is that most of the traders in the market actually operate at this level of margin in the open market. In fact, this fact was also identified in the Report of the Task Group constituted by Department of Commerce in 2013, in which the margin in diamond trading was accepted to be in the range between 1 to 3%. Hence, the margin for a petty dealer in the market would not be more than 3%, which is the same margin that is now being adopted for purchases made from such dealers by assessee and for (A.Y: 2012-13) M/s. KA International which the bills are procured from the Bhanwarlal Jain group concerns. Accordingly, the profit margin embedded in these transactions is taken at 3% of the value of the purchases made from the above mentioned parties and the said amount of Rs.1,23,117/-is added to the total income of the assessee for the assessment year under consideration.”
Respectfully following the above decision of the Coordinate Bench and taking the totality of facts and circumstances, keeping in view the nature of business of the assessee i.e. manufacturing, trading in diamond, and following the method adopted by the Assessing Officer in the above said assessment years and for the sake of consistency, it would be justified if the profit element embedded in the disputed purchases are restricted and estimated at 3%. Accordingly, we direct the Assessing Officer to estimate the profit element from the non-genuine purchases at 3% for the year under consideration and compute the income accordingly. Accordingly, grounds raised by the assessee are partly allowed.
In the result, appeals filed by the assessee are partly allowed.
Order pronounced in the open court on 20th December, 2023.