ASSISTANT COMMISSIONER OF INCOME TAX, NA vs. ARI CIRCLE, SURATVS.M/S RUSHABH INTERNATIONAL, NAVSARI

PER SUDHANSHU SRIVASTAVA, J.M. The three appeals are filed by the revenue and pertain to assessment years 2010-11, 2011-12 and 2012-13. The three Cross Objections (COs) are preferred by the assessee. The issue involved is identical in all the three appeals/COs and, therefore, they were heard together and are being disposed of through this common order for the sake of convenience. 2.0 Brief facts of the case are that the assessee firm is engaged in the business of purchase/import of rough/polished diamonds. The rough diamonds are processed to covert the same into cut caps. The rejected rough diamonds are sold in the open market whereas the caps diamonds are sent for manufacturing to diamond polishing factory where they are converted to cut and polished diamonds in various sizes and cuttings. For the assessment years under consideration, the returns of income were filed showing the total income as under:- i) Assessment year 2010-11 - Rs. 16,20,115/- ii) Assessment year 2011-12 - Rs. 27,03,290/- 2

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 iii) Assessment year 2012-13 - Rs. 16,70,060/- 2.1 The returns of income were initially processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") and the returned income was accepted. Subsequently, the department came into possession of information received from the DIT (Inv.), Mumbai regarding sharing of information in the case of beneficiaries of accommodation entries relating to Shri Rajendra Jain/Dharmichand Jain Group wherein the details about who had taken accommodation entries regarding bogus purchases and sales were shared. As per the information received, it was mentioned that search and seizure operation u/s 132 was carried out in Shri Rajendra Jain/Dharmichand Jain Group which was involved in providing accommodation entries through its various concerns. The assessee was alleged to have entered into bogus purchase transactions with M/s Dharam Impex and M/s Maniprabha Impex Pvt. Ltd. which were operated by Shri Rajendra Jain/Dharmichand Jain Group. As per the information with the Assessing Officer, the assessee had received accommodation entries pertaining to bogus purchases in all the three assessment years under consideration. The bogus nature of the purchases was said to be confirmed by the statement of Shri

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 Dharmichand Jain. The Assessing Officer proceeded to reopen the case u/s 147 of the Act and in response to notice u/s 148 of the Act, the assessee requested the Assessing Officer to treat the original return/s of income filed as the return/s filed in response to notice u/s 148 of the Act. The assessee also asked for copy of the reasons recorded which were provided to the assessee. 2.2 During the course of reassessment proceedings, the Assessing Officer issued show cause notice proposing addition for bogus purchase at 100% of the purchase said to be bogus. The assessee gave point wise reply to the Assessing Officer and submitted that the assessee was maintaining proper books of accounts which included stock register also. It was submitted that the books of accounts of the firm were duly audited and further there were copies of accounts and confirmations from M/s Dharam Impex and M/s Maniprabha Impex Pvt. Ltd. along with related bank accounts and bank statements which proved the assessee’s claim that the assessee had physically received the rough diamonds and also that the payments for the purchase had been made through account payee cheques which were duly deposited in the bank accounts of M/s Dharam Impex and M/s Maniprabha Impex Pvt. Ltd. The assessee also produced

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 manufacturing stock statements which showed rough diamonds purchased from the two concerns and which were given to the diamond polishing factories indicating the date on which the diamonds were sent for polishing as well as the date when polished diamonds were received back by the assessee. The assessee also submitted the details of labour charges paid for the polishing of diamonds. The assessee also submitted that there was no material on record to prove that the diamonds purchased from these two concerns were bogus purchases and that the payments made to these two concerns against the purchases were received back by the assessee in cash. The assessee also submitted that Shri Dharmichand Jain had retracted the statement and an affidavit to this effect was also furnished before the Assessing Officer. However, the Assessing Officer did not accept the contentions of the assessee and noted that although it might be true that the assessee had maintained all the records in support of purchases made, since information had been received by the Assessing Officer pursuant to a search conducted in Shri Rajendra Jain/Dharmichand Jain Group of cases, the books of the assessee could not be relied upon. The Assessing Officer proceeded to reject the books of accounts and disallowed the

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 entire purchases u/s 69C of the Act. The purchases disallowed in assessment year 2010-11 amounted to Rs. 1,71,85,026/- Similar disallowances were made in assessment year 2011-12 and 2012-13 wherein the purchases disallowed amounted to Rs. 1,79,87,850/- and Rs. 2,72,62,752/- respectively. 2.3 Aggrieved, the assessee preferred appeals before the Ld. First Appellate Authority for all the three years. The assessee challenged the initiation of proceedings u/s 147 of the Act and also challenged the rejection of books of accounts while challenging the additions on merits on account of bogus purchases. The Ld. CIT (A) upheld the reopening but agreed with the assessee’s contention that the rejection of books of accounts was not proper in view of the facts of the case. On merits, the First Appellate Authority restricted the addition to 2% of the alleged bogus purchases. Thus, for assessment year 2010-11, the Ld. CIT(A) sustained the addition to the tune of Rs. 3,43,700/-, for assessment year 2011-12 to the tune of Rs. 3,59,757/- and for assessment year 2012-13 to the tune of Rs. 5,45,255/-. 2.4 Aggrieved by the orders of the Ld. CIT (A), the department is now before this Tribunal (ITAT) challenging the

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 sustenance of disallowance only to the tune of 2%. The assessee in his cross objection/s has challenged the action of the Ld. CIT (A) in upholding the validity of reopening u/s 147 and has also challenged the action of the Ld. CIT (A) in sustaining the addition to the extent of 2% of the purchases. 3.0 The Ld. Authorised Representative (AR) submitted that both the parties i.e. M/s Dharam Impex and M/s Maniprabha Impex Pvt. Ltd. were regular assessees and that they had filed their returns of income for the assessment years under consideration before the search took place in the Rajendra Jain/Dharmichand Jain Group of cases. The Ld. AR also submitted that the purchases which the department has alleged to be bogus were duly supported by purchase invoices from the two parties, confirmation of accounts, affidavit of Shri Dharmichand Jain confirming the transaction, affidavit of retraction of statement by Shri Dharmichand Jain, stock statement, cost sheet for the manufactured diamonds lot-wise, challans for transfer of the diamonds to manufacturing department, lot-wise labour charges paid, monthly report of TDS and challans, bank statements reflecting payments made to suppliers, Form 3CD of the tax audit report showing quantitative

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 details, entries in the purchase book along with daily stock register etc. 3.1 The Ld. AR further submitted that although the Assessing Officer had rejected the books of accounts, the Ld. CIT (A) had given a finding that the books of accounts could not be rejected. It was submitted that even the Assessing Officer has observed in the assessment order that it might be true that the assessee has maintained all the records in support of the purchases. It was submitted that the Hon’ble Bombay High Court has held in the case of CIT vs. Nikunj Exim reported in 372 ITR 619 (Bom) that addition on account of bogus purchases cannot be made when the books of accounts are not rejected and merely because the suppliers did not appear before the Assessing Officer. It was also submitted that in these group of cases, the Assessing Officer did not issue any notice u/s 133(6) of the Act or summons u/s 131 to the parties from whom the assessee had purchased the goods. Reliance was placed on the judgment of the Hon’ble Gujarat High Court in the case of ACIT vs. Vardhman Exports in Tax Appeal no. 265 of 2008 wherein the Hon’ble Gujarat High Court had held that the disallowance u/s 69C of the Act could be made only where the assessee had not explained the

