M/S. YAELSTAR DIAMONDS PVT. LTD.,,SURAT vs. THE DCIT, CIRCLE-2(1)(1),, SURAT

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 1 of 10 आयकरअपीलीयअिधकरण,सुरत�यायपीठ,सुरत IN THE INCOME TAX APPELLATE TRIBUNAL-SURAT-BENCH-SURAT BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUTANT MEMBER आ.अ.सं/.I.T.A No.198/SRT/2018 िनधा�रणवष�/Assessment Year:2007-08 Yaelstar Diamond (P) Ltd, Deputy Commissioner of FC-3011, 3rd Floor, Bharat Diamond Income Tax, Circle-2(1)(1), Bourse, Bandra Kurla Complex, Surat Mumbai-400 051. [PAN: AAACY 3155 F] अपीलाथ� Appellant ��यथ�/Respondent Shri Kiran K. Shah, AR िनधा�रतीक�ओरसे /Assessee by Shri Sreenivas T. Bidari, CIT(DR) राज�वक�ओरसे /Revenue by 10.12.2019 सुनवाईक�तारीख/ Date of hearing: 11.12.2019 उ�ोषणाक�तारीख/Pronouncement on आदेश /O R D E R PER O. P. MEENA, AM: 1. This appeal by the Assessee is directed against the order of learned Commissioner of Income tax (Appeals)-2, Surat (in short “the CIT (A)”) dated 06.03.2018pertaining to Assessment Year 2007-08, which in turn has arisen from the order passed under section 271(1)(c) dated 30.03.2017 of Income Tax Act, 1961 (in short ‘the Act’) by the Deputy Commissioner of Income-Tax, Circle – 2(1)(1) Surat (in short “the AO”). 2. The sole grounds of appeal is against the confirmation of penalty of Rs.1,32,50,902/- levied under section 271(1)(c)of the Act. 3. Succinct facts are that the original return of income was filed on 06.07.2011 declaring total income of Rs.27,11,150/- which was assessed at Rs.27,11,150/- under section 143(3) read with section 153A of the Act on vide order dated 31.01.2013. A search and seizure operation was carried out in the

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 2 of 10 case of Bhanwarlal Jain Group on 03.10.2013 wherein it was revealed that said group is providing accommodation entries to various concerns. The assessee has alos received accommodation entries of Rs.6,01,50,246/- from A. Jewels and Rs.9,73,17,596/- from M/s. Kothai & Co. totaling to Rs.15,74,67,842/- from the concerns controlled by Bhanwarlal Jain Group. On the basis of, information received from Investigation Wing, the assessment of the assessee was reopened u/s.147 and after recording reasons and notice under section 148 of the Act was issued. In response to which the assessee has filed his return of income on 22.04.2014 disclosing total income at Rs.27,11,150/-. However, the AO observed that the bogus purchases were reported by the Investigation Wing in respect of above two parties. Therefore, the purchases amounting to Rs.15,74,67,842/- were treated as bogus on the basis of statement recorded from Shri Bhanwarlal M. Jain during the course of search and seizure proceedings. However, applying the ratio of decision in the case of Vijay Proteins 55 TTJ 76 (Ahd-Trib), the AO made disallowed @25% of above bogus purchases of Rs.15,74,67,842/- and made addition of Rs.3,93,66,960/- on which penalty were also initiated under section 271(1)(c) for furnishing of inaccurate particulars of income and concealment of income. The assessee has filed an appeal before CIT (A) against the addition so made. However, CIT (A) has dismissed the appeal of the assessee. In view of these facts, the AO further, issued show-cause notice on 06.03.2017 for levy of penalty under section 271(1)(c) but no compliance was made hence, the AO concluded that for the reasons mentioned in the assessment order, it is a fit case for levy of penalty under section 271(1)(c) of I. T. Act for concealment of income and furnished inaccurate particulars of income. Accordingly, the AO levied minimum penalty

