INCOME TAX OFFICER WARD-1 BEAWAR, WARD-1 BEAWAR vs. M/S. MANIRTANAM GEMS PVT. LTD, CHHAJER SADAN, NEAR CHIMAN SINGH LODHA SCHOOL, OUT SIDE NEHRU GATE, BEAWAR, BEAWAR

Briefly the facts of the case are that the assessee company is engaged in the business of Gems and Jewellery as well as diamonds and carry out its activities through its branches situated at Surat and Mumbai. During the year under consideration, the assessee has reported total turnover of Rs. 446 Crores and has reported Gross Profit rate of 0.61% as against the G.P rate of 0.15% on turnover of Rs 434 Crores shown in the immediate preceding year. In order to verify the results declared by the assessee company, the latter was asked to furnish details of purchases and sales exceeding Rs. 50 lacs. Further in order to verify the genuineness of the transactions, information U/s 133(6) of the Act were also sought from 19 parties however, in respect of 11 parties, the notices sent to them were received back undelivered and in most of the cases, the notices were returned with the remarks “left” by the postal authorities. However, during the course of assessment proceedings, the assessee furnished copy of the confirmations in respect of these parties however, the same were not found reliable and were not found acceptable to the Assessing Officer holding that when the notices were received back unserved, how these parties are responding to the said notices through the assessee and therefore, the information submitted that the assessee were not found acceptable. Further, the Assessing Officer received information from DDIT Mumbai stating that the assessee has taken accommodation entry of bogus purchases of Rs. 50 lacs from M/s Taj Impex which is entity operating from Shri Praveen Kumar Jain. Accordingly, information from M/s Taj Impex were also sought U/s 133(6) of the Act. Based on these preliminary enquiries, the AO issued show cause notice to the assessee wherein the AO stated that in spite of sending notices to the various parties, no verification of purchase could be made, therefore, he intend to reject the books of account and apply suitable G.P. rate in respect of purchase shown to have been made from the said parties. Further, in the show cause notice, the AO also stated that he intend to add back the entire amount of Rs. 50 lacs in respect of purchase shown to have made from M/s Taj Impex which is nothing but accommodation entry obtained from Shri Uttam Hinger who is associate of Shri Praveen Kumar Jain and indulge in the business of providing accommodation entries of bogus purchases and the said addition was proposed to be made U/s 69C of the Act.

In response, the assessee filed its submissions however, the same were not found acceptable to the AO. As per the Assessing Officer, notice issued U/s 133(6) of the Act were sent on the addresses given by the assessee and these parties are not a small time shop keepers but diamond dealers, some of which are running business in the status of private limited companies and as such addresses as furnished by the assessee should have been correct. No verification of purchases/sales could be made as letters were received back unserved and it is surprised to note that how the above parties have complied with and send reply when they have not got notices U/s 133(6) of the Act and letters were received back undelivered. The information so supplied by the assessee is not on the letter pad of the said concerns and the same cannot be taken cognizance and it is not ascertained as to whether these were supplied by the concerned parties. Mere payments made through account payee cheque do not prove genuineness of the transactions. The ld. AR’s contention that Unique Diamond International is foreign company from whom import was made rather than purchasing from Surat, the AO stated that the assessee has furnished his Surat address “Unique Diamond International, Millenium Dia, Complex, Varachha Road, Surat and notice was issued U/s 133(6) accordingly on the Surat address. The Assessing Officer further stated that the fact of accommodation entry being provided is admitted by Praveen Kumar Jain whose statement were recorded U/s 132(4) of the IT Act on 01.10.2013. Further, the Assessing Officer rejected the books of accounts of the assessee stating that the assessee has not kept qualitative details of closing stock and Diamonds are precious stone as such in the absence of qualitative details, their real valuation of closing stock is not ascertainable. Further, on perusal of the purchase register, no bill numbers were found mentioned in respect of purchases made from 7 parties. Further, the assessee has made bogus purchase of Rs. 50 lacs to reduce the incidence of tax from M/s Taj Impex, Surat which is found to be bogus purchase in view of the admitted statement of Shri Praveen Kumar Jain. The AO also referred to the statement of Shri Praveen Kumar Jain recorded U/s 132(4) of the I.T. Act as well as statement of Shri Uttam Chand Hinger, proprietor of M.s Taj Impex whose statement were also recorded U/s 132(4) of the Act wherein he admitted that he is only director on paper and none of these concerns run by Shri Praveen Kumar Jain is genuine and all these concerns are used for providing entries for purchase unsecured loans and shares application money. The AO accordingly held that in view of the admitted statement of Shri Uttam Chand Hinger, purchase of Rs. 50 lacs by the assessee from M/s Maniratnam Gems Pvt. Being a bogus purchase entry which is obtained just to reduce tax incidence and payment by account payee cheque is not sufficient to establish the genuineness of purchases. In view of the above reasoning so elaborately discussed in the assessment order, the book results were rejected.