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 source of expenditure. It was submitted that in this case, the payments had been made through the bank accounts and, therefore, no addition u/s 69C could be made. 3.2 The Ld. AR also submitted that the department has accepted the sales of the assessee and once the sales had been accepted, no addition could be made on account of bogus purchases. It was further submitted that there is no evidence pointed out by the department that the payments made to the two parties by the assessee were recycled back to the assessee. Reliance was also placed on the order of the ITAT Delhi Bench in the case of Haryana Jewellers Pvt. Ltd. vs. ITO in ITA No. 2315/Del/2018 wherein vide order dated 10th September, 2018, it was held that the purchases made from Avi Exports, which was operated by Shri Rajendra Jain, could not be considered to be bogus in view of the voluminous documents supporting the said purchases and also in view of the affidavit of Shri Rajendra Jain retracting his statement. 3.3 The Ld. AR also submitted that the assessee had requested for the cross examination of Shri Dharmichand Jain which was denied and, therefore, in absence of the benefit of

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 cross-examination being allowed to the assessee, the entire addition was baseless. 3.4 The Ld. AR also submitted that the assessee was not pressing the ground relating to the validity of the proceedings u/s 148 of the Act as taken in the cross objections. 4.0 The Ld. Senior Departmental Representative (Sr. DR) submitted that the Ld. CIT (A) had totally disregarded the settled judicial precedent in respect of bogus purchases and had erred in restricting the addition to 2% of the bogus purchases. It was submitted that the Hon’ble High Court of Gujarat in the case of N.K. Industries Ltd. vs. DCIT reported in (2016) 72 taxmann.com 289 (Gujarat) had held that where the entire purchases shown on the basis of fictitious invoices was debited in the trading account and though the Tribunal had made addition of 25 per cent of total purchase after coming to a conclusion that there were purchases from bogus suppliers, the Tribunal should have made an addition of the total purchases. The Ld. Sr. DR also submitted that in another case of Vijay Proteins Ltd. vs. CIT reported in (2015) 58 taxmann.com 44(Gujarat), the Hon’ble Gujarat High Court had held that the Tribunal was justified in disallowing 25% of the purchase price in case of bogus purchase. It was also submitted

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 by the Ld. Sr. DR that the Assessing Officer had made a categorical comment in page 7 of the assessment order that the books of accounts and vouchers etc. could not be accepted when search is conducted and large scale bogus havala racket is unearthed. The Ld. Sr. DR submitted that the addition deleted by the Ld. CIT (A) should be restored. 5.0 We have heard the rival submissions and have also perused the material available on record. It is not in dispute that the statement of Shri Dharmichand Jain on which the department has relied while making the impugned additions has been retracted by Shri Dharmichand Jain. This fact has been duly noted by the Assessing Officer but the same has not been given credence by the Assessing Officer. It is also seen that the assessee had filed the following documents before the lower authorities to substantiate the genuineness of the purchases:- purchase invoices from the two parties, confirmation of accounts, affidavit of retraction of statement by Shri Dharmichand Jain, stock statement, cost sheet for the manufactured diamonds lot- wise, challans for transfer of the diamonds to the manufacturing department, lot-wise labour charges paid, monthly report of TDS and challans, bank statements reflecting payments made to

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 suppliers, form 3CD showing quantitative details, entries in the purchase book along with daily stock register etc. Apart from this, there is also an affidavit of Shri Dharmichand Jain confirming the transactions along with confirmation of accounts by the two parties and copy of bank statements of the two parties to substantiate the receipt of payment against the purchases. The retraction of statement by Shri Dharmichand Jain regarding the statement made after search and filed before the DCIT, Surat and the affidavit of Shri Dharmichand Jain regarding the retraction of the statement has been completely ignored by the Assessing Officer without assigning any reason. It is also noteworthy that the sales, as declared by the assessee, were accepted as genuine by the department and it is only the purchases which have been doubted by the department. However, no cogent reason has been given by the department for treating the purchases as not being genuine but accepting the sales made against the said bogus purchases as genuine. Therefore, on an overall view of the facts, it is our considered opinion that the Ld. CIT (A) was not justified in sustaining the disallowance to the tune of 2% of the alleged bogus purchases when the very basis on which the bogus purchases being alleged

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 to have been made does not stand in view of the retraction of statement by Shri Dharmichand Jain as well as the voluminous documentary evidences which were filed by the assessee before the lower authorities and which substantiate the genuineness of the purchase from M/s Dharam Impex and M/s Maniprabha Impex Pvt. Ltd. The department’s reliance on the case of Vijay Proteins Ltd. vs. CIT (supra) does not come to the aid of the department as in this case, the Tribunal had reached a conclusion that the purchases were bogus and, therefore, a disallowance of 25% of the purchase price was held to be justified. However, in the present case, it is our considered opinion that the purchases are not bogus because they are duly supported by the voluminous evidences in this regard which cannot be brushed aside simply for the reason that a search had taken place in the premises of Shri Rajendra Jain/Dharmichand Jain group of cases . Also the statement of Shri Dharmichand Jain on which the department had relied initially for the making of the impugned addition has also been retracted. Similarly, the department’s reliance in the case of N.K. Industries (supra) would not help the case of the department because in that case also, the Tribunal had reached a finding that the purchases were from

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 bogus suppliers. However, in the present case, in view of the reasons narrated in the foregoing paragraphs, the purchases are held to be genuine. We find the assessee’s case identical to a case decided by ITAT Delhi Bench in the case of Haryana Jewelers P. Ltd. vs. ITO (supra) wherein in the same search relating to the same group i.e. Rajendra Jain/Dharmichand Jain group, the purchases made by M/s Haryana Jewellers were held to be genuine and the sustenance of disallowance @ 25% by the Ld. CIT (A) was directed to be deleted. In this case also, the co- ordinate Bench of the Tribunal has given credence to the retraction of statement by Shri Rajendra Jain as well as the confirmation of the transactions by Shri Rajendra Jain in response to notice u/s 133 (6) of the Act. In the present case, it is undisputed that no notices were issued u/s 133(6) to the two parties from whom the alleged bogus purchases were made and, thus, the Assessing Officer failed to take the enquiry further. Once, the purchases are held to be genuine, no additions can be made. We note that the Ld. CIT (A) has not given any cogent reason for sustaining the disallowance to the tune of 2% except for an observation that it was a possible situation that the assessee could have purchased rough diamonds from a third

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 party in the grey market and had ended up getting bills for purchase from M/s Dharam Impex and M/s Maniprabha Impex Pvt. Ltd. Thus, this sustenance of 2% is based only on assumptions and surmises by the Ld. CIT (A) and there is nothing on record to establish the said observation of the Ld. CIT (A). Therefore, in view of the facts of the case, we are unable to concur with the findings of the lower authorities and we deem it fit to set aside the order of the Ld. CIT (A) and direct the deletion of the sustenance of 2% of the alleged bogus purchases. Therefore, for the reasons as mentioned in the foregoing paragraphs, we allow the ground in assessee’s cross objections in all the three years and direct the Assessing Officer to delete the additions as sustained by the Ld. CIT (A). 5.1 Since the assessee has submitted that the ground relating to the validity of jurisdiction u/s 148 was not being pressed, the same is dismissed as not pressed. 6.0 In the result, all three C.O.s of the assessee stand partly allowed. 7.0 In view of the fact that the C.O.s of the assessee have been partly allowed and the additions have been deleted, the

ITA 347,349,350/SRT/2018 CO 9 to 11/SRT/2018 three appeals filed by the department on the same reasoning are dismissed. 8.0 In the final result, the three appeals of the department are dismissed whereas the three COs of the assessee are partly allowed. Order pronounced in the open court on 31st July, 2019.

Sd/- Sd/- (VIKRAM SINGH YADAV) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 31st JULY, 2019 ‘GS’