J.K. JEWELLERS INTERNATIONAL,JAIPUR vs. INCOME TAX OFFICER, WARD-6-2, JAIPUR

PER VIJAY PAL RAO, JM : This appeal by the assessee is directed against the order dated 26th December, 2018 of ld. CIT (A) for the assessment year 2010-11. The assessee has raised the following grounds :-

2. The assessee is a partnership firm and dealing in precious and semi-precious stones. During the year under consideration, the AO noted that the assessee has shown the purchases from 5 (five) parties which were subjected to search and seizure action by the Investigation Wing, Mumbai and found to be involved in providing bogus entry. Accordingly, the AO considered the purchases made by the assessee from those entities as bogus/unverifiable purchases and consequently made addition of 25% of such purchases after rejection of books of account. The ld. CIT (A) restricted the addition made by the AO to lump sum of Rs. 10,00,000/- as against the disallowance/addition made by the AO of Rs. 60,79,802/- along with unaccounted commission of Rs. 48,638/-.

3. Before us, the ld. A/R of the assessee has submitted that an identical issue has been considered by this Tribunal for the assessment years 2008-09 and 2009-10 & 2014-15 vide orders dated 28th March, 2018 and 06.06.2019 respectively. Thus the ld. A/R has submitted that the Tribunal has held that once the books of account are rejected by the AO, then the only option with the AO to make the best judgment assessment by estimating the income of the assessee on the basis of the average GP of past years. Thus the ld. A/R has submitted that the Tribunal has deleted the identical addition made by the AO and partly sustained by the ld. CIT (A) in those years.

He has further submitted that there was no issue of declining of GP and NP in the earlier years where the Tribunal has deleted the addition made by the AO. He has relied upon the orders of the authorities below.

Therefore, by considering the GP declared by the assessee in the year under consideration, no addition is required even after rejection of books of account.

“4. We have heard the ld. DR as well as the ld. AR and considered the relevant material on record. The Revenue is aggrieved by the order of the ld. CIT(A) in the first round of assessment whereby the assessee is aggrieved the order of the ld. CIT(A) in the reopening of the assessment. The assessee firm is deriving income from export of precious and semi precious stones including export of gold and silver jewellery. In the original assessment passed u/s 143(3) the AO doubted the purchases made from 12 parties and when the assessee could not produce the suppliers for examination, the AO treated the purchases to the extent of Rs. 1,33,94,163/- as not genuine and disallowance the same. On appeal, the ld. CIT(A) after considering the relevant facts as well as evidences produced by the assessee before the AO in support of the purchases made from these 12 parties has adjudicated the issues in para 2.3 as under:-

“2.3. I have carefully considered the facts of the issue under consideration, observations of the AO and also the submissions made by Ld. AR in this regard. Before going into the merits of the rival stands, the primary claim of the appeal that the present issue has already been dealt and decided by the Hon'ble ITAT, Jaipur bench, in their favour, in the past, was examined. On 3 perusal of the relevant orders of A.Y. 2006-07 & 2007-08, it is transpired that the Hon'ble ITAT has deleted the addition made by the AO of entire or part of such purchases, made almost from same suppliers, which are involved in current year. While giving the relief to the appellant, the Hon'ble bench has held that once the-sales are accepted then the addition cannot be made while terming the corresponding purchases as bogus in nature. Under such circumstances, the Hon'ble bench has laid down the principle that any addition can be made, only on the basis of the adequacy of the trading results shown of current year viz. shown in the past period. While disposing the appeal for A.Y. 2006-07, the Hon'ble ITAT deleted the addition of entire purchases made u/s 69C of the Act and restricted the same, up to the gap of the higher GP ratio shown in the past then shown is the relevant year. Similarly while deciding the appeal of A.Y. 2007-08, the Hon'ble bench has deleted the addition made of 25% of such purchases. Similarly in view of the fact that the GP in the relevant year was offered at higher side then the previous year, the Hon'ble ITAT made adhoc addition of Rs. 1,00,000/- to cover-up the discrepancies found i.r.o. relevant purchases.