Thereafter, the AO observed that the assessee on its consolidated sales of Rs. 446 crores has reported G.P. rate of 0.61% which is quite low and thereafter, referring to the decision of Hon’ble Gujarat High Court in case of Mayank Diamonds Pvt. Ltd. vs. ITO dated 07.11.2014, applied G.P @ 2% on the consolidated sales and given the declared G.P. of Rs.2,73,87,008/-, trading addition of Rs. 6,18,39,745/-was made to the declared total income of the assessee.

Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A). During the course of appellate proceedings, the ld. CIT(A) requested the AO to examine 11 parties from whom the assessee has made the purchases during the year and which was not verified during the course of assessment proceedings. In respect of M/s Surana Corporation Ltd, Chennai, the ld. CIT(A) has stated that the party appeared before the DDIT, Chennai and confirmed the sale of goods to the assessee company. Four parties namely Helios jewellery Private Limited, Vithoba Narayan Kalambe, Vithoba Kalambe (HUF) and Superstar Multitrade Pvt. Ltd, appeared before the DDIT, Mumbai and confirmed the sale of goods to the assessee. Regarding 4 parties namely, M/s International, Surat, Yash Overseas, Surat, Satyarth Export and Adeshwar Gems Pvt. Ltd, the ld. CIT(A) stated that though these parties were not found by the DDIT, Surat at the address given by the assessee but the assessee produced all these four parties before the AO and all these four parties have confirmed before the AO that they have sold the goods to the appellant. Regarding Unique Diamond International, the ld. CIT(A) stated that the party is based out of USA and the AO did not issue any notice U/s 133(6) at its USA address. Regarding Anant Export, Surat, the ld. CIT(A) stated that the party could not be found by the DDIT, Surat at the address given by the appellant and the assessee has also expressed its inability to produce the party as the assessee was not in contact with the party. Based on above examination and verification of the various parties, the ld. CIT(A) stated out of the 11 parties whose purchases were sought to be verified by the AO, except M/s Anant Export, Surat, all other parties have confirmed that they have sold goods to the appellant. The ld CIT(A) also acknowledged the fact that though the AO has expressed his doubt in respect of the genuineness of the purchases from these parties on the basis of the statement of these parties or for other reasons however, he was of the view that purchases made by the appellant cannot be held to be bogus, just on the basis of suspicion or doubt when these parties have in unambiguous manner, confirmed that they have sold the goods to the assessee and the assessee has produced all the necessary documentary evidences including purchases bills and bank statements of the assessee in which the payment to these parties are reflected. It was further held by the ld CIT(A) that the Assessing Officer or DDIT has not brought on record any evidence to show that payments made to these parties through banking channel were received back by the assessee in cash. The assessee is also maintaining stock register wherein quantity of goods purchased and sold are recorded, the AO has not found any discrepancy in the quantity of goods purchases or sold recorded in the stock register. Regarding M/s Anant Export, Surat though the party is not available at the given address however, the assessee has filed copy of the purchase bills of this party and in the bank statement of the assessee, the payment made to the this party are duly reflected and the quantity of goods purchased from this party is also recorded in the stock register. Regarding purchases of Rs. 50 lacs made from M/s Taj Impex, the ld. CITT(A) has held that AO has treated the said purchase as unverifiable only on the basis of statement of Shri Praveen Kumar Jain which was subsequently retracted by him. It was further held by the ld. CIT(A) that the assessee has furnished complete documentary evidence to prove the genuineness of the purchase