PANKAJ KANWARLAL JAIN HUF,SURAT vs. INCOME TAX OFFICER, WARD-2(3)(8), SURAT

IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH : SURAT BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI O.P. MEENA, ACCOUNTANT MEMBER ITA.No.269/SRT/2017 Assessment Year 2013-2014 The Income Tax Officer, Shri Pankaj Kanwarlal Jain HUF (Prop. Mahak Ward-2(3)(8), Aayakar Diamond) 302, Santok vs. Diamond, Somnath Bhawan, Majura Gate, Mahadev Ni Sheri, Haripura, Surat. Surat. PAN AAHHP8610E (Appellant) (Respondent)

For Assessee : Shri Rasesh Shah, C.A. For Revenue : Shri O.P. Singh, CIT-D.R.

Date of Hearing : 23.07.2019 Date of Pronouncement : 27.08.2019

ORDER PER BHAVNESH SAINI, J.M.

This appeal by Assessee has been directed against the Order of the Ld. CIT(A)-1, Surat,Dated 06.10.2017, for the A.Y. 2013-2014, challenging the addition of Rs.8,01,93,887/- for bogus purchases.

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admitted that he manage and controls the business affairs of all the concerns in which the persons who were his employees are also shown as Directors, Partners and Proprietors. List of group concerns operated and managed by Bhanwarlal Jain was obtained from him during the course of search. It is also noted that all of them have license which make them eligible for importing diamonds. Further, data collected from Customs Department had revealed that all the said group concerns have genuinely been imparting diamonds for last many years. The imported diamonds were also getting cleared by the CHAs. It prima facie gives an impression that all the group benami concerns were indeed in the business of import of diamond and its subsequent exports and local sales. However, during the course of search, it was found that they are not into genuine business. No Stock of diamond was found and no books of account were maintained at the registered offices. During the course of search, evidences were found, persons were examined on oath which established that Bhanwarlal Jain and others have been using group benami concerns to

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give accommodation entries in the nature of bogus purchase and bogus unsecured loans to various beneficiaries. The A.O. noted that the assessee has shown to have made transactions with the following concerns associated with Bhanwarlal Jain during assessment year under appeal.

2.1. A show cause notice was issued to the assessee for explanation based on the details obtained during the course of search by Investigation party at Mumbai. The assessee filed certain details in support of the explanation. The details furnished by the assessee shows that for A.Y. 2013-2014 assessee has taken accommodation entries, therefore, A.O. show caused the assessee as to why the aforesaid addition of the impugned amount of the aforesaid purchases should not be made in assessment year under appeal.

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2.2. The assessee filed written reply before A.O. which is reproduced in the assessment order in which the assessee briefly explained that assessee made genuine purchases and sales which are verifiable. The same are supported by copy of the purchase invoices, copy of the stock register reflecting the purchases and sales, copy of the bank statements of both the above parties along with copy of acknowledgment of filing of the return of income, their balance-sheets and copy of confirmation. It was submitted that these documents are sufficient to explain that assessee made genuine purchases and all the transactions were settled through account payee cheques/RTGS. The assessee further explained that A.O. relied upon evidences and material found during the course of search in the case of Bhanwarlal Jain Group of cases. The assessee asked for the copy of such statements and materials and asked to give an opportunity to cross-examine those persons, before the same are relied upon against the assessee. The assessee filed complete details with regard to genuine parties. The assessee also explained that A.O. was relying upon

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statement given by third party namely Shri Gautam Jain and Shri Rajendra Jain Group, given by DDIT, Mumbai. However, they have retracted from their statements, therefore, such statement cannot be read in evidence against the assessee. It was submitted that there is no basis to reject books of account of assessee and third party statement cannot be the basis for rejection of the books of account of the assessee. The assessee relied upon several decisions in support of the contention that such material cannot be used against the assessee without allowing cross- examination of the statements and without giving opportunity to rebut these evidences. The assessee relied upon Judgment of Hon’ble Supreme Court in the case of Kishanchand Chellaram 125 ITR 713 (SC) and Others.