With the above background, it the facts and circumstance of the current year are match with the A.Y. 2006-07 & 2007-08, they would be found identical in all manners. So much, so that most of the suppliers of goods are common in both the assessment years and also that the GP the current year is better then the last year. Accordingly, while respectfully following the guidelines and verdict of the Hon'ble tribunal, it is held that the AO was not reasonable and justified, while disallowing the entire purchases of the appellant, which were indisputability utilized for making export sales of the relevant period. Accordingly the addition of Rs. 1,19,58,445/- is found untenable on the facts and merits also and thus found disserves to be deleted. Similarly in view of the fact that the GP rate of the current year (i.e.18.55%) is better then the previous year (17.36%), therefore, while following the foot prints of the decision of the Hon’ble ITAT Bench, in the appellant case for A.Y. 2007-08 and also the fact of the increased turnover of the current year, an adhoc action of Rs. 3,00,000/- is sustained to take care of all the incrementing aspects, related to the issue under consideration, if any consequently, this ground of appeal is partly upheld.”

Thus, it is clear that the ld. CIT(A) while deleting the addition made by the AO has followed the decision of this Tribunal in assessee’s own case for the assessment year 2007-08. It is also not disputed that the assessee is an exporter of precious and semi precious stones as well Jewellery therefore, when the export of goods is not in dispute then the purchases of the corresponding quantity cannot be doubted except the cost of purchase which might have been inflated by the assessee. However, it is not the case of the A.O. that the assessee has inflated the purchases in comparison to the prevailing market price of the goods. Therefore, when the GP rate of the current year declared by the assessee at 18.55% is better than the earlier assessment year at 17.36% which has been accepted as finally decided by this Tribunal in deleting the addition made by the AO then no addition is called for on this account. Hence, as far as the Revenue’s appeal is concerned in the absence of any contrary material or fact we do not find any error or illegality in the impugned order of the ld. CIT(A).”

Thus the Tribunal has deleted the addition made by the AO and sustained by the ld. CIT (A) by considering the fact that the GP declared by the assessee for the said year was more than the previous assessment years. Similarly for the assessment years 2009-10 and 14-15, the Tribunal deleted the addition by noting the fact that after rejection of books of account best judgment assessment ought to have been framed by the AO by estimating the income on some reasonable and proper basis.

The average GP declared by the assessee in the past years was considered a as proper criteria for estimation of income. Accordingly, when the GP declared by the assessee for those years were found to be in line or more than the average of the GP declared in the preceding years, the Tribunal deleted the addition made by the AO and confirmed by the ld. CIT (A). Thus it is clear from the earlier orders of this Tribunal that there was no issue of declining of GP and NP declared by the assessee in those years. The authorities below have considered the fact that there was decline in GP as well as NP declared by the assessee for the year under consideration. The details of the GP and NP for the year under consideration as well as in the preceding years as reproduced at page 12 of the order of the ld. CIT (A) are as under :-

A.Y. Turnover Gross Profit GP Rate Net Profit NP Rate 2010-11 46751902.00 8598887.00 18.39% 607263.05 1.30% 2009-10 87369875.00 16499885.00 18.89% 9352554.00 10.70% 2008-09 69102064.00 12818695.00 18.55% 7661894.11 11.09% The assessee has not disputed these factual details. Further, the ld. CIT (A) has decided this issue in para 3.3 to 3.3.2 as under :-

“ 3.3. I have perused the facts of the case, the assessment order and the submissions of the appellant. Assessee has not challenged the invocation of section 145(3) and merely contended that its trading results are better therefore no additions should be made. He placed reliance on ITAT order for assessment year 2008-09 in appellant’s own case. 3.3.1. On going through results, it is seen that GP fell down from 18.89% to 18.39% and NP fell down sharply from 10.70% to 1.30%. No plausible explanation was given for sharp decrease in NP by appellant. 3.3.2. Once books are rejected, estimation is to be made based on past history. Records of assessee show decline in profits therefore a lump sum addition of Rs. 10,00,000/- is upheld in place of addition made by Assessing Officer of Rs. 60,79,802/-. This ground of appeal is partly allowed.”

It is clear that the ld. CIT (A) has considered the fact that GP declared by the assessee fell down from the earlier years and NP declared by the assessee fell down sharply from 10.70% to 1.30%. It was also noted by the ld. CIT (A) that no plausible explanation was given for sharp decline in NP by the assessee. So far as the addition made by the AO and sustained by the ld. CIT (A), we find that in view of the earlier decisions of this Tribunal, the same is not sustainable as it is not based on some reasonable or proper criteria being the average GP or NP declared by the assessee in preceding years. Accordingly, we set aside the orders of the authorities below and remit the issue to the record of the AO to estimate the income of the assessee by applying the average of past GP declared in the preceding years by the assessee and thereafter the AO may examine the allowability of expenditure independently to find out the cause of sharp decline in NP. The assessee be given a proper opportunity of hearing before passing the fresh order.

Order is pronounced in the open court on 02/07/2019.