recorded and the goods received from M/s Taj Impex has also entered in the stock register. The AO has not found any discrepancy in the quantity of goods purchased and sold recorded in the stock register. Regarding issuance of notice issued U/s 133(6) of the Act to M/s Taj Impex, the AO has not mentioned that notice was returned back unserved or M/s Taj Impex had denied having made sale to the assessee. Further, the AO has also not brought on record any evidence to show that payment made to M/s Taj Impex by the assessee through banking channel was received back in cash. Thus, there is no evidence with the AO to treat the purchases from M/s Taj Impex as unverified purchases except the statement of Shri Praveen Kumar Jain which he had already retracted. Regarding the AO’s observation that the assessee is not maintaining qualitative details of closing stock, the ld CIT(A) held that the assessee is maintaining the stock register consistently in quantitative terms and in support, reference was drawn to assessment year 2013-14 wherein the AO has rejected the book results of the assessee U/s 145(3) of the Act mainly on this ground however has made an addition of Rs. 3 lac only. The ld. CIT(A) finally stated that at the most, purchase of Rs. 4,32,77,012/- made by the assessee from M/s Anant Export, Surat can be held to be unverifiable because the parties is not available at the address given by the assessee. But the assessee has furnished all the documentary evidences to prove the purchases from these parties including the purchase bills and bank statement in which the payment made to M/s Anant Export are reflected. The goods received from M/s Anant Export are also recorded in the stock register of the assessee. The asseessee could not have sold the goods unless he had purchased the goods and the quantity of goods purchased and sold are recorded in the stock register which have been accepted by the AO. Thereafter, the ld. CIT(A) finally held that he is of the considered view that it would be fair and reasonable to upheld the rejection of book results made by the AO U/s 145(3) of the Act but he restricted the addition in respect of the difference between the GP rate declared by the assessee @ 0.61% and the GP rate estimated on this unverified purchases of Rs. 4,32,77,012/-. Given that the AO himself has estimated GP rate of 2%, the ld. CIT(A) has held that it would be fair and reasonable to restrict the addition to Rs. 6,05,878/- (2% less 0.61% on Rs 4,32,77,018) and the balance addition of Rs 6,12,33,867 was directed to be deleted.

Against the said findings of the ld. CIT(A), the Revenue in appeal stating that the ld. CIT(A) has erred in restricting the trading addition by applying G.P. @ 2% on the unverifiable purchase instead of total turnover declared by the assessee without considering the fact that the books of accounts of the assessee were rejected U/s 145(3) of the Act not only on the above issue but also on the basis of other defective notice issued by the AO. In its cross objection, the assessee has challenged the action of the ld. CIT(A) in upholding the action of the Assessing Officer in rejecting the books of account of the assessee by invoking the provisions of Section 145(3) of the Act and further, in making the addition of Rs. 6,05,878/- in relation to purchases from M/s Anant Exports.

During the course of hearing, the ld. DR has submitted that the assessee was engaged in the business of trading including import of precious stones, mainly diamond rough and cut and polished diamonds and having offices at Mumbai and Surat. It has filed its ROI for the year declaring total income at Rs. 19,88,730/-. It has disclosed total turnover of Rs. 446 Crore, on which it has declared GP of Rs. 2.74 Crore giving GP rate of 0.61%. However, as per the separate trading accounts for Mumbai and Surat, it has declared sales of Rs. 364 Crore and Rs. 81.50 Crore in respect of its Surat and Mumbai offices respectively and has declared GP rates of 0.08% and 0.50% accordingly giving overall GP rate of 0.15% against 0.61%.

Per contra, the ld. AR of the assessee has submitted that the ld. CIT(A) has erred in sustaining the rejection of books of accounts. The ld. AR submitted that out of total purchases of Rs 448.28 Crores, purchases from only few parties amounting to Rs. 68.96 crores were unverified. However, during the course of appellate proceedings, based on examination by the DDIT as well as by the AO himself, this purchases have been verified and the parties have been produced and there is no basis for ld. CIT(A) to confirm the rejection of books of account. Regarding purchase from M/s Taj Impex, the ld. AR has submitted that the assessee furnished the necessary documentation in support of its purchase and the ld. CIT(A) has duly confirmed the same but has wrongly rejected the books of accounts. It was further submitted that the books of accounts are duly audited and no adverse comments have been made by the auditors and therefore, there is no basis for rejection of books of accounts. Regarding estimation of GP rate, ld. AR submitted that the assessee had disclosed a better GP rate as compared to the previous years and it was submitted that the assessee has shown GP rate of 0.61% as against 0.15% for the A.Ys. 2011-12 and 0.2% for A.Y. 2010-11. It was further submitted that even in AY 2013-14, the assessee has declared a G.P rate of 0.19% which was accepted except for an addition of Rs 3 lacs by the AO. It was accordingly submitted that even where the books of accounts are rejected, there is no basis for making the addition and it is settled legal proposition that mere rejection of books of account does not ipso facto result in addition in the hands of the assessee.

We have heard the rival contentions and perused the material available on record. The Assessing officer has rejected the books of accounts by invoking the provisions of section 145(3) and the same has been sustained by the ld CIT(A). Once the books of accounts are rejected, only course of action left with the AO is to assess the income of the assessee on the basis of best judgement. Where the assessee has a settled past history, in such cases, accepted G.P rate for the past years in assessee’s own case has been held by the Rajasthan High Court as proper and reasonable basis for estimation of G.P rate for the current year. In the instant case, the AO has estimated the G.P rate of 2% on the declared turnover of the assessee without considering the assessee’s own past history. The ld CIT(A) has accepted the assessee’s declared G.P and at the same time, as upheld G.P rate of 2% on unverified purchases from M/s Anant Exports. This act of the ld CIT(A) contradicts his own act of confirming the rejection of books of accounts and the results so declared by the assessee. Once the books of accounts have been rejected due to non-verifiability of purchases made by the assessee company and non-mainetance of qualitative records and provisions of section 145(3) have been invoked, the authorities cannot resort to make addition as a percentage of the unverified purchases or by estimating gross profit rate on such unverified purchases. Only course left with the authorities is to estimate the gross profit rate based on best judgement and the past results of the assessee provides a reasonable basis for such estimation. For the year under consideration, the assessee has declared G.P rate of 0.61% as against 0.15% in AY 2011-12 and 0.20% in AY 2010-11 and has thus declared a better G.P rate for the year under consideration as compared to average G.P rate for the past two years. Even where the books of accounts are rejected, there is thus no basis for making the addition in the hands of the assessee company. It is a settled legal proposition that mere rejection of books of accounts are not sufficient to hold that the trading additions have to be necessarily made in the hands of the assessee company. Where the assessee company has declared a better trading results as compared to previous years, such results provide a reasonable basis to hold that there should not be any addition in the hands of the assessee company. In light of above discussions and in the entirety of facts and circumstances of the cases, the trading addition so made by the AO and so confirmed by the ld CIT(A) are hereby directed to be deleted and the trading results so declared by the assessee are directed to be accepted.

The issue regarding rejection of books of accounts so raised by the assessee in its cross-objection thus becomes academic and we