PRINCIPAL COMMISSIONER OF INCOME TAX vs. M/S SHAH VIRCHAND GOVANJI JEWELLERS PVT. LTD.

All these three appeals under section 260A of the Income­tax Act, 1961 (hereinafter referred to as “the Act”) arise out of a common order dated 28.09.2018   passed   by   the   Income   Tax   Appellate Tribunal,   Surat   Bench,   Surat   (hereinafter referred to as “the Tribunal”) in I.T.A. No.1, 2 &   3/SRT/2018   and   involve   common   questions   and hence,   the   same   were   taken   up   for   hearing together and are decided by this common judgment.

The   appellant   has   challenged   the   impugned order   passed   by   the   Tribunal   by   proposing   the following   questions,   stated   to   be   substantial questions of law: TAX APPEAL NO.72 OF 2019:

Whether on the facts and in circumstance of   the   case,   the   Hon’ble   ITAT   erred   in deleting   the   addition   made   on   account   of disallowance   of   gratuity   expense   of Rs.11,26,728/­ without considering that the assessee   did   not   have   approval   of Commissioner of Income tax?

Whether on the facts and in circumstance of   the   case,   the   Hon’ble   ITAT   erred   in deleting   the   addition   on   account   of disallowance   of   Gratuity   expenses   of Rs.11,26,728/­?

Whether on the facts and in circumstance of   the   case,   the   Hon’ble   ITAT   erred   in deleting   the   addition   on   account   of disallowance   of   Insurance   expense   of Rs.99,865/­?

Whether on the facts and in circumstance of   the   case,   the   Hon’ble   ITAT   erred   in deleting the addition of Rs.5,38,20,000/­ on account   of   additional   remuneration   to Directors disallowed u/s.36(1)(ii) of the I­ T Act?”

Proposed question No.1 in Tax Appeal No.72 of 2019 as well as the sole question proposed in Tax Appeal No.73 of 2019 and questions No.1 and 5 in Tax   Appeal   No.74   of   2019   are   more   or   less similarly worded except that the amount differs in each case.

1 The facts relating to the said questions are that during the course of assessment proceedings, it was noticed that the respondent Company had claimed   expenditure   of   Rs.3,28,36,400/­   for assessment   year   2011­12,   Rs.7,12,65,000/­   for assessment year 2012­13 and Rs.5,38,20,000/­ for assessment year 2014­15 on account of payment of commission   to   five   Directors/shareholders.   The Assessing   Officer   was   of   the   view   that   the payment to Directors/shareholders was hit by the provisions of section 36(1)(ii) of the Act as the said commission would have been payable to the Directors as dividend and accordingly, disallowed the same and added it to the total income of the assessee by following the decision of the Special Bench of the ITAT in case of Dalal Broacha Stock Broking   (P)   Ltd.   v.   Additional   Commissioner   of Income­tax   Range   4(1),   Mumbai,   (2011)10   ITR(T) 357 (Mumbai) (SB).

2 Being aggrieved, the assessee went in appeal before the Commissioner of Income­tax (Appeals), who dismissed the said ground of appeal.

3 The  assessee   carried   the  matter  in  further appeal   before   the   Tribunal,   which   allowed   the ground of appeal. 3.4 Mr.  Nikunt  Raval,  learned  advocate  for  the appellant, invited the attention of the court to the decision of the ITAT, Mumbai Bench in case of Dalal   Broacha   Stock   Broking   (P)   Ltd.   v. Additional Commissioner of Income­tax Range 4(1), Mumbai  (supra) to submit that the Tribunal has failed   to   consider   the   said   decision   while deciding the issue in favour of the respondent assessee. It was submitted that, therefore, the matter   requires   consideration   and   the   appeal deserves to be admitted on this question.

5 On   the   other   hand,   Mr.   J.P.   Shah,   Senior Advocate,   learned   counsel   for   the   respondent, invited the attention of the court to the order passed by the Tribunal, to point out that such payment of commission made by the assessee to the Directors   since   assessment   year   2006­07   was allowed up to assessment year 2010­11, that is, continuously   for   a   period   of   five   years, whereafter the dispute has been raised. It was submitted   that   it   is   a   settled   legal   position that the rule of consistency is required to be followed by the Income­tax authorities and that in the absence of any difference in the facts and circumstances of the case for the assessment year under   consideration,   the   Assessing   Officer   was not justified in disallowing the claim. 3.5.1 In  support  of such  submission,   the learned counsel placed reliance upon the decision of the Supreme Court in case of  Commissioner of Income­ Tax v. Excel Industries Ltd., (2013) 358 ITR 295 (SC), wherein the court observed that it appears from the record that the Revenue accepted the   order   of   the   Tribunal   in   favour   of   the assessee   and   had   not   pursued   the   matter   any further but in respect of some assessment years, the   matter   was   taken   up   in   appeal   before   the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip­ flop on the issue and it ought to have let the matter   rest   rather   than   spend   the   tax­payers’ money in pursuing litigation for the sake of it. 3.5.2 Reliance   was   also   placed   upon   an unreported decision of the Supreme Court in case of  Commissioner of Income Tax, Delhi­IV v. M/s. Dalmia Promoters & Devels (P) Ltd. rendered on 16.09.2015 in Civil Appeal No.74 of 2017, wherein the court has held that consistency does demand that there being no change in circumstances, the income for the year 1993­94 would also have to be treated as “business income” as for the previous three years. 3.5.3 It was, accordingly, urged that the Tribunal did not commit any error and hence, the said ground of appeal  does not give rise to a question   of   law,   much   less,   a   substantial question of law.

6 As can be seen from the impugned order, the Tribunal has noted that payment of commission had been   made   by   the   assessee   Company   to   its Directors   since   assessment   year   2006­07,   which was   allowed   up   to   assessment   year   2010­11, continuously for five years, and for the first time,   a   dispute   was   raised   by   the   Assessing Officer   in   assessment   year   2011­12   by   way   of initiating re­assessment proceedings and that too without   specifically   alleging   or   mentioning   or stating about the escapement of income regarding payment of commission or additional remuneration in   the   reasons   recorded   for   reopening   of   the assessment. The Tribunal has observed that it is a   well   accepted   principle   of   tax   jurisprudence that the principle of res judicata does not apply to tax cases, but rule of consistency has to be respected by the tax authorities. The Tribunal, after   referring   to   various   decisions   of   the Supreme Court in this regard, has held that the rule of consistency also supports the case of the assessee as the facts and circumstances of the present case are quite similar and identical in the present assessment year 2011­12 and it is not the case of the Assessing Officer that there was any difference in the facts and circumstances of the present assessment year as compared to the immediately preceding years.

7 At this juncture it may be apposite to refer to the decision of the Supreme Court in the case of  Radhasoami Satsang, Saomi Bagh, Agra v. CIT, (1992) 1 SCC 659, wherein has held thus:

One   of   the   contentions   which   the learned   senior   counsel   for   the   assessee­ appellant raised at the hearing was that in the   absence   of   any   change   in   the circumstances, the Revenue should have felt bound   by   the   previous   decisions   and   no attempt should have been made to reopen the question. He relied upon some authorities in support of his stand. A Full Bench of the Madras   High   Court   considered   this   question in T.M.M. Sankaralinga Nadar & Bros. v. CIT, 4 ITC 226 (Mad) (FB). After dealing with the contention   the   Full   Bench   expressed   the following opinion: “The principle to be deduced from these two   cases   is   that   where   the   question relating   to   assessment   does   not   vary with the income every year but depends on   the   nature   of   the   property   or   any other   question   on   which   the   rights   of the parties to be taxed are based, e.g., whether   a   certain   property   is   trust property   or  not,   it  has  nothing  to   do with   the   fluctuations   in   the   income; such questions if decided by a Court on a   reference   made   to   it   would   be   res judicata   in   that   the   same   question cannot be subsequently agitated.”

One of the decisions referred to by the Full   Bench   was   the   case   of   Hoystead   v. Commissioner of Taxation, 1926 AC 155 (PC). Speaking   for   the   Judicial   Committee,   Lord Shaw stated: “Parties   are   not   permitted   to   begin fresh   litigation   because   of   new   views they   may   entertain   of   the   law   of   the case, or new versions which they present as   to   what   should   be   a   proper apprehension by the court of the legal

This Court in Parashuram Pottery Works Co. Ltd. v. ITO, (1977) 106 ITR 1, stated: “At the same time, we have to bear in mind   that   the   policy   of   law   is   that there must be a point of finality in all legal   proceedings,   that   stale   issues should   not   be   reactivated   beyond   a particular stage and that lapse of time must   induce  repose   in   and   set   at   rest judicial

We are aware of the fact that strictly speaking   res   judicata   does   not   apply   to income   tax   proceedings.   Again, each assessment   year   being   a   unit,   what   is decided   in   one   year   may   not   apply   in   the following   year   but   where   a   fundamental aspect   permeating   through   the   different assessment   years   has   been   found   as   a   fact one   way   or   the   other   and   parties   have allowed that position to be sustained by not challenging   the   order,   it   would   not   be   at all appropriate to allow the position to be changed

On   these   reasonings   in   the   absence   of any   material   change   justifying   the   Revenue to take a different view of the matter – and if there was no change it was in support of the assessee – we do not think the question should   have   been   reopened   and   contrary   to what had been decided by the Commissioner of Income   Tax   in   the   earlier   proceedings,   a different   and   contradictory   stand   should have been taken. We are, therefore, of the view   that   these   appeals   should   be   allowed and the question should be answered in the affirmative,   namely,   that   the   Tribunal   was justified in holding that the income derived by   the   Radhasoami   Satsang   was   entitled   to exemption   under   Sections   11   and   12   of   the Income Tax Act of 1961.” [Emphasis supplied]

8 Thus,   as   held   by   the   Supreme   Court   in the   above   decision,   where   a   fundamental   aspect permeating through the different assessment years has been found as a fact one way or the other and the   parties   have   allowed   that   position   to   be sustained by not challenging the order, it would not be at all appropriate to allow the position to   be   changed   in   a   subsequent   year.   In   the present case, the payment of commission made by the assessee Company to its Directors has been allowed   for   five   continuous   assessment   years. Nothing   has   been   pointed   out   to   show   that   the position   has   changed   in   the   year   under consideration.   Under   the   circumstances,   the Tribunal   was   wholly   justified   in   allowing   the ground   of   appeal.   The   said   ground   of   appeal, therefore, does not give rise to any question of law, much less, a substantial question of law, warranting interference.

Insofar as question No.2 in Tax Appeal No.72 of   2019   which   relates   to   addition   of   bogus purchases to 3% is concerned, it appears that the assessee Company is engaged in the trading and manufacture of silver, gold, diamonds, stones and its jewellery. The assessee filed its return of income for assessment year 2011­12 on 29.09.2011 declaring total income of Rs.7,70,89,860/­. The return   of   income   was   processed   under   section 143(1) of the Act without any alteration to the total   income   of   the   assessee.   Thereafter,   the case was reopened under section 147 of the Act on the basis of information from the Investigation Wing,   Mumbai,   wherein   two   purchases   of Rs.40,08,960/­   from   M/s.   A2   Jewels   and Rs.1,50,20,000/­ from M/s. Amit Diamonds, made by the assessee, during the assessment year 2011­12, were   held   to   be   bogus   purchases   from   the Bhanvarlal   Jain   Group   of   hawala   concerns.   The Assessing Officer framed assessment under section 143(3) read with section 147 of the Act, inter alia   making   an   addition   of   Rs.1,90,28,960/­   on account of bogus purchases.

1 The   assessee   carried   the   matter   in   appeal before the Commissioner of Income Tax (Appeals), who   observed   that   in   the   reassessment proceedings,   the   assessee   had   explained   the purchases of polished diamonds on the basis of its   audited   books   of   account   along   with quantitative record of items purchased and other evidences of material receipt register, etc. On behalf of the assessee it was contended that the payments for purchases were made through account payee cheques, the goods were reflected in the stock   statement,   and,   therefore,   the   purchases should not be disallowed merely on the statement of   a   third   party.   The   assessee   had   also   shown from   its   books   of   account   that   the   sale   of diamond jewellery shown in the Profit and Loss account   could   not   have   been   made   without   the purchases   of   the   polished   diamonds.   The Commissioner (Appeals) observed that this led to a situation where the suppliers, that is, M/s. A2 Jewels and M/s. Amit Diamonds are proved to be bogus/paper   entities   providing   accommodation entries, whereas the evidence indicates purchase of polished diamonds from the said two parties and the use of the same in the making as well as sale   of   diamond   jewellery.   The   Commissioner (Appeals) was of the view that the finding of the search   of   the   Investigating   Wing,   Mumbai   as regards   entry   provider   is   also   an   undeniable fact.   He   further   found   that   the   same   could   be explained from the statement of Bhanvarlal Jain and his associates under section 132(4) of the Act, wherein the whole modus operandi of diamond trade   was   explained.   It   was   stated   that   the group’s concerns import diamonds on behalf of the cash/grey   market   operator,   who   take   away   the physical   stock   of   imported   diamond   and   the concerns   of   Bhanvarlal   Jain   and   others   end   up having   fictitious   stock.   The   cash/grey   market operators   provide   funds   through   cheque   to   the entry operator for payment to foreign supplier of rough diamonds. Thus, any purchaser of polished diamonds from such grey market operators ends up getting   bills   of   purchases   from   the   Hawala concerns.   In   such   a   case,   the   only   possible situation   can   be   that   the   assessee   purchased polished   diamonds   from   a   third   party   in   the cash/grey market and ended up getting bills for purchases   from   the   concerns   of   Bhanvarlal   Jain Group.   The   Commissioner   (Appeals)   has   further observed   that   the   assessee   had   shown   from   its audited books of account, stock statement as well as material receipt register that it could not have   sold   the   equivalent   quantum   of   diamond jewellery without these two purchases. According to him, the assessee's books of accounts could not be rejected merely on a third party statement under   section   132(4)   of   the   Act,   which   has evidentiary   value   for   the   party   making   the statement   and   not   any   other   person.   He   was, therefore, of the view that there could be a case of   over­invoicing   of   purchases   only   to   some extent. The Commissioner (Appeals) observed that in the case of M/s. Sahajanand Exports and other cases, a disallowance of 2% to 3% was considered as reasonable to account for any suppression of profits   by   way   of   purchase   bills   from   Hawala concerns, and accordingly, found it reasonable to disallow   3%   of   the   total   purchases   of Rs.1,90,28,960/­ from bogus Hawala concerns and reduced   the   addition   from   Rs.1,90,28,960/­   to Rs.5,70,869/­ only.

2 The   Revenue   carried   the   matter   in   appeal before the Tribunal, which confirmed the view of the   Commissioner   (Appeals)   and   dismissed   the ground of appeal.

3 Mr.  Nikunt  Raval,  learned  advocate  for  the appellant,   submitted   that   the   impugned   order passed by the Tribunal, confirming the order of the   Commissioner   (Appeals),   whereby   he   has reduced   the   extent   of   disallowance   of   bogus purchases to 3% of the total bogus purchases, is against   the   decision   of   this   court   in   case   of N.K. Proteins Limited v. Deputy Commissioner of Income­tax, (2017)2 92 CTR 354. It was submitted that the reasoning applied by the High Court in the   above   case   is   squarely   applicable   to   the present case inasmuch as the purchases claimed to have been made by the assessee were held to be bogus   purchases   by   the   Assessing   Officer   and that, once the purchases are held to be bogus, then   disallowing   a   part   of   such   purchases   is against the principles of sections 68 and 69C of the   Act.   It   was   submitted   that   therefore,   the Tribunal   was   not   justified   in   confirming   the order passed by the Commissioner of Income Tax (Appeals) restricting the bogus purchases to 3% only. It was, accordingly, urged that the matter requires consideration.

4 On   the   other   hand,   Mr.   J.P.   Shah,   learned counsel for the respondent, submitted that after duly   considering   the   facts   of   the   case,   the Tribunal has restricted the addition to 3%. It was submitted that the percentage of addition is a matter of estimation, which does not give rise to   any   question   of   law.   It   was   also   submitted that   it   is   an   admitted   position   that   the respondent   assessee   has   shown   sale   of   diamond jewellery   manufactured   from   diamonds   stated   to have been purchased from M/s. Amit Diamonds and M/s. A2 Jewels. The Assessing Officer has found that M/s. A2 Jewels and M/s. Amit Diamonds were bogus entities. However, as rightly held by the Commissioner (Appeals), though the two entities were   found   to   be   bogus,   the   assessee   had,   in fact, purchased diamonds which were used for the purpose   of   making   diamond   jewellery   and therefore, the sale of such diamond jewellery has been accepted by the Assessing Officer. Under the circumstances,   the   Commissioner   (Appeals)   was justified in not disallowing the entire purchase and in restricting the same to 3% of the amount of   purchases   and   the   Tribunal   was   wholly justified in confirming the same. 4.5 This   court   in  N.K.   Industries   v.   Deputy Commissioner   of   Income­tax  (supra)   had   relied upon its earlier decision in the case of  Vijay Proteins   Ltd.   v.   Commissioner   of   Income   Tax, [2015]   58   taxmann.com   44   (Gujarat),   wherein   it has been held thus: “It is a matter of fact that the goods were not received from the parties from whom it is   shown   to   have   been   purchased,   but   such material   was   received   from   a   different source   which   is   exclusively   within   the knowledge   of   the   assessee   and   none   else. Therefore,  it is evident that the assessee had inflated the expenditure in question by showing   higher   amount   of   purchase   price through fictitious invoices in the names of 33 bogus suppliers. Considering the overall factual scenario, the Tribunal was justified in disallowing 25% of the purchase price.”

6 This court in  Sanjay Oilcake Industries v. Commissioner of Income­tax, 2009(316) ITR 274, on which   reliance   has   been   placed   in   the   case   of Vijay Proteins Ltd. v. Commissioner of Income­tax (supra),   has   recorded   the   findings   of   the Tribunal, wherein the Tribunal had concurred with the   action   of   the   Commissioner   of   Income­tax (Appeals) of confirming 25% of the amount claimed as fair and reasonable. The Tribunal found that the parties from whom the purchases were shown to have   been   made   were   perhaps   a   creation   of   the assessee   itself   for   the   purpose   of   banking purchases into the books of account because the purchases with bills were not feasible. Thus, the said   parties   become   conduit   pipes   between   the assessee firm and the sellers of raw materials. Under   the   circumstances,   it   was   not   impossible for   the   assessee   to   inflate   the   prices   of   raw materials. The Tribunal, accordingly, held that an addition of 25% for extra price paid by the assessee, over and above the prevalent price, is fair   and   reasonable   and   accordingly,   confirmed the   findings   of   the   Commissioner   of   Income­tax (Appeals).

7 This court concurred with the findings of the Commissioner (Appeals) and the Tribunal and held that   the   estimate   made   by   the   two   appellate authorities did not warrant interference as, even otherwise, whether the estimate should be at a particular sum or at a different sum, can never be an issue of law.

8 This   court   is   in   agreement   with   the concurrent findings recorded by the Tribunal and the   Commissioner   (Appeals),   namely,   that   the assessee had shown purchases as well as sales. If the   sales   were   accepted,   the   Assessing   Officer could not have rejected the purchases. Once the purchases   are   accepted,   the   difference   between the inflated and actual price of purchases would be required to be disallowed and as to what would be the extent of difference would be a matter of estimate.

9 In   the   present   case,   the   Commissioner (Appeals) has estimated this difference at 3% of the bogus purchases and the Tribunal has accepted the   same.   As   has   been   held   by   this   court   in Sanjay   Oilcake   Industries   v.   Commissioner   of Income­tax (supra), whether an estimate should be at a particular sum or at a different  sum can never   be   an   issue   of   law.   Under   the circumstances,   this   ground   of   appeal   also   does not give rise to a question of law, much less, a substantial question of law.

Insofar as questions No.2 and 3 of Tax Appeal No.74 of 2019 are concerned, the learned counsel for the Revenue has fairly invited the attention of the court to the decision of the Supreme Court in case of Commissioner of Income­tax v. Textool Co.   Ltd.,   [2013]   35   taxmann.com   639   (SC),  to submit   that   the   controversy   in   issue   stands concluded   by   the   said   decision   of   the   Supreme Court. Under the circumstances, these questions also do not give rise to any substantial question of law warranting interference.

Insofar   as   proposed   question   No.4   in   Tax Appeal No.74 of 2019, which relates to addition on account of disallowance of insurance expense of Rs.99,865/­ is concerned, before the Tribunal, the   assessee   had   challenged   the   disallowance pertaining   to   insurance   expense   incurred   on purchase of new motor car during the year. The Assessing   Officer   was   of   the   view   that   any expenditure   incurred   towards   purchase   of   new plant, machinery or furniture during the current year,   inclusive   of   insurance   premium,   was   of capital

In   the   light   of   the   above   discussion,   it cannot be said that the impugned order passed by the   Tribunal   suffers   from   any   illegality   or infirmity so as to give rise to any question of law,   much   less,   a   substantial   question   of   law warranting interference. The appeals, therefore, fail and are, accordingly, dismissed. (HARSHA DEVANI, J) (VIRESHKUMAR B. MAYANI, J) PRAVIN KARUNAN