RAM GOPAL,HYDERABAD vs. ITO, WARD-8(2), HYDERABAD

आयकर अपील�य अ�धकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘A‘ Bench, Hyderabad Before Shri R.K. Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member 514 & 572/Hyd/2022 Assessment Years: 2008-09 to 2010-11 Shri Ram Gopal Vs. Income Tax Officer Hyderabad Ward 8(2) PAN:ACHPR8639M Hyderabad (Appellant) (Respondent) Assessee by: C.A Mrudulatha Revenue by: Shri KPRR Murthy, DR Date of hearing: 07/03/2023 Date of pronouncement: 14/03/2023 ORDER Per R.K. Panda, A.M ITA 571/Hyd/2022 is directed against the order dated 23.08.2022 of the CIT (A)-NFAC Delhi relating to A.Y 2008-09. ITA No.514/Hyd/2022 is directed against the order dated 10.08.2022 of the CIT (A)-NFAC Delhi relating to A.Y 2009-10. ITA 572/Hyd/2022 is directed against the order dated 29.8.2022 of the CIT (A)-NFAC Delhi relating to A.Y 2010-11. For the sake of convenience, all these appeals were heard together and are being disposed off by this common order.

ITA 571/Hyd/2022 – A.Y 2008-09 2. Facts of the case, in brief, are that the assessee is an individual and derives income from trading in jewellery and precious stones. He filed his return of income on 5.9.2008 declaring total income of Rs.48,13,858/-. The assessment was completed u/s 143(3) on 27.12.2010 determining the total income of the assessee at Rs.50,69,940/- wherein an amount of Rs.2,51,080/- was added as unvouched expenditure.

2.1 Subsequently, information was received from the Investigation Wing, Hyderabad wherein it has been mentioned that during the financial year 2007-08 relevant to A.Y 2008-09, the assessee has shown purchases to the tune of Rs.25,63,834/- from three entities namely Rajendra Kumar Jain group, Dharmichand Jain Group and Sanjay Chaudhary Group, Surat which happened to be paper entities with no real business activity and provide accommodation entries to interested parties for bogus purchases. In view of the above, the Assessing Officer was of the opinion that the assessee has inflated the expenditure by claiming bogus purchases to the extent of Rs.25,63,834/- which was an accommodation entry and not a real transaction. He, therefore, initiated proceedings u/s 147 with the prior approval of the Jt. Commissioner of Income Tax, Range-8 Hyderabad. Accordingly notice u/s 148 of the Act was issued on 27.3.2015 which was served on the assessee on 30.03.2015.

2.2 The Assessing Officer thereafter issued statutory notices u/s 143(2) and 142(1) of the Act calling for certain information regarding the transaction. The assessee in response to the same filed the following details:

1. Original Affidavit from Rajendra Jain in relation to the purchases debited in our books of account of the assessee during the F.Y. 2007-08. Page 2 of 15

2. Details of purchases invoice dated 10.04.2007 vide invoice no. PD/MIPL/APR/07/2007-08 from Mouli Mani Impex Pvt Ltd (director) amounting to Rs. 4,87,759/-.

3. Details of purchase invoice dated 12.04.2007 vide invoice no. SDS/PD/ÁPR/12/2007-08 from Sun Diam (partner) amounting to Rs. 11,60,950/- 4. Details of purchase invoice dated 12,04.2007, vide invoice no. AE/PD/APR/11/2007-08 from Avi Exports (Proprietor) amounting to Rs.9,15,125/- and also furnish purchase invoices.

2.3 During the course of assessment proceedings, the assessee filed an affidavit of Rajendra Jain according to which the goods were duly sold by him to the assessee and others and the payment of the aforesaid amounts were duly received.

