DCIT, CENTRAL CIRCLE 7(1), MUMBAI vs. LLOYDS STEELS INDUSTRIES LIMITED, MUMBAI

On facts and circumstances of the case and in law. The Ld. CIT(A) erred in holding that the expenses claimed by the assessee, including indirect expenses and depreciation, should be allowed as deductions, despite the clear evidence that the assessee was involved in bogus transactions and illegal activities.

On facts and circumstances of the case and in law. The Ld. CIT(A) failed to consider the fact that the assessee's business activities were based on false and fabricated transactions and therefore, any expenses claimed by the assessee in relation to these activities cannot be allowed as a deduction under Section 37 of the Income Tax Act, 1961.”

The CIT(A) has erred in upholding the assessment order passed u/s 153C r.w.s 143(3) of the Act which is illegal and bad in law.

The CIT(A) has erred in not holding that the assessment order passed is invalid and illegal on account of non-mention of DIN on the assessment order as per the CBDT Circular No. 19 of 2019 dated 14.08.2019.

From the search operation and the seized materials it was found by the AO that the search entities were booking bogus sales and bogus purchases without underlying goods. The AO further noticed that there was no evidence of actual movement of goods and the Directors of the search parties admitted to being dummy and acting on instructions. The AO also noticed from the documents retrieved and books of accounts seized during the course of search action it is found that bogus invoices are being booked in order to avail Letter of Credit (LC) from Banks and artificially inflate sales and purchase figures in the financials to satisfy the Bank requirements to continuous availing of LC facility. The AO recorded a finding the Searched entities are engaged in the practice of providing bogus Back-To-Back sales & purchases entries from the various paper companies. The AO further recorded that Mr. Vinod Jatia, Director of the searched entities has made arrangements with the directors and promoters of Top Worth Group of Companies as well as with Uttam Galva and Llyods Group of Companies in connection with availing Letter of Credit facilities from various banks. In this regard various sets of Companies were created and used as tabulated in the AO's order is extracted below–

The AO rejected the books of accounts of the assessee. The AO noticed that out of the total purchases Rs.2,62,59,23,045/- is bogus and that the assessee has not booked any bogus sales during the year. The AO considered higher of the purchases and sales and estimated the income @ 5% i.e. Rs.13,12,96,152/- being 5% of Rs.2,62,59,23,045/-. On further appeal the CIT(A) held that since the profits are estimated on the sales, the addition should be an estimation of the sales only. In this regard the CIT(A) has elaborated the modus operand of the impugned transactions as under – “7.2.9. On the first issue, I refer to the modus operandi of the transactions given in the assessment order.

The CIT(A) further held that since, the fund used for circular trading has been received in the hands of appellant through inflated sales, the value of such inflated sales should be adopted for purpose of estimation of income earned on the funds so received. The CIT(A) also held that the percentage of estimated income is to be at 0.5% of bogus sales based on his own decision in the case of Lloyd group. The assessee did not have any bogus sales during the year under consideration and therefore the CIT(A) deleted the addition made by the AO. The CIT(A) while doing so also held that the AO is not correct in rejecting the books of accounts u/s.145 of the Act. The revenue is in appeal against the order of the CIT(A).

The ld. DR presented a detailed written submission which is taken of record. The summary of ld. DR's arguments are as under:

The ld. AR on the other hand submitted that the impugned addition is deleted by the Co-ordinate Bench of the Tribunal in the case of other entities who are part of the same search as tabulated in the AO's order (refer table extracted hereinabove). The ld. AR submitted that the Co-ordinate Bench in the case of M/s Indrajit Properties Pvt. Ltd. (in which M/s Duli Trade & Commodities Pvt. Ltd. and M/s Insco Steel Pvt. Ltd. are merged) vs. DCIT (ITA No. 2139 & Ors/Mum/2025 dated 22.08.2025) has considered an identical issue where it is held that the addition cannot be sustained.

We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in the above case has considered a similar addition and held that “17. Now considering the above facts in detail, we proceed to decide the merits of the additions. In this regard, it was submitted that the assessee had not entered into any bogus/circular transactions as held by the AO. As per Ld. AR the assessee is engaged in the business of wholesale trading of metals and metal ores having a turnover of more than Rs. 2,000 crores. Considering the nature of the goods traded, which are heavy and bulky in size, there is typically no physical movement of such goods at the time of sale. Instead, the goods are stored at designated warehouses, and symbolic delivery is effected by way of transfer of title documents or delivery orders, which is an accepted and recognized commercial practice in the line of business. Such operational model is standard across the industry and does not, in any manner, indicate the presence of sham transactions. Thus the transactions are genuine.

