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Facts
The assessee, engaged in wholesale trading of metals and ores, filed its return of income. The Assessing Officer (AO) rejected the books of account and made additions based on alleged circular transactions and bogus purchases/sales, estimating income at 5% of non-genuine sales. The CIT(A) partly allowed the appeal, estimating additional income at 0.5% of sales.
Held
The Tribunal held that the transactions, while circular in nature for increasing turnover and availing bank credit, did not appear to be for suppressing income. It found no evidence of cash consideration or unaccounted income outside the books. The Tribunal disagreed with the AO's rate of estimation and held that the profit declared in audited books already covered the commission portion.
Key Issues
Whether the additions made by the AO and confirmed by the CIT(A) on account of alleged bogus and circular transactions are sustainable, and if so, on what basis and at what rate.
Sections Cited
143(3), 145, 153C
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Income Tax Appellate Tribunal, ‘C’ BENCH MUMBAI
Before: SHRI SANDEEP GOSAIN & PRABHASH SHANKAR
आदेश / O R D E R
PER BENCH:
The present appeals have been filed by the assessee as well as revenue challenging the different impugned orders passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi (NFAC) for the A.Ys 2013-14 to 2019-20.
Since all the issues involved in these four appeals are common and identical, therefore, they have been clubbed, heard together and a consolidated order is being passed for the sake of convenience and brevity. We shall take A.Y 2013-14 as lead case and facts narrated therein.
ITA No. 2139/Mum/2025, A.Y 2013-14
As per the facts of the present case The assessee is a private limited company engaged in the business of wholesale trading of metals and metal ores. For the year under consideration, the assessee had filed its return of income on 19.09.2013 declaring total income of Rs. 4,64,67,120/-. Thereafter, the case of the assessee was selected for scrutiny and an order was passed u/s. 143(3) of the Act thereby estimating and determining the total income of the assessee at Rs. 4,64,67,120/- by proportionately disallowing other expenditure as well as depreciation claimed and calculated such disallowance at Rs. 5,65,304/- and 1,844/- respectively.
3 3. Aggrieved by the said order, the assessee filed appeal. After considering the overall facts of the case, the Ld. CIT(A) while partly allowing the appeal, estimated the additional income at 0.5% of the sales.
Aggrieved by the order of Ld. CIT(A), both the assessee as well as revenue filed their respective appeals. Since we are first of all dealing with the appeal filed by the assessee, which has been filed on the grounds mentioned herein below:
1. 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.
2. The CIT(A) has erred in not holding that the assessment order passed u/s 153C of the Act as invalid since preconditions for invoking S. 153C of the Act are not satisfied. The CIT(A) ought to have appreciated that no incriminating material pertaining to the Appellant has been found during the course of search.
The CIT(A) has erred in confirming addition at Rs. 4,06,79,455/-being estimated 0.5 per cent of the total alleged bogus sales by the assessee. 4. The CIT(A) has also erred in not holding that the transactions carried out by the assessee with its group company 'INSCO Steels Private Limited' are genuine and further, no incriminating material has been found during the course of search. 5. The CIT(A) has erred in not holding that the order passed by the AO was in violation of principles of Natural Justice. The appellant craves leave to add to, amend, alter or delete all or any of the foregoing grounds of appeal
5. All the grounds raised by the assessee are interrelated and interconnected and relates to challenging the order of Ld. CIT(A) in upholding the assessment order passed u/s 153C r.w.s 143(3) and confirming the additions being
4 estimated @ 0.5% of the total alleged bogus sales. Therefore we have decided to adjudicate the same through the present consolidated order.
We have heard the counsels for both the parties, perused the material placed on record, judgments cited before us and also the orders passed by the revenue authorities. Although the assessee has also raised arguments on legal propositions such as non mentioning of DIN, Satisfaction note has not been recorded within the prescribed time, No incriminating material found during the course of search qua additions made by the AO.
But we have decided to first of all consider and decide the merits of the additions and for doing so, we feel it is necessary to discuss and evaluate in detail the facts of the present case, thus after considering the same from the records, we noticed that a search and seizure operation was carried out in the case of one Mr. Vinod Jatia and his group companies on 17.04.2018. Consequently, a notice u/s. 153C of the Act was issued to the assessee on 27.01.2022, after recording satisfaction u/s. 153C of the Act by the AO of the searched person and the AO of the assessee.