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 3 of 10 @100 at Rs.1,32,50,920/- being tax sought to be evaded on concealed income of Rs.3,93,66,960/-. 4. Being, aggrieved, the assessee filed an appeal before the Ld. CIT (A). Wherein it was contended that the assessee has changed his address hence, notice issued under section 271(1)(c) by the AO could not be received by him hence, no explanation was filed. The AO levied penalty merely because addition was confirmed by the CIT (A). However, the appeal is pending before tribunal. However, the case of Vijay Proteins Ltd. (supra) is entirely different as in that case payment was made by cross cheque and not by account payee cheques. Disallowance made merely third party gave statement that he was doing business in the name of other parties. There was no withdrawal of cash after the payment of bank account from the sellers. The assessee has also filed copy of confirmation, copy of purchase bills, copy of bank statement of parties and they has complied with notice under section 133(6) of the Act issued which is part of assessment order. Therefore, thus, these documents are sufficient to explain the disallowance of purchases. However, CIT (A) observed that enquiries conducted during appellate proceedings revealed that parties are not residing on the given address, nor they were ever noticed by the nearby residents. Therefore, on spot enquiry established that above parties were bogus, purchases are not identifiable. Hence, the quantum appeal of the assessee was dismissed by the CIT (A). Therefore, CIT (A) observed that if a person obliged to furnish particulars of his income and omits to furnish them, he thereby conceals the particulars. Accordingly, the CIT (A) viewed that explanation 1 to section 271(1)(c) raises a presumption that as and when any amount is added or disallowed in computing the total income the same shall be

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 4 of 10 deemed or represented the income in respect of which particulars have been concealed. Similar view was expressed in the case of A.M. Shah & Co. v. CIT 238 ITR (Gujarat). Accordingly, levy of penalty under section 271(1)(c) was upheld. 5. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that in response to notice under section 133(6) issued by the AO, both the parties have filed reply and confirmed the transaction and accepted having sold diamonds to assessee. The assessee has also filed copy of confirmation, bank account statement for payment of account payee cheques that purchases are genuine. The assessee has also filed day to day quantity account wherein receipts of polished diamonds were found corresponding to sales also. The assessee has also requested to cross examination of the person whose statement were relied upon but no opportunity of cross examination was allowed. Hence, there is violation of decision of Hon`ble Supreme Court in the case of Kishanchand Chellaram v. CIT [1980] 125 ITR 713 (SC) [1980] 4 Taxman 29 (SC).The disallowance were restricted to 25% following decision in the case of Vijay Proteins 55 TTJ 76 (Ahd-Trib) and same was confirmed. However, ITAT vide its order has restricted the disallowance to 5% to cover possible fall in Gross Profit relying on the decision of Hon’ble Gujarat High Court in the case of Mayank Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003] dated 17.11.2014 [2014] 11 (TMI) 812 (Gujarat). Thus, the quantum of Rs.3,39,66,960/- on which penalty was levied has reduced to Rs.78,73,390/- hence, penalty if confirmed be reduced to quantum addition sustained finally, which would worked out at Rs.23,62,017/-. The learned counsel for the assessee further submitted that

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 5 of 10 penalty were initiated for furnishing of inaccurate particulars of income and concealment of income and finally levied for both defaults. Therefore, initiation of penalty proceedings is bad-in-law as the AO was not certain whether it was for concealment of income or furnishing inaccurate particulars of income. In support of his contention on this issue, the learned counsel for the assessee relied in the case of New Sorathia Engineering Co. v. CIT [2006] 282 ITR 642 (Guj)/ 155 Taxman 513 (Gujrat) and CIT v. Manu Engg. Works [1980] 122 ITR 306 (Guj). Further, the facts of Vijay Proteins 55 TTJ 76 (Ahd-Trib) were entirely different hence, not applicable, therefore, confirmation of penalty by the CIT (A) is not justified. The learned counsel for the assessee contended that since the assessee has filed bills of purchases and there is payment by account payee cheques , no addition is called for as held by the Hon’ble Gujarat High Court in the case of CIT v. M. K. Brothers [1987] 163 ITR 249 (Guj). Further, disallowance of purchases is mere estimate as the purchases were not fully verifiable. In similar circumstances several authorities have reduced the estimate to 3 to 5% of the purchases. Therefore, this being purely an estimate basis and therefore, this does not amounts to either concealment of income or furnishing inaccurate particulars of income. The genuineness of purchases were explained as reproduced the submissions of the assessee in para 7 of the assessment order and same was relied in penalty order by the AO. The learned counsel for the assessee further place reliance in the case of CIT v Reliance Petro-products Pvt. Ltd. [2010] 322 ITR 158 (SC); [2010] 189 Taxman 322(SC) for support of his contentions.

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 6 of 10 6. On the other hand, Ld. D.R. supported the order of lower authorities and submitted that purchases made by the assessee were not genuine hence, the penalty has been rightly imposed and confirmed. 7. We have heard the rival submissions and perused the relevant material on record. We have gone through the case laws relied upon the learned counsel for the assessee. We find that the assessee is doing the business of trading of polished diamonds. The books of accounts are audited u/s.44AB and quantitative details have been maintained by the assessee. A search u/s.132 was conducted at the premises of Bhanwarlal Jain Group and during the course of statement Shri Bhanwarlal M. Jain and Shri Lunkaran P. Jain that they are issuing the bills of accommodation entries. They further stated that they have received the consideration of such purchases by account payee cheques. Further, in reply to notice under section 133(6) they have accepted of having supplied goods to the assessee. The assessee has also filed copy of confirmation from them, copy of bank statement showing payments received by account payee cheques and there was no immediate cash withdrawal. The AO has estimated profit of such bogus purchases @ 25 % by applying the ratio laid down in the case of Vijay Proteins 55 TTJ 76 (Ahd-Trib.) whereas the Tribunal in the case of the assessee has reduced the same to 5% of unverifiable purchases by relying on the decision of Hon’ble Gujarat High Court in the case of Mayank Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003] dated 17.11.2014 [2014] 11 (TMI) 812 (Gujarat). Thus, the addition was sustained on estimate basis only. The assessee has purchased the goods, which is undisputed fact. The Bhanwarlal Jain Group might have arranged the bills but purchase cannot be treated as non-genuine, since the same quantity of goods has been sold by the

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 7 of 10 assessee. We find that in the assessment order, the AO has estimated the profit of the assessee on the balance sheet of Vijay Proteins 55 TTJ 76 (Ahd-Trib.). However, the assessee has produced the quantitative tally, which shows that the assessee has sold the goods to other parties and issued the bills and amounts received from them through cheques. As such, it appears that the sales were actually made. As purchases were not made from the bills providers as it is and evident that the purchases were made from the third party. Since the goods were exported the same were routed through customs authorities hence, the corresponding sales are not in dispute. The bills were from accommodation entries provider were recorded in the books of accounts and quantities were entered into books The purchase amount was not verifiable and as such,5% profit rate on bogus purchases was applied by the Tribunal. From the order of the AO, we found that the AO has estimated the income on the bills of purchases of diamonds. The similar issue had come before the Hon'ble M.P. High Court in the case of CIT vs. Shivnarayan Jamnalal, (1998) 232 ITR 311( MP), wherein the Hon'ble High Court has held that the books of accounts maintained by the assessee were not properly maintained and if assessee has not concealed any material and not tried to defraud the authorities, the penalty cannot be levied, because the income was assessed on estimate basis. We found that similar case has come up before the Hon'ble Punjab and Haryana High Court in the case of Harigopal Singh vs. CIT, 258 ITR 85 (P&H), wherein it is held that it was a difference of opinion as regards the estimate of income of the assessee, it could not be said that the assessee has concealed the income so as to attract the provisions of Section 271(1)(c). In the instant case, the assessee has filed the return of income and which was reopened on the basis of

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 8 of 10 the statement of Shri Bhanwarlal M. Jain and on the basis of the statement, the assessee’s income was estimated on the ground that the assumed bogus purchases bills and filing the ratio of Vijay Proteins 55 TTJ 76 (Ahd-Trib) and Mayank Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003] dated 17.11.2014 [2014] 11 (TMI) 812 (Gujarat) and thus, it income was estimated. In order to protect the clause (c) of Section 271(1) of the Act, it is necessary that there must be concealment by the assessee of particulars of his income or if he furnishes the inaccurate particulars of income. The assessee has maintained books of accounts and he has filed the return of income and during the course of search, the AO has estimated 25% profit which was record to 5 % by the ITAT. The assessee cannot be make sales without purchases. Therefore, the addition was made and income was estimated which amounts to only estimation of income. Therefore, we are of the view that the penalty cannot be levied. We further note that the addition is reduced to Rs.78,73,393/- hence, minimum penalty leviable comes to Rs.23,62,017/-. Even if the penalty is confirmed the same is required to be reduced to Rs.23,62,017/-. Hence, same is reduced to that extent. Similarly, the Hon’ble Gujarat High Court in the case of CIT v. Subhash Trading Co. [1996] 131 CTR 121 (Guj) held that where penalty under section 271(1)(c) , Explanation is sought to be imposed on the basis of estimated income after rejecting book results, the preponderance of probability is that failure to return the assessed income was not on account of any fraud or gross or willful neglect on the part of the assessee. It has been held that onus on assessee the assessee stands discharged and the presumption under Explanation to section 271(1)(c) stands rebutted. Hence, penalty under section 271(1)(c) cannot be imposed in such a case. In the case of Dilip N.

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 9 of 10 Shroff v. JCIT [2007] 291 TTR 519 (SC)The Hon`ble Supreme Court held that finding in assessment proceedings can be automatically adopted in penalty proceedings and the authorities have to consider the matter afresh from different angles. In CIT v. Mahendra Singh Khedla [2012] 252 CTR 453 (Raj) the Hon`ble Rajasthan High Court has held that a fact or allegation based on estimation can be correct or incorrect, therefore, penalty under section 271(1)(c) was not justified. 8. Just because Appellant’s explanation was not found acceptable by the AO, it does not follow that that the Appellant was unable to substantiate his explanation by providing various evidences and judicial opinions. Explanation 1 to section 271(1)(c) of the Act does not therefore cover the case of the Assessee. Based on the above facts of the case; it can be held that the Assessee had made all the necessary disclosures on a bonafide belief, which is not agreeable to the AO, it will not automatically lead to a case for penalty under section 271(1)(c) of the IT Act, 1961. We are therefore of the considered view that the penalty is not sustainable in law in the ratio laid down by the Hon’ble Supreme Court in case of CIT v Reliance Petro-products Pvt. Ltd. [2010] 322 ITR 158 (SC); [2010] 189 Taxman 322(SC) wherein it was held that merely because the assessee has claimed the expenditure, which claim was not accepted or was not acceptable by the revenue, penalty under section 271(1) (c) of the Act cannot be attracted. The Hon'ble Supreme Court also observed that mere disallowance of claim made by the assessee, cannot amount furnishing of inaccurate particulars of income unless, the information as given in return of income was found to be incorrect or inaccurate. The other various decision of Tribunals as well as High Courts as relied by the assessee are also

Yelstar Diamond Pvt. Ltd. v. DCIT-Circle-2(1)(1)Surat/I.T.A.No. 198/SRT/2018/A.Y. 07-08 Page 10 of 10 supports its case In the light of above discussion, the penalty levied at Rs.1,32,50,920 /- is deleted. Accordingly, the sole grounds of appeal is therefore, allowed. 9. In the result, the appeal of the assessee stands allowed. 10. The order pronounced in the open Court on 11-12-2019. Sd/- Sd/- (SANDEEP GOSAIN) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat: Dated: 11th December, 2019/opm Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/ Guard file of ITAT. By order // TRUE COPY // Assistant Registrar, Surat