Alternatively, it was also submitted that even if it is to be assumed that the assessee has entered into circular transaction, there is no evidence nor any findings arising out from the search proceedings to suggest that the assessee has earned extra cash which is in excess of amounts/profits already reflected in the books of accounts. On the contrary, the statements recorded of various individuals at the time of search indicate that the assessee has earned commission as its profits for CO 164 & Lloyds Engineering Works Ltd. providing the service of generating alleged non-genuine invoices. In this regard out attention was drawn to the statement of Shri Narsingh Vijay Dhawale, accountant of Mr. Vinod Jatia which is at paper book page No. 56 & 57, (Q. No. 13 and 14). Further, statement of Shri Riyaz Shaikh, CFO of Lloyds Metal and Energy Limited (group company of the assessee) which is at paper book page No. 71, (Q. no. 32). Thus, in this way we have noticed that the statements itself indicate that the transactions were executed in an auto mode with a pre-determined commission structured as profits. Most importantly, there is no mention of any cash consideration or compensation being paid for availing the alleged bogus invoices in any of the search statements including confessional statements.

We noticed from the record that not only there are no seized documents supporting the findings of the AO, absolutely there is no deposition made by anybody indicating any cash receipts by the assessee. It is important to mention here that in a case where there would have been such statements during the course of search alleging such cash receipts, the assessee would have an opportunity to cross examine the deponent. However, as per the facts of the present case, the assessee is in a worst situation in as much as the AO and Ld. CIT(A) has merely presumed and inferred cash consideration and thus the assessee had no such opportunity.

We further noticed that the additions made by the AO for all the six years is of approximately Rs. 250 crores. However, it is impossible and against the prudence that such substantial amounts have been paid to the assessee without leaving behind any documentary evidence such as notings, diaries or any cash trail. The complete absence of such evidence, in spite of extreme action of search and seizure, strongly suggest that no cash income was actually received by the assessee. Thus the absence of any evidence in itself is a positive evidence to suggest absence of cash transactions. On this proposition reliance is being placed upon the decision of the Coordinate Bench of the Mumbai of the Hon'ble Tribunal in the case of DCIT v. Supreme Holdings and Hospitality (India) wherein, with respect to the same search proceedings of Mr. Vinod Jatia and his companies, the Coordinate Bench of the Tribunal held that there is no involvement of any cash transaction nor there is any cash trail found in the search proceedings.

Furthermore, neither the AO nor the Ld. CIT(A) has referred to or relied upon any specific finding or tangible evidence to demonstrate that the assessee had actually received any cash. In our view, at the time of making the addition, the AO has merely proceeded on a presumptive basis by stating that the assessee might have received cash, without bringing any concrete, corroborative or even CO 164 & Lloyds Engineering Works Ltd. circumstantial evidence on record to substantiate such an assumption. Such reasoning of the revenue authorities is based purely on conjectures was also accepted by the Ld.CIT(A). In our considered view, such conjectural reasoning cannot form the basis for a sustainable addition under the Act. On this proposition, reliance is being placed up on the decision of the Hon'ble Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. v. CIT (26 ITR 775) (PBP 144), wherein, it was held that although, the AO is not restricted by the strict and technical rules of the evidence and pleadings, he cannot proceed to make an addition purely on a guess work without any reference to material or tangible evidence.

After evaluating the entire records, we also found that the payer of the alleged amount has not been identified throughout the assessment proceedings. It is strange that the AO has alleged that the receipt of excess consideration to the extent of 5% of the turnover, which aggregates to approximately Rs. 250 crores for all the years under consideration but at the same time had not identified the person who had paid such a huge amount to the assessee. The revenue has also not made any addition in the hands of any counter party in respect of such huge amount allegedly paid to the assessee. Thus in our view, if the assessee had received the cash consideration outside the books of accounts, then in that eventuality, there has to be some entity who has paid such amount and such entity ought to have been identified and taxed by the Income-tax Department.