Since the AO has referred to the search action at the premises of Vinod Jatia, findings of the search team, seized material recovered during the search action and the statements of various persons recorded during the course of the search. Therefore based on these evidence, the AO
5 observed that the companies of Vinod Jatia have entered into circular transactions with companies of Uttam Galva, Topworth and the assessee (Lloyds), so that the sales bill raised by these entities upon Vinod Jatia group could be discounted with the bank and thereby money could be obtained from the bank. Accordingly, one of the group entities of said Uttam Galva would raise a paper sales bill in the name of Vinod Jatia group company without any movement of the goods. Such bill would be discounted to avail the funds from the bank. Thus in order to balance the books of account and stock records, Vinod Jatia company would raise the paper sales bill on assessee- company who in turn will raise the paper sales bill in the name of Uttam Galva company. Each of these sales invoices are merely paper invoice and there is no movement of the goods. Thus, in this way the assessee will book purchases with the help of the paper invoice and in the same manner book a sale with the help of the paper invoice. Consequently, the assessee would disclose the difference between purchase and sale price as its income.
The AO further observed that the assessee has a total purchase turnover of Rs. 2186,50,53,853/ and total sales turnover of Rs. 2191,26,62,758/-. Out of this, sales of Rs. 813,58,91,001/- are bogus and purchase of Rs. 355,40,89,669/- are bogus. The AO has further observed that the assessee has booked accommodation purchase and accommodation sales in the books of account and, hence, the books of account are not reliable. Therefore the AO
6 while invoking Sec. 145 of the Act, rejected the books of accounts.
Therefore based on the search proceedings conducted by the Investigation Wing and the statements of various parties recorded during the course of the search, the AO concluded that the assessee had earned non-genuine profit. The AO further observed that although the assessee had merely provided accommodation entries in the form of bogus invoices, it may have also earned some unaccounted income in the form of cash for rendering such services. Thus on this assumption, the AO estimated additional income by applying a rate of 5%. For the purpose of applying the G.P. rate, the AO has taken the higher of alleged circular purchase and alleged circular sales. Accordingly, worked out G.P @ 5% on the non-genuine sales turnover of Rs. 813,58,91,001/- and made an addition of Rs. 40,67,94,548/-. The relevant portion of the order of assessment is reproduced herein below:
"The searched entities of Vinod Jatia Group of companies used their goodwill and mortgaged their assets & properties with banks to obtain LC facility from the banks. This funding was passed on to Uttam/Topworth/Lloyds group entities. By providing this LC facility to his creditors who in turn passed on this funding to their group companies, the searched entities of Vinod Jatia Group took burden of lot of risk on themselves. They did not received any guarantee or LC from the parties to whom goods were allegedly sold. Therefore the searched entities of Vinod Jatia Group would have earned additional commission for providing additional facility of LC to various parties. In the case of searched entities, where documents are on record regarding mortgaging properties for LC facility, the income is estimated at rate of 7% of turnover.
7 However, the assessee company was not bearing risks of mortgaging properties, hence income is estimated at lower rate in the case of the assessee company. Considering the market practices, facts in other similar cases and overall facts & circumstances of the case, the income on such turnoveris estimated at 5%. This estimated 5% income includes commission on accommodation entries of purchases and sales made/passed on to further the entries obtained from searched entities; and other unaccounted incomes like Bill Discounting income, interest received, Discounts, income on account of suppression of GP etc. Further no adjustment on account of existing gross profit is being given to the assessee company since the assessee company has suppressed GP to very miniscule and meagre level and no specific GP information as per the books of the assessee on account of transactions in question is available. Therefore, the estimated additional income in the case of the assessee company is 5% of Rs. 8135890969- which comes to Rs. 406794548/-. Therefore, Rs.406794548/-is added to the total income of the assessee company".
Apart from this, the AO has also observed that the assessee has also incurred other expenditure as well as depreciation on the assets. According to the AO, since part of the total turnover of the assessee is not genuine, therefore proportionate other expenditure as well as depreciation needs to be disallowed. Thus calculated such disallowance at Rs. 5,65,304/- and Rs. 1,844/- respectively.
During the appellate proceedings, on the legal issues , the Ld. CIT(A) came to the conclusion that the Department has unearthed incriminating material pertaining to the assessee during the course of the search. Therefore, he held that the invocation of the provisions u/s. 153C of the Act is justified.
8 13. So far as the rejection of the books of account is concerned, the Ld. CIT(A) has held that since all the transactions entered into by the assessee have been duly reflected in the books of account, the same cannot be rejected. According to the CIT(A) the returned income of the assessee has not been disturbed by the AO and the additions are made over and above the returned income. Therefore, the CIT(A) did not approve the action of the AO in invoking the provision of section 145 of the Act.
