ACIT CENTRAL CIRCLE 7 (1), MUMBAI vs. LLOYDS ENTERPRISES LIMITED, MUMBAI

In the appeals of the Revenue in the case of Lloyds Metals and Energy Limited for the year under consideration, the common grounds raised assail the relief granted by the learned CIT(A) and, shorn of verbiage, can be summarised but are required to be noticed in extenso, since they delineate the Revenue’s entire case. The Revenue has, in substance, contended as under:-

In the cross appeals and cross objections of the assessees, the principal issue raised is the challenge to the very validity of the assumption of jurisdiction under section 153C and, on merits, to the addition sustained by the learned CIT(A) by estimating additional income at zero point five percent of the alleged bogus sales. It is the assessees’ case that even such estimation is unwarranted on the facts and in law, in the absence of any incriminating material evidencing undisclosed income over and above what stands disclosed in the regular books. and others Lloyds Metals and Energy Limited and other 5. Turning to the factual backdrop, the brief and undisputed facts are that a search and seizure operation under section 132 was conducted on 17 April 2018 in the case of Jatia Group and other related concerns, including entities belonging to Topworth Group, Uttam Galva Group and Lloyds Group. The action extended to business as well as residential premises of the directors. Based upon material seized and statements recorded in the course of such action, and upon subsequent post search investigation, the Assessing Officer recorded satisfaction that certain documents seized related to and belonged to the present assessees, and accordingly proceedings were initiated and completed under section 153C for the years under consideration.

The assessment order in the lead case unfolds a detailed narrative based on seized tally data, statements recorded under sections 132(4) and 131, physical verification of premises, LC documentation and banking trails. The Assessing Officer painstakingly records that, in his view, a discernible pattern emerged of alleged circular trading and accommodation entries amongst group entities. At the core of the Assessing Officer’s findings is the allegation that none of the searched entities, including the assessees now before us, could demonstrate the usual trail of documents that would attend genuine trading transactions in iron and steel. According to him, there were no delivery challans, no lorry receipts, no weighment slips, no inward or outward registers, no confirmations and no supporting documents evidencing movement of goods. The seized tally books allegedly revealed and others Lloyds Metals and Energy Limited and other back to back entries of purchases and sales between entities of the group and other so called paper companies, with matching quantities and dates, which led the Assessing Officer to infer that the transactions were mere accounting entries designed to circulate funds and to avail LC facilities rather than genuine commercial trades.

The Assessing Officer further noted that, during the course of search, statements under section 132(4) were recorded from key individuals such as Shri Narsingh Vijay Dhawale, Shri Chetan Mehta and Shri Vinod Jatia, who, according to the Assessing Officer, made admissions regarding bogus sales and purchases, circular trading and LC driven accommodation entries. The Assessing Officer also referred to physical verification of premises, where he found, as per his description, absence of stock, infrastructure or machinery commensurate with the alleged large scale trading in metals. Examining the seized digital data, he observed that mirror image entries appeared in various entities’ books, and LC backed invoices were being discounted and funds circulated in a pre determined manner. On such foundation, the Assessing Officer concluded that the assessees were engaged in the business of providing accommodation entries and that the purchases and sales recorded in their books were non genuine.

It is in this background that the Assessing Officer issued a detailed show cause notice to the assessees, calling upon them to demonstrate the genuineness of purchases and sales and others Lloyds Metals and Energy Limited and other and to furnish a host of primary evidences such as purchase orders, sales orders, stock registers, transport details, lorry receipts, weighment slips, details of manufacturing, storage and warehousing arrangements, quality check documents, and the like. The assessees, while furnishing ledger accounts and certain sample invoices, were, according to the Assessing Officer, unable to furnish the underlying movement and control records which, in his view, would ordinarily be expected in the course of a real trading business of this magnitude. On this premise, the Assessing Officer invoked section 145, rejected the books of account as not reflecting a true and fair picture of the assessees’ business, financial position and performance, and proceeded to estimate additional income. At this juncture, in the original assessment order, the Assessing Officer reproduced, at great length, his detailed reasoning, the various deficiencies noticed, the statutory provisions relied upon, and the final working of the estimated addition.

Thereafter, ld. AO has incorporated various statements recorded on oath to corroborate such evidences. He has also incorporated various dates extracted from seized material and corroborative evidence and modus operandi to generate funds through LC etc., After confronting all these materials, he noted that these companies have made various transaction with such entities which reflected bogus purchases and bogus sales thereafter, he gave detailed show-cause notice in response to which assessee had submitted ledger copy with related parties however, he noted that assessee had not and others Lloyds Metals and Energy Limited and other produced any documents relating to loading, vehicles numbers, receipt of loading charges, truck bill / lorry receipts etc., Thus, he concluded that there is no genuine business. Finally, he estimated the net profit paid after observing and holding as under:-

The Assessing Officer then proceeded to make a separate disallowance in respect of indirect expenses claimed by the assessees in their profit and loss accounts. He tabulated the various heads such as salary, staff welfare, bill discount charges, rent, selling expenses, audit fees, travelling and sundry expenses, aggregating to Rs. 1,14,35,599 in the lead year, and observed that, in his opinion, these expenses were unreal and fabricated since, in his view, the underlying business itself was not genuine. He emphasised that the assessees had not satisfactorily explained these expenses or furnished supporting evidence. He then noted that the ratio of alleged bogus transactions with searched entities to the total and others Lloyds Metals and Energy Limited and other turnover worked out to about seven percent, and on that basis proceeded to disallow a corresponding portion of the indirect expenses. His relevant finding is as under:- “On the basis of documents available on records, it is established that Searched entities is engaged in the practice of booking bogus sales & bogus purchases entries from the various parties. During the year under consideration, the searched entities has claimed various Indirect Expenses. The assessee company has claimed all the above-mentioned expenses in the books of accounts. By doing this, he tried to show that the assessee company did genuine business activity Since, it is very much established that the assessee company has booked bogus sales & bogus purchases in the books, therefore, all these expenses are unreal and fabricated in nature. It can be said that, the only motive behind this is to reduce the tax burden. The details for the same is extracted from the return filings and/or financial filed by the assessee and are produced here under- Account Head Amount Salary 7,194,449 Staff welfare 380,224 Bill Discount Charge & Other 2,421,582 Rent 345,413 Other Selling Exp 2,22,90 Audit fees 14,265 Travelling/Coveyance 328,704 Sundry Expenses 750,962 Total 11,435,599 During the course of assessment proceeding, the assessee company has neither satisfactorily explained nor submitted any proof w.rt the above indirect expenses amounting to Rs11435599/- The bogus transaction of the assessee company with the searched entities is 7% (that is Rs 557001849/- divided by Rs. 7592021599/-).

On the question of rejection of books of account, the learned CIT(A) took note of the fact that although the Assessing Officer had ostensibly invoked section 145(3), he had simultaneously relied upon the very figures disclosed in the audited books and returns of income to compute the impugned additions. The returned income was not substituted, but additions were made over and above the income already reflected in the audited financial statements. The learned CIT(A) reasoned that this approach indicated that the Assessing Officer had not in truth rejected the books in entirety, but had treated them as a partially reliable basis upon which further estimation could be superimposed. In such a situation, in the view of the learned CIT(A), a formal and others Lloyds Metals and Energy Limited and other rejection of books under section 145(3) was not strictly warranted, because the Assessing Officer could have made additions on the basis of the very material in the books and seized records without invoking best judgment provisions. He therefore held that the rejection of books was not justified in the facts of the case, although he accepted the broader factual narrative relating to the nature of transactions.

Coming to the estimation of additional income, the learned CIT(A) recorded that the Assessing Officer had adopted a composite rate of five percent on the higher of alleged bogus purchases or bogus sales, purportedly to subsume commission, LC discounting gains, interest arbitrage and suppressed gross profit. The learned CIT(A) examined this methodology and found it wanting. He observed that the modus operandi, as culled out by the Assessing Officer himself, revealed that the economic benefit to the assessees arose principally at the point of onward sale and circulation of LC backed funds rather than at the stage of purchase. Therefore, in his view, it was more rational, even on the Assessing Officer’s own hypothesis, to peg the estimation, if at all, with reference to the alleged inflated sales. He further recorded that the assessees had placed on record comparative industry data highlighting that, in the line of business of wholesale trading in metals, the average gross margin ordinarily ranged between zero point one seven percent and zero point six three percent. While acknowledging that the present set of transactions was not a paradigm of ordinary genuine trading, he emphasised that any estimate of income and others Lloyds Metals and Energy Limited and other had nevertheless to be grounded in commercial reality and could not be pitched at an artificially high level divorced from industry benchmarks.

The learned CIT(A) thus concluded that the rate of five percent applied by the Assessing Officer was clearly excessive and disproportionate. Having regard to the nature of the transactions, the circulation of LC backed funds, the temporary financial float and incidental commission, and the comparative data furnished, he held that a reasonable estimate of additional income could not exceed zero point five percent of the alleged inflated sales. He, therefore, restricted the addition to zero point five percent of the alleged bogus sales and granted relief to the extent of the difference. He also noted that the assessees had furnished audited accounts, VAT returns, sample invoices and other documentation, which, in his view, militated against the complete discarding of books, even if the transactions displayed circularity. On this composite reasoning, he partly allowed the appeals of the assessees, upholding the characterisation of circular transactions but substantially reducing the quantum of addition and also granting relief in respect of disallowance of indirect expenses.

The Revenue, being aggrieved, carried the matter in appeal before us, while the assessees, not fully satisfied, also preferred appeals and cross objections, particularly assailing the residual addition at zero point five percent and questioning the validity of the proceedings under section 153C. and others Lloyds Metals and Energy Limited and other 16. Before us, the learned Departmental Representative filed elaborate written submissions and advanced oral arguments, essentially reiterating and reinforcing the findings of the Assessing Officer. He emphasised that the learned CIT(A) was not justified in observing that there were no discrepancies in the documentary evidence filed by the assessees, since, as per the assessment record, the assessees had repeatedly failed to furnish the primary evidences of movement of goods and had not produced the directors in response to summons under section 131. The learned DR invited our attention to the detailed narrative of the Assessing Officer regarding seized tally extracts, bank trails, LC documentation and the sworn statements of Shri Narsingh Dhawale, Shri Chetan Mehta and Shri Vinod Jatia, which, according to him, demonstrated that the purchases and sales were merely on paper. He also contended that the learned CIT(A) had admitted and relied upon documents produced for the first time at the appellate stage without calling for a remand report or affording the Assessing Officer an opportunity to examine them, which, in his submission, was contrary to settled appellate procedure.

On the question of estimation, the learned DR submitted that the learned CIT(A) had gravely erred in reducing the profit rate to zero point five percent. He argued that the assessees were not engaged in genuine trading, and therefore industry wide gross profit margins were inapposite. He pointed out that even the LC discounting rate itself, as per record, was in the vicinity of seven point seven percent, which supported the reasonableness of the Assessing Officer’s and others Lloyds Metals and Energy Limited and other estimate of five percent when all elements of alleged unaccounted income were taken together. He further submitted that, once it was established that the assessees’ activities contravened banking norms and involved misuse of LC facilities, the disallowance under section 37 was correctly made, since no expenditure incurred for illegal activities could be allowed. According to him, the learned CIT(A) had erred in deleting or reducing the disallowances and in substituting the Assessing Officer’s estimate with his own without adequate justification. He, therefore, urged that the assessment orders be restored in toto and the assessees’ appeals be dismissed.

The learned counsel placed before us a copy of the consolidated order of the Tribunal in Indrajit Properties Private Limited and invited our attention to paragraphs 17 to 26 thereof, wherein the Tribunal had, inter alia, analysed the nature of transactions, noted the absence of any seized material evidencing cash, commented upon the improbability of such large cash movements without any trail, adverted to the fact that no payer had been identified nor any addition made in the hands of counterparties, and held that the profit disclosed in the books in respect of alleged circular transactions already subsumed any commission income. He contended that the present cases were indistinguishable on facts and law from the said decision and that, applying the rule of consistency and judicial discipline, the additions deserved to be deleted here as well. In the original order in the group case, the Tribunal reproduced in extenso the aforesaid paragraphs 17 to 26 of the order in Indrajit Properties Private Limited, setting out the reasoning in that case. The following relevant portion is incorporated herein below.

We have given our thoughtful consideration to the rival submissions, carefully perused the assessment orders, the and others Lloyds Metals and Energy Limited and other appellate orders of the learned CIT(A), the written submissions of ld. DR, and most crucially, the coordinate bench decision in the case of Indrajit Properties Private Limited arising from the very same search. The entire controversy stands on a narrow but significant plank. The Revenue’s case is that, owing to the alleged circular nature of transactions and the misuse of LC facilities, the assessees must necessarily have earned substantial unaccounted income in the form of commission, arbitrage or other benefits, which, according to the Assessing Officer, could reasonably be estimated at five percent of the alleged bogus turnover. The assessees’ case, on the other hand, is that there is no incriminating material evidencing any such unaccounted income and that the profits already disclosed in the audited books fully capture whatever margin was actually realised.

The coordinate bench, in Indrajit Properties Private Limited, has, after an exhaustive analysis of the same search proceedings, categorically recorded that there is absolutely no seized document or statement indicating receipt of cash or other unaccounted consideration by the assessee. It has emphasised that, if indeed such substantial sums, aggregating to about Rs. 250 crores across years, had moved in cash, it would be wholly contrary to human conduct and business prudence to expect that no trail whatsoever would surface in a search of the magnitude carried out. The bench has also highlighted that no payer has been identified, nor any addition made in the hands of any alleged counterparty, thereby rendering the Revenue’s theory of substantial and others Lloyds Metals and Energy Limited and other unaccounted payouts wholly conjectural. The coordinate bench has further held that, in the context of such circular transactions, the margin disclosed in the books itself represents the commission element and that, in the absence of any positive material, no further estimate of additional income can be made merely on surmise. The relevant portion is reproduced as under:- “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 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). and others Lloyds Metals and Energy Limited and other 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 and others Lloyds Metals and Energy Limited and other the Tribunal held that there is no involvement of any cash transaction nor there is any cash trail found in the search proceedings.

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 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 and others Lloyds Metals and Energy Limited and other as discussed by us above, we allow the grounds of appeal

We may add that even on first principles of best judgment assessment, an estimate, howsoever honest, cannot be built on pure conjecture divorced from evidence. The Supreme Court in Dhakeshwari Cotton Mills Limited 26 ITR 775, while recognising that the Assessing Officer is not fettered by strict rules of evidence, has equally cautioned that he cannot make a pure guess without reference to any material. In the present cases, beyond the characterisation of transactions as circular and the absence of typical trading documentation, there is no material to show that any income beyond the disclosed margin has actually accrued. The assessees’ disclosed margin itself is within the range of, or slightly above, industry benchmarks placed before the learned CIT(A), and in the absence of contrary material, it would be inappropriate to assume a much higher undisclosed margin. The coordinate bench in Indrajit Properties Private Limited has, after referring to a series of decisions of different benches and others Lloyds Metals and Energy Limited and other of the Tribunal, held that where circular transactions are recorded in the regular books and the profit thereon is duly reflected and subjected to tax, no further addition is warranted in the absence of evidence of cash or other consideration outside the books. We see no reason to differ.

In view of the foregoing discussion and respectfully following the binding precedent of the coordinate bench in Indrajit Properties Private Limited, we hold that the additions made by the Assessing Officer by estimating additional income at five percent of alleged bogus purchases or sales, and as partly sustained by the learned CIT(A) at zero point five percent of alleged bogus sales, are unsustainable. The entire additions on this score are directed to be deleted in the cases of both the assessees for all the years under appeal. The elaborate arguments advanced by the learned Departmental Representative, being a reiteration of the line of reasoning already considered and rejected by the coordinate bench, do not persuade us to take a different view.

Before parting with the merits, we may also notice that neither the Assessing Officer nor the learned CIT(A) has pointed out any specific incriminating material to suggest that the profit margins disclosed by the assessees, even treating the transactions as circular amongst group entities, were artificially depressed or that some extra profit or commission was earned in cash. The seized documents refer to the pattern of circular purchases and sales and the use of LC facilities, but do not indicate any parallel cash component. In such circumstances, any estimation of a higher profit rate goes and others Lloyds Metals and Energy Limited and other beyond the permissible scope and ambit of assessment under section 153C. Once the substantive additions are deleted, nothing further survives in these appeals in so far as quantum is concerned.

In the light of our conclusion on merits, the challenge raised by the assessees to the validity of jurisdiction under section 153C becomes merely academic in nature. We accordingly refrain from adjudicating the jurisdictional ground, treating it as infructuous, and leave the question open.

In the result, for all the Assessment Years involved and in respect of both the assessees, the appeals filed by the Revenue stand dismissed, while the appeals and cross objections filed by the assessees are allowed on merits in the manner indicated above.