Even otherwise, the additions sustained by the Ld. CIT(A) is excessive. As in this regard, it was submitted that as per prevailing industry practice, the profit margin earned in case of a genuine wholesale trading is between 0.17% and 0.63%. (This fact has been accepted by the Ld. CIT(A) on Pg. 86). Therefore, in our view, even assuming that the transaction entered by the assessee are circular in nature and non-genuine, then in that eventuality the findings of the Ld. CIT(A) that the assessee must have earned 0.5% commission is contrary to commercial logic. No prudent businessman would pay such a high commission to a mere entry provider, especially when the commission exceeds or equals the profit margins earned in legitimate trading activity. Hence, the commission earned by the assessee has to be much lower than the industry's average net profit margin.

Even otherwise, the profit margin disclosed by the assessee on alleged circular transactions comes to 0.27% for the year under consideration (chart showing profit margin for the all the years is enclosed in the file). Therefore, in our view, considering the thin margin in this line of business, it is held that the profits disclosed by the assessee in its audited books of account includes commission income earned, therefore, in our considered opinion, no further addition is CO 164 & Lloyds Engineering Works Ltd. warranted on this account. Reliance is being placed on the decision of the Rajkot Bench of the Hon'ble Tribunal in the case of Kamlesh Deoraj Jain v. ITO (PBP 154), Chandigarh Bench of the Hon'ble Tribunal in the case of Seo Lehenga House v. DCIT (PBP 173) and Nagpur Bench of the Hon'ble Tribunal in the case of ACIT v. Solaries Holdings Pvt Ltd. (PBP 197), wherein it has been held that in case of a circular transaction, the profit declared in the books of accounts covers the commission portion and that no further addition is warranted especially in absence of any evidence of cash payments.

Therefore, considering the totality of the facts and circumstances of the present case and also considering the decisions of the Coordinate Benches of the Tribunal as discussed by us above, we allow the grounds of appeal

We heard the parties and perused the material on record. The AO disallowed the expenses in the same proportion of the bogus purchase/sales stating that the expenses to the extent of bogus purchase/sales would also be non-genuine. From the perusal of the above findings of the CIT(A) we notice that the CIT(A) has analysed the nature of expenses and held that the expenses are incurred in regular course of business to be allowed as deduction. The AO while making the disallowance has merely estimated the disallowance in the same proportion of bogus transaction, without examining the issue on merits. We further notice that the AO did not call for any details and did not examine any documentary evidences. Accordingly in our view, the AO is not correct in disallowing the expenses on proportionate basis without verifying the expenses based on CO 164 & Lloyds Engineering Works Ltd. documents. It is an admitted fact that the assessee is engaged in both genuine business as well as inflating the sales and purchases by accounting non-genuine entries. Therefore in our view it has to be factually examined whether the entire expenses booked by the assessee are genuine expenses incurred towards genuine business activity and do not include any inflated non-genuine expenses. Accordingly we are remitting the issue of expenses disallowed u/s.37 back to the AO with a direction to call for necessary documentary evidences to allow the claim of the assessee in accordance with law. The disallowance of depreciation is also remitted back with similar directions. It is ordered accordingly.

In view of our decision with regard to revenue's appeal the C.O. of the assessee challenging the validity of notice u/s.153C has become infructuous and dismissed accordingly.

For AY 2018-19 the assessee has raised several grounds contending the additions sustained by the CIT(A) both on merits and on legal grounds. During the course of hearing the ld. AR submitted that ground no.3 contending the addition sustained at 0.5% on alleged bogus sales by the CIT(A) is the only ground pressed and the rest of the grounds may be treated as not pressed. Accordingly, we dismiss ground no.1 to 6 except ground no.3 as not pressed.

From the perusal of the facts pertaining to the addition made on estimated basis on the bogus sales by the assessee, we notice that the facts are identical to the facts of the similar issue for AY 2015-16. We have for AY 2015-16 held that no addition can be estimated only alleged bogus sales by placing reliance on the decisions of the Co-ordinate Bench. In our considered view the said decision is mutatis mutandis applicable to the impugned addition sustained by the CIT(A) for

In result, the appeal of the revenue for AY 2015-16 is partly allowed and the C.O. of the assessee for AY 2015-16 is dismissed. The appeal of the assessee for AY 2018-19 is allowed.