However on merits of the additions, the Ld. CIT(A) framed two issues to be answered for the purpose of adjudication of the appeal. The relevant discussion is being reproduced herein below:
"7.2.8. I have considered the discussion made in the assessment order and the submission of the appellant. In the context of the allegations against the appellant, usually, it is seen that the bogus transactions are booked by the assesses to suppress the taxable income. For the suppression of income, the preferred modus is to inflate the purchases or expenses by taking accommodation entries. In the present case, the allegation is that the appellant has booked back-to-back bogus sales and bogus purchases. Considering that both sales and purchases have been inflated, it doesn't seem that the transactions were carried out forsuppression of income. The issues to be examined are 1. What is the nature of transactions entered by the appellant? 2. Whether there is any other income earned by the appellant from these back to-back transactions?"
After evaluating the records, the Ld. CIT(A) answered the first question by holding that the assessee has entered into circular transaction of bogus purchase and sales. Further, it was observed that the assessee had duly
9 reflected the profits earned in the books of accounts from such circular transactions. The relevant portion is reproduced herein below for:
"7.2.11 It is seen that a detailed analysis of the pattern of transaction of sale and purchases has been made in the assessment order before arriving at the conclusion that they are bogus transactions. Absence of supporting documents for transport of goods, marketing, purchase orders inward and outward register etc., further strengthen the findings of the AO. The statements recorded during the search, corroborate the findings of the search. Considering the facts before me, I concur with the findings of the AO that the appellant has shown back-to- back sale and purchase transaction without carrying out actual sale and purchase. On the nature of transactions, in my view, the transactions in question do not appear to be 'Bogus' transactions in a conventional sense, where the cheque is deposited in lieu of cash. Such bogus transactions are either carried out to generate unaccounted cash or to introduce unaccounted cash into the books. The transactions in question can be said to be nature of 'circular trading carried out with the objective of increasing the turnover and availing of bank credit facilities. Through such transactions, the bank funds are made available by the Jatia group to the entities of Llyod, Topworth and Uttam group for their use. Since the transactions are carried out using the funds of the banks and therefore, it is for the banks to judge whether their funds were misused or otherwise. The responsibility for action on misuse of funds, if any, lies with the bank. What is relevant from, the point of view of the Income-Tax, is whether the income from such circular trading is disclosed by the appellant? In light of this discussion, I proceed to examine whether the income from the transactions have been disclosed by the appellant.
7.2.12. From the chart above, it is seen that the purchases made by the concerns are backed by the letter of credit facility of buyers bank and bill discounting of sellers bank, which means that two Banks are involved in the transaction. These transactions are duly accounted for in the books of respective concerns. The resultant income is accounted for in the books. In reply to Q no. 13, Shri Narsingh Dhavale has stated that, "immediate sales transactions have been made after the receipt of purchase bills with small additions as per agreed amount with promoters of the group, therefore back-to-back transaction of sales and purchase are there and very less profits have been shown". From the chart given above, it can be seen that the final sale value as per the invoice comprises of the Purchase price + 2% to 4%/Rs. 100 to 150+ LC charges, which means that profit has been booked on the final sale. Thus, the back-to-back sale and purchase transactions and 10 the resultant income from the transaction is disclosed in the books."
As regards the second question is concern the Ld. CIT(A) has that he does not agree with the decision of the AO to adopt the higher of sales and purchase values for the purpose of estimation. According to the Ld. CIT(A), since the profits are estimated on sales, the figures of sales should be adopted for the said purpose. On the issue as to whether the assessee has in fact earned anything outside the books of account, in this regard it was observed that it is unlikely that any assessee would undertake such activity on such massive scale, unless there are some more added benefits. The Ld. CIT(A) has thereafter referred to the comparable cases of genuine traders and observed that considering the overall facts of the case, the additional income is to be estimated at 0.5% of the sales. The relevant portion is reproduced herein below::
"7.2.15. On the second issue of Whether there is any other income earned by the appellant from these back-to-back transactions?, it is seen that the AO has made an addition of Rs 55,21,60,756/- to the income of the appellant. The addition is calculated at the rate of 5% of the alleged bogus sales or purchases, whichever is higher. The 5% estimation is stated to include commission on accommodation entries of purchases and sales made/passed on to further the entries obtained from searched entities and other unaccounted incomes like bill discounting income, interest received, discