M/S. VRAJ DIAMOND,,SURAT vs. THE DY, CIT, CIRCLE-2(3),, SURAT

आदेश /ORDER PER O. P. MEENA, AM 1. This appeal by the Assessee is directed against the order of learned Commissioner of Income tax (Appeals)-1, Surat (in short “the CIT (A)”) dated 26.02.2016pertaining to Assessment Year 2007-08, which in turn has arisen from the assessment order passed under section 143 (3) read with section 147 dtd. 18.03.2015 of Income Tax Act,1961 (in short ‘the Act’) by the Deputy Commissioner of Income-Tax, Circle -2(3), Surat (in short “the AO”). 2. Ground No.1, 3 and 4 are not pressed before us by the learned counsel for the assessee, ex-consequenti, these are treated as dismissed as not pressed. 3. Ground No. 2 states that the ld. CIT (A) has erred in confirming the action of the AO in making addition of Rs. 39,55,968 on account of total purchase transaction from M/s. Mayank Impex as alleged bogus purchases.

Page 2 of 5 Vraj Diamond v. DCIT-2(3) Surat I.T.A. No.1008/AHD/2016/A.Y.2007-08 4. Succinct facts are that a search and seizure action carried out in the case of Shri Rajendra Jain Group, wherein it was noticed that the assessee has taken an accommodation entries of Rs. 39,55,968 for Mayank Impex, hence, assessment was reopened u/s.147 of the Act. The assessee has asked the assessee to furnish copies of bills in respect of transaction entered in to with Mayank Impex and produce the said party for verification. However, the assessee has failed to produce the party of which proprietor was Shri Sanjay Chaudhary a, close related party of Shri Rajendra Jain Group. Therefore, the AO has added the entire amount of purchases made by the assessee. 5. Being aggrieved, the assessee filed an appeal before the ld. CIT (A).Who has also confirmed the said addition made by the AO. 6. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that the CIT(A) was not justified in treating the entire purchases as bogus and upholding the addition so made by the AO. The assessee has filed all detail and confirmation from M/s. Mayank Impex and their affidavit in this regard. The AO has relied on the statement of third party but no cross examination was allowed hence, addition made is not justified in the light of decision of Hon`ble Supreme Court in the case of Andaman Timber Industries v. Commissioner of Central Excise Kolkata-II [2015] 13 STD 805 (SC) (Civil Appeal No. 4228 of 2006) dated September, 2, 2015. (SC). Further in many cases the CIT (A) has restricted the addition to 5% on the basis of decision of Mayank Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003] dated 17.11.2014 [2014] 11 (TMI) 812 (Gujarat). It was submitted that the AO has not doubted the genuine of sales hence, genuine of purchases cannot be doubted. It

Page 3 of 5 Vraj Diamond v. DCIT-2(3) Surat I.T.A. No.1008/AHD/2016/A.Y.2007-08 was submitted that in such case the 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) has held that entire amount of purchases cannot be added when the sales are not doubted. It was further submitted that Hon’ble Gujarat High Court has considered the diamond net profit rate ranging between 2% to 5 % as reasonable in diamond industry. Therefore, the AO was not justified in making addition @100% of purchases, when he himself has not doubted the genuineness of the purchase transaction. 7. The ld. D.R. submitted that the assessee has made bogus purchases from M/s. Mayank Impex during the year and therefore, the AO was right in making addition of entire purchases to total income. 8. We have heard the rival submissions, considered the facts and perused the material on record and relevant case laws. We find that the assessee has produce all the relevant purchases and sales bills and the stock tally register before the lower authorities. The assessee has shown the payments of alleged purchases by account payee cheques. The assessee has also filed affidavit for Shri Sanjay Chaudhary proprietor of M/s. Mayank Impex. Therefore, it would be unfair and unreasonable to treat the entire amount of purchases as income of the assessee. Because, when the purchases of the assessee have not been doubted by the Assessing Officer. Then the entire amount of bogus purchases of the assessee cannot be considered as income of the assessee. We find that the assessee had maintained the quantity stock of diamonds purchases and sold, which has not been disputed by the AO, thus the entire amount of purchases cannot be added to the total income. In our humble understanding of the provisions of the Act and nature of

Page 4 of 5 Vraj Diamond v. DCIT-2(3) Surat I.T.A. No.1008/AHD/2016/A.Y.2007-08 commercial transactions, the element of profit of alleged purchases may be made to cover up the possible leakages of Revenue and same also serve the purpose of entire exercise undertaken by the tax authorities. Therefore, we are inclined to hold that the action of the AO in making disallowance of entire alleged bogus purchases from the parties by treating them as bogus is not correct and justified and sustainable in law. We further notice that the Hon`ble Jurisdictional High Court in the case of Mayank Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003] dated 17.11.2014 wherein the Hon`ble High Court has observed as under: “5. We have heard learned advocates for both sides and perused the orders passed by the CIT as well as the Tribunal. As a result of hearing and perusal of records, it is borne out of that the average profit which has been considered for this industry is around 3 to 7%. The Tribunal in the instant case has directed addition at the rate 12.5%, which is in our opinion, is on higher side. Learned advocate for the appellant has fairly conceded that excess 7% is on higher side and that at the most 3% may be applied. In that view of the matter, going by the peculiar facts of the present case, we are of the view that ends of justice will be met by taking mean of maxim and minimum of the profit rate which comes to 5%. Therefore, we think it fit to direct the Assessing Officer to apply 5% G.P. rate as the rate of 12.5% is drastically higher and 1.03% is drastically lower. Gross profit rate of 5% is the average rate of the industry and we think it fit to make addition on account of 5% gross profit rate. The addition be made accordingly. We therefore, answer the question raised in the negative i.e. against the revenue and in favour of the assessee.” 9. We further observe that the assessee has failed to substantiate the purchases by not producing the parties in question and admission of the party that they have indulged in providing bogus accommodation entries. The Co-ordinate Bench of the Tribunals in he case of Deluxe Diamonds v. ITO [I.T.A.No. 1396/Ahd/2017 dated 11.04.2018- Surat-Trib] , DCIT v. J. B. Brothers [ I.T.A.No. 3661/Ahd/2015 dated of Surat bench, ITAT] and DCIT v. Opulent Jewels Pvt. Ltd. [I.T.A.No. 1855/Ahd/2010/SRT] wherein the Tribunal has restricted the estimation of 5% of bogus phases and not of entire purchases disclosed in books of accounts

Page 5 of 5 Vraj Diamond v. DCIT-2(3) Surat I.T.A. No.1008/AHD/2016/A.Y.2007-08 by the assessee by following 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). Therefore, in the light of above facts and circumstances and considering the net profit of 5% as the average rate of the industry as observed by the Hon`ble Jurisdictional 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); we deem it fit to restrict the addition to 5% of total bogus purchases of Rs.39,55,968. The AO will work out the disallowance accordingly. Accordingly, Ground No. 2 of appeal is partly allowed. 10. In the result, the appeal of the Assessee is partly allowed. 11. The order pronounced in the open court on 17.07.2019

Sd/- Sd/- (H. S. SIDHU) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat: Dated: 17th July, 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