2.3. The A.O. however, did not accept the explanation of assessee. The A.O. noted that assessee has filed copy of the tax invoice, purchase copy of the stock register, copy of the bank statements and books of account along with confirmative statement of account in the books of the concerned parties. The A.O. however, noted that burden was

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upon assessee to prove genuine purchases, which, assessee failed to prove because of the following facts :

(i) “The income Tax Department has conducted search & seizure action in the case of Group concerns of Shri Bhanwarlal Jain and conclusively proved that these parties are engaged in the business of providing accommodation entries only, as can be clearly seen from the discussions in the above paragraphs. The parties are issuing bills without delivering any goods and services. (ii) Evidently, the assessee had adopted a modus operandi to reduce its true profits by inflating its expenses including purchase expenses by taking accommodation entries from such parties. (iii) Thus, in the books of accounts of the assessee, the purchases to the extent made from the above said parties remained unverifiable and hence undersigned arrived at a conclusion that the purchases shown by the assessee in the books of accounts are initiated and bogus purchases are

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debited to trading account to suppress the true profits to be disclosed to the Department. (iv) The onus was upon the assessee to establish the genuineness of purchases made by the assessee.”

2.4. The A.O. in view of the above findings rejected the books of account under section 145(3) of the I.T. Act, 1961 and made the addition of Rs.8,01,93,887/- on account of bogus purchases. The said addition was challenged before the Ld. CIT(A). The written submissions of assessee is reproduced in the appellate order in which the assessee briefly reiterated the same facts and also briefly explained that no adverse finding have been given by A.O. on purchase invoices, stock register, bank statements and confirmations along with accounts of the seller parties. The A.O. did not doubt the transactions carried-out through banking channel. The A.O. did not provide material collected during the course of search and no right of cross- examination have been given to the statements of the persons Shri Bhanwarlal Jain Group whose statements have been recorded at the back of the assessee at Mumbai

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by Investigation Wing. The documents furnished by the assessee have not been doubted. The assessee, therefore, submitted that since assessee produced all the documentary evidences which have not been rejected by the A.O. and all the transactions are carried-out through banking channel, therefore, there was no justification to make the impugned addition on account of bogus purchases. The Ld. CIT(A), however, dismissed the appeal of assessee.

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Narendra Kumar Jain who have retracted from their statements given to Investigation Wing, Mumbai, therefore, no addition could be made on the basis of statements of third parties. Further no copy of the statements of any of such persons recorded by the Investigation Wing at Mumbai have been provided to assessee and no right of cross- examination have been given to assessee to cross-examine their statements. No material collected during the course of search in the case of Shri Bhanwarlal Jain have been supplied to assessee, therefore, such evidence cannot be read in evidence against the assessee. In support of the contention, he has relied upon Judgments of Hon’ble Supreme Court in the case of Kishanchand Chellaram vs. CIT 125 ITR 713 (SC) and Andaman Timber Industries vs. CCE 281 CTR 214 (SC). He has submitted that in similar cases the ITAT, Delhi Bench in the case of Bhatia Diamonds Pvt. Ltd., vs. ITO ITA.No.2822/Del./2018 vide Order Dated 24.06.2019 has deleted similar addition in similar group of cases. He has also relied upon Order of ITAT, Ahmedabad Bench in the case of ITO vs. Abhishek Ispat Pvt. Ltd., in

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ITA.No.2709/Ahd./2008 Dated 30.09.2010. He has also relied upon decision of ITAT, Surat Bench in the case of M/s. Gopinath Gems vs. ITO in ITA.No.624 to 629/SRT/2018 Dated 01.05.2019 in which on the same circumstances addition have been deleted.

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recorded by Investigation Wing at Mumbai and material collected in the entities of Shri Bhanwarlal Jain Group of cases have not been provided to assessee for rebuttal and no right of cross-examination have been given to assessee to cross-examine such statements. It is well settled Law that if any material is collected at the back of the assessee or statement is recorded, such material or statement cannot be read in evidence against the assessee unless these adverse material is supplied to assessee and right of cross- examination have been given to the assessee. We rely upon Judgments of the Hon’ble Supreme Court in the cases of Kishanchand Chellaram vs. CIT (supra) and Andaman Timber Industries vs. CCE (supra). Therefore, such material found during the course of search in the entities of Shri Bhanwarlal Jain Group of cases cannot be used in evidence against the assessee. The reliance of the authorities below of such material is of no use and basis. The other material available on record are the documentary evidences filed by assessee which are copies of the purchase invoices, stock register reflecting purchase and sales, bank statements

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highlighting payments made by assessee to these parties through banking channel, copy of bank statements of both seller parties along with their balance-sheet confirmations and copy of acknowledgment of filing of the income tax returns. The A.O. did not make any inquiry on the documentary evidences filed by assessee and did not doubt the explanations. Since the documentary evidences filed on record have not been doubted by A.O. and no adverse finding have been given and no inquiry have been made into the claim of assessee, therefore, there was no basis to treat such purchases as bogus. The ITAT, Surat Bench recently in the case of M/s. Shantai Exim Limited, Surat vs., DCIT, Circle-2(1)(2), Surat in ITA.Nos.273 & 436/SRT/2018 for the Assessment Year 2012-2013 has similarly deleted the addition on merits. The findings of the Tribunal in Para Nos. 7, 7.1 and 7.2 are reproduced as under :

“7. We have considered the rival submissions and perused the material available on record. The Hon’ble Gujarat High Court in the case of Pr. CIT vs.,

14 ITA.No.269/SRT/2017 Shri Pankaj Kanwarlal Jain HUF, Prop. Mahak Diamond, Surat. Tejua Rohitkumar Kapadia [2018] 91 taxmann.com 324 (Gujarat) held as under :

“Where purchases made by assessee-trader were duly supported by bills and payments were made by account payee cheque, seller also confirmed transaction and there was no evidence to show that amount was recycled back to assessee, Assessing Officer was not justified in treating said purchases as bogus under section 69C.”

7.1. The aforesaid Judgment has been confirmed by the Hon’ble Supreme Court reported [2018] in 94 taxmann.com 325 (SC). The ITAT, Delhi Bench, in the case of Bhatia Diamonds Pvt., Ltd., vs., ITO, Ward- 4(4), New Delhi, vide Order Dated 24.06.2019 in para- 8 following its earlier order in the case of same assessee, in which it was held in para-8 as under :

“8. We have considered the submissions of both the parties and gone through the material on record. It is an admitted fact that an identical issue have been

15 ITA.No.269/SRT/2017 Shri Pankaj Kanwarlal Jain HUF, Prop. Mahak Diamond, Surat. considered by ITAT, Delhi SMC-Bench in the case of the same assessee in preceding A.Y. 2011-2012 and similar addition have been deleted on merits and this fact is also stated by the Ld. D.R. that facts are identical in assessment year under appeal as have been considered in A.Y. 2011-2012. In the present case also, two of the parties have denied making any sales to the assessee. No entries of such sales have been recorded in the books of account. Two parties have admitted to have made sales to the assessee and filed reply under section 133(6) of the I.T. Act, 1961, supported by bill and Affidavit, on which, no adverse inference have been drawn by the A.O. All the payments of purchases have been made through banking channel which have not been doubted by the authorities below. The assessee also filed the quantitative details of opening stock, purchase goods, manufacture, sales made and closing stock at Page-25 of the PB which also supports the explanation of assessee that he has

16 ITA.No.269/SRT/2017 Shri Pankaj Kanwarlal Jain HUF, Prop. Mahak Diamond, Surat. made genuine purchases which have been sold later on. These facts clearly show that there was no basis for the authorities below to consider it to be a case of bogus purchases. It is also an admitted fact that statement of Shri Rajendra Jain was not provided to assessee nor statement was subjected to cross-examination on behalf of the assessee. He has also retracted from his earlier statement. Therefore, there was no basis to make any addition against the assessee. The issue is, therefore, covered by the Order of ITAT, Delhi SMC-Bench in the case of same assessee for the A.Y. 2011-2012 Dated 05.04.2019 (supra). In view of the above, we set aside the Orders of the authorities below and delete the entire addition. Ground Nos. 3 to 7 of the appeal of the Assessee are accordingly allowed.”

7.2. In the case of M/s. Nangalia Fabrics Pvt. Ltd., (supra), the Hon’ble Gujarat High Court confirmed the findings of the Tribunal in which the Tribunal

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accepted the submissions of the assessee that purchases are supported by bills, entries in the books of account and payments are made by cheque and quantitative details provided. The Hon’ble Gujarat High Court in the case of M.K. Brothers (supra), held that “amounts representing purchases could not be added as income as there was no evidence to conclude that the transactions were bogus.” Considering the facts of the case in the light of above decisions, it is clear that assessee made purchases from Damor family concerns which are duly supported by bills and vouchers. All the payments are made to Damor family concerns through account payee cheques. The Damor family concerns have confirmed all the transactions with the assessee before the authorities below. The Damor family concerns have filed their income tax returns reflecting the transaction with the assessee, and also have got their books of account audited by an independent auditor. The assessee undisputedly made the exports of all the finished purchase goods which includes impugned

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purchases which have not been doubted by assessing officer. Without purchases, assessee could not have made the exports. The explanation of assessee as regards exports supported by all the documentary evidences which have not been disputed. The assessee filed confirmation statement of all the purchase parties. The assessing officer in the remand proceeding also examined the purchase parties and their auditor, who have confirmed the genuineness of the transaction. There is no evidence on record to prove that amount of purchases given to Damor family have come back to the assessee. In survey, no incrementing material was found to prove that assessee made bogus purchases. Whatever evidence was found during the course of survey i.e., bills and invoices of purchases have already been recorded in the books of account. The sellers are also assessed to tax and have declared the transaction in their returns which have been accepted by the Revenue Department. The seller party have also replied to the notice under section 133(6) of the Income Tax Act.

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The assessing officer did not reject books of account of assessee under section 145 of the Income-Tax Act. If the aforesaid addition is confirmed, according to explanation of assessee, it would give gross profit rate of 41.4 % which is impossible to earn in this line of trade. The assessing officer accepted in the remand report that assessee maintained stock quantitative details, in which, no deficiency have been pointed-out. The assessing officer analysed the KYC documents of bank statements of Damor family and their bank statements and nothing adverse was found against them or against the assessee. The assessee produced complete details before the authorities below in which no deficiency have been pointed-out. The assessee need not to prove source of the source i.e., purchase made by the purchaser parties i.e., Damor concerns. The assessee also established common practice in Textile Sector in Surat for supply of goods at door step of consumer. Thus, the initial burden upon assessee to prove the genuine purchases have been discharged by

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assessee. The assessee has fully discharged its onus of proving the purchases by giving names, addresses, confirmation, PAN, bills and invoices, details of payment by account payee cheques, ITRs and Audit reports of its suppliers. Merely because further suppliers to Damor family did not respond to the notice of the assessing officer is no ground to reject the explanation of assessee. Since in the case of assessee no incriminating material was found to prove bogus purchases, therefore, the decision in the case of M/s. M.K. Proteins Limited (supra), would not apply. It may also be noted here that in A.Y. 2010-11 the assessing officer accepted similar purchases in the scrutiny assessment order under section 143(3) of the Income Tax Act on the identical facts. Similarly, seized material was also considered in that year. The Ld. CIT, Surat, however, did not agree with the assessment order of the A.O. and initiated revision proceedings under section 263 of the I.T. Act. However, the Order of the Ld. CIT under section 263 of the I.T. Act for the A.Y. 2010-2011 have been set aside

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and quashed by the ITAT, Ahmedabad Bench in the case of same assessee vide Order Dated 19.02.2016. Therefore, issue is covered on identical facts in favour of assessee by the aforesaid decision of the Tribunal. Considering the totality of the facts and circumstances of the case and above discussion, we do not find it to be a fit case where even gross profit rate of 5% be applied against the assessee as per Judgment of Hon’ble Gujarat High Court in the case of Mayank Diamonds Pvt. Ltd., (supra). In view of the above discussion, we set aside the Orders of the authorities below and delete the entire addition. Ground No.1 of the appeal of Assessee is accordingly allowed.”

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Order pronounced in the open Court.

Sd/- Sd/- (O.P. MEENA) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER Delhi, Dated 27th August, 2019 VBP/- Copy to 1. The appellant 2. The respondent 3. CIT(A) concerned 4. CIT concerned 5. D.R. ITAT Surat Bench, Surat. 6. Guard File. // BY Order //

Assistant Registrar : ITAT Delhi Benches : Delhi.