5. In appeal, the learned CIT (A) relying on the decision of the Hon'ble Gujarat High Court in the case of NK Industries Ltd vs. DCIT 72 Taxmann.com 289, which has been upheld by the Hon'ble Supreme Court, and various other decisions directed the Assessing Officer to restrict the addition to 25% of the bogus purchases of Rs.25,63,834/- i.e., Rs.6,40,958/- by observing as under: “6. Ground Nos. 1, 2 & 3: In ground No. 1, the appellant has challenged that under the facts and circumstances of the case, the learned I.T.O. erred in making an addition of Rs.25,63,834 as "Bogus Purchases". In ground No. 2, the appellant has challenged that the learned ITO failed to note that the aforesaid purchases were genuine, fully recorded in the books, payments we made through bank cheques, acknowledged by the seller. In ground No. 3, the appellant has challenged that the leaned ITO failed to note that the supplier of diamonds had filed affidavits and retracted the statement given earlier before the IT authorizes at Surat and confirmed the transactions as given and therefore the leaned ITO erred in making the addition of Rs.25,63,834/- . 6.1. The appellant has submitted that he had in response to the notice issued U/s. 143(2) in respect of the re-assessment proceedings, filed the details called for including party wise purchase and sales invoices. The appellant has submitted that the purchases are genuine and Rajender Jain had furnished affidavits stating that he had sold the diamonds to the appellant and this evidence has not been rebutted by the Assessing Officer. The appellant has argued that the mere fact that the appellant has not been able to adduce evidence for the movement of the purchases from Surat to Hyderabad which on many occasions was delivered by the seller or on other occasions personally taken by the appellant. Further, the appellant has stated that the movement of goods cannot be the ground to disbelieve the purchases made. The appellant has argued that the Assessing Officer's statement that accommodation entries by M/s. Rajender Jain and group was established by the departmental authorities ran contrary to the affidavit filed by the Rajender Jain. 6.2 A perusal of the assessment order reveals that a search & Seizure action in these group of cases - Sri Rajendra Jain, Shri Sanjay Choudary and Sri Dharmichand Jain and it was found that they are some of the entry providers operating in Mumbai indulging in providing

accommodation entries in the nature of bogus sales and unsecured loans. A search & Seizure action in these group of cases has been carried out on 03.10.2013 by DCIT, CC-4, Surat. During the course the list of beneficiaries who have benefited from the entries obtained from these the group are collected. During proceedings Unit-I(4), Mumbai a statement on oath of Sri Rajendra Jain was recorded by DDIT(Inv). on 05.10.2013. In response to Q. No. 14, his reply is as under: Q.14 During the survey action undertaken it various office premises of yours; not a single piece of diamond has been found by respective server teams though there is substantial turnover shown by various concerns controlled by you. Please state as to where do you keep your stock in trade? Ans- Sir, in this regard, I want to admit that we are engaged in business of bills shopping response to your through all the concerns as named by me in question no, 13 due to which don't have any physical stock of diamond with us at any of place at any point of time. 1 would like to further add that we are merely lending names of our various concerns to the real imports of diamond who takes the actual delivery of diamonds, Later, the said person Rajendra Jain filed affidavits in favor of the appellant but during the assessment proceedings, the Assessing Officer had called upon Sri Ram Gopal. However, citing health reasons, he was unable to attend the proceedings Therefore, the said affidavits cannot be treated as sacrosanct. 6.3. The question which emerges is whether the entire amount of the Bogus Purchases of 3 entities, Rajender Kumar group, Dharamchand Jain group and Sanjay Chander group, Surat, to the extent of Rs.25,63,834/- which happened to be accommodation entries, should be added, as the AO has done or the percentage method is to be adopted. 6.4 All the facts of the case have been considered. Bogus Purchase are entries made in books of accounts for purchases made, when in fact, no purchases have been made, the aim being reduction of taxable income by inflating expenses on account of purchases. In the case of M/s. Lifeline Drugs and Intermediates Pvt. Ltd. (5535/Mumbai/2007), ITAT Bombay Bench held that when the assessee has no explanation to offer for the bogus purchases, the same has to be added to the total income. lt cannot be said that no addition can be made since the assessee might have made corresponding purchases from alternate sources and the assessee cannot be given an opportunity to legalize its illegal transaction through accommodation entries. In the case of N.K. Industries Ltd. Vs DCIT [2016] 72 taxmann.com 289 (Gujarat), entire purchases shown on basis of fictitious invoices was debited in trading account. Assessing Officer made addition of 25 per cent of total purchase. Tribunal came to a categorical finding that there were purchases from bogus suppliers and, thus, Tribunal made addition of total purchases.

The Hon'ble Gujarat High Court upheld Tribunal's finding as follows: "6. The Tribunal in the case of Vijay Proteins Ltd. (supra) has observed that it would be just and proper to direct the Assessing Officer to restrict the addition in respect of the undisclosed income relating to the purchases to 25% of the total purchases. The said decision was confirmed by this Court as well. On consideration of the matter, we find that the facts of the present case are identical to those of M/s. Indian Woollen Carpet Factory (supra) or Vijay Proteins Ltd. (supra) In the present case the Tribunal has categorically observed that the assessee had shown bogus purchases amounting to Rs. 2,92,93,288/- and taxing only 25% of these bogus claim goes against the principles of Sections 68 and 69C of the Income Tax Act. The entire purchases shown on the basis of fictitious invoices have been debited in the trading account since the transaction has been found to be bogus. The Tribunal having once come to a categorical finding that the amount of Rs. 2,92,93,288/- represented alleged purchases from bogus suppliers it was not incumbent on it to restrict the disallowance to only Rs. 73,23,322/," Above case of N K Proteins Ltd (earlier N.K. Industries Ltd.) Vs CIT has been confirmed by Hon'ble Supreme Court vide SLP(C) No. 769 of 2017. Some courts have taken a different view that sales shown by taxpayers are not possible without there being purchases which are being held as bogus and hence, no addition can be made except addition on account of inflation in the price of goods if any. Therefore, the Assessing Officer has a choice to incorporate in the body assessment order alternate additions without prejudice. Amount of addition to be made on alternative basis will depend upon the nature of business undertaken by the Taxpayer. In the instant appeal, since there is information regarding the purchases being bogus, corresponding sales will be treated as ingenuine sales, and profit element will be taxed at an estimation basis, looking into the facts and circumstances of the case. 6.5. In view of the statement of the receiving end of the payments and the person who has issued the bills, the appellant could not produce any material to disbelieve the statement of the Hawala parties. A similar issue was elaborately examined in the case of Vijay Proteins Ltd. v. Assistant Commissioner of Income tax 58 ITD 428 (1TAT AHMEDABAD BENCH"C' and the observation is as under:. "It is well known that if purchases are made from open market without insisting for the genuine bills, the suppliers may be willing to sell those products at a much lower rate as compared to the rate which they may charge in case the dealer has to give a genuine sale invoice in respect of that sale and supply the goods. There may be various factors due to which there is bound to be a substantial difference between the purchase price of unaccounted material and rate of purchase of accounted for goods. There may be a saving on account of sales-tax and other taxes and duties which may be leviable in respect of manufacture or sale of goods in question. The suppliers or the manufacturers make a substantial saving in the income-tax in respect of income from sale of unaccounted goods produced and sold by them. This may also be one of the factors due to which the seller may be willing to charge lower rates for unaccounted goods as compared to accounted goods. Keeping all these in mind and also keeping in view the decision of the ITAT in the case of Sanjay Oil Cake Industries (supra) we hold that 25% of the purchase price accounted for in the books of accounts through such fictitious invoices in the name of 33 bogus parties should be disallowed out of the amount of purchases shown to have been made from those 33 bogus suppliers. We direct the Assessing Office to disallow 25% of the aforesaid amount on account of inflation of purchase price." The above decision was accepted by the department and the assessee. In the case of Vijay Proteins Ltd. v. Assistant Commissioner of Income (Supra) also suggested to disallow reasonable percentage of the alleged bogus purchases for the possibility of inflation of purchases by booking the purchase bills, even though payments are made through bank and the also for the reason that the contrary has not been completely ruled out. Similar view was also expressed in the case of ACIT VS M/s. Kulubi Steel in dt. 16.12.2010 AND Sumit P. Sheth Vs ITO ITA No. 3238 & 3293/Ahd/2009. 6.6. Further, as Rajendra Jain never appeared before the AO, the above cited purchases and its sources and genuineness remain unexplained. However, in view of the facts and circumstances of the case, and by applying the principle of Lex noncogit ad Impossibilia and by relying upon the decision in the case of Vijay Proteins Ltd. Vs. Assisstant Commissioner of Income-tax 58 ITD 428, the Hon. (1TAT AHMEDABAD BENCH 'C), 25% of bogus purchases Rs.25,63,834 amounting to Rs. 6.409585/- is hereby disallowed and added to the total income. In view of the above discussion, Appeal on Ground No. 1, 2 & 3 are partly allowed”.

1. The order of the Ld. Commissioner of Income Tax Centre (Appeals), National Faceless Appeal ['Ld. CIT(A)'] is erroneous and unsustainable in law and on facts of the case.

2. The Ld. CIT(A) failed to note that the entire reassessment proceedings stood merely on N- the premise of "borrowed satisfaction" and that there was no other fresh or tangible evidence brought on record to prove otherwise. M 3 The Ld. CIT(A) failed to consider that the regular assessment proceedings u/s 143(3) of the 1.T. Act, 1961 was completed accepting the purchases and therefore there was no fresh tangible material brought on record by the Assessing Officer to prove that income had had escaped assessment. 4 The Ld. CIT(A) erred in sustaining the order of the Assessing Officer despite the fact that the entire purchases were accounted in the books of the Appellant and the same was shown in the stock register as well.

6. The Ld. CIT(A) on a wrong foundation of reasoning arising from a misconception of the facts failed to appreciate the entries in the stock register which finally culminated in sales and therefore erred in disallowing 25% of the purchases.

7. The Ld. CIT(A) failed to appreciate the line of business of the Appellant that loose diamonds purchased are embedded in various forms of jewellery and then sold, and therefore erred in disallowing 25% of the purchases.

8. The Ld. CIT(A) failed to note that Rajender Kumar Jain and others who were search and subject to seizure department and operation u/s 132 of the 1.T.Act, 1961 were witnesses of the onus lay on the Department to produce them for cross examination and therefore the disclosure of 25% of purchases at Rs. 6,40,960/- is totally contrary to the facts and evidence on record.

10. The Ld. CIT(A) failed to note that neither the books of accounts were rejected nor was the genuineness of the purchases questioned and therefore, the addition of Rs. 6,40,960/- is totally contrary to the facts and evidence on record and is to be deleted.

11. The Ld. CIT(A) having allowed 75% of the purchases as genuine erred in disallowing 25% at Rs. 6,40,960/- without any basis and merely relying on the Ahmedabad Tribunal concluded that 25% of the purchases ought to be disallowed.

9. The learned Counsel for the assessee referring to page 75 to 80 of the Paper Book drew the attention of the Bench to the copy of acknowledgement of the Income-Tax return of the 3 parties from whom the assessee has purchased Diamond which was treated as bogus by the Assessing Officer. Referring to page 81 of the Paper Book, he drew the attention of the Bench to the invoices raised by Mouli Mani Impex Ltd., on 10.04.2007 for an amount of Rs.4,87,759/-. Referring to various other pages he drew the attention of the Bench to the invoices raised by the same party and other parties. She submitted that the purchase of Diamond so made from the above parties have entered into the stock register and the sales have not been doubted by the Assessing Officer. Further, the books of account have also not been rejected. Referring to pages 85 to 88 of the Paper Book, she drew the attention of the Bench to the affidavit of Mr. Rajender Jain, Partner of Sun Diam confirming the sales to the assessee. Referring to page 96 to 97 of the Paper Book, she drew the attention of the Bench to the affidavit of Shri Rajendra Jain, Proprietor of AVI Exports confirming the sales to the assessee. Referring to page 73 to 74 of the Paper Book, she drew the attention of the Bench to the affidavit filed by Shri Rajendra Jain, Director, Mouli Mani Impex Ltd confirming the sales to the assessee. She submitted that when the books of account of the assessee are not rejected, sales has been accepted, the parties from whom assessee has purchased diamond have confirmed to have sold the goods to the assessee which has entered in the stock register and when the payments have been made through proper banking channel, then estimation of profit @ 25% is uncalled for. Referring to various decisions, she submitted that the Courts and various Benches of the Tribunal have estimated such profit at 3 to 5% which is the norm of the industry in such type of cases. She accordingly submitted that either the entire amount should be deleted or in the alternate the profit on such alleged bogus purchases be reduced to 3 to 5%. She also relied on the following decisions:

12. We find some force in the above argument of the learned Counsel for the assessee. Admittedly, the Assessing Officer in the instant case has accepted the sales and books of account have not been rejected. Further, the payments for the alleged bogus purchases have been made through proper banking channels and the Revenue is not in appeal against the order of the CIT (A) allowing 75% of such purchases as genuine and only 25% of the bogus purchase has been sustained by the CIT (A). In the case law compilation, the learned Counsel for the assessee has filed certain decisions, wherein in such type of cases, the additions have been sustained ranging from 3% to 5% of such purchases. Considering the totality of the facts of the case and considering the fact that the profit shown by the assessee is more than the case law cited by the learned Counsel for the assessee, we are of the considered opinion that the disallowance of 15% of such bogus purchases in the instant case will meet the ends of justice. We, therefore, modify the order of the CIT (A) and direct the Assessing Officer to restrict the addition to 15% of such bogus purchase as against 25% restricted by the CIT (A) being the profit on such bogus purchases. The grounds raised by the assessee are accordingly partly allowed.

14.1 So far as the grounds on merit are concerned, we have already directed the Assessing Officer to restrict 15% of such bogus purchases. Following our directions in ITA 514/Hyd/2022, here also we direct the Assessing Officer to restrict the disallowance to 15% of such bogus purchases. The grounds raised by the assessee in the above two appeals are accordingly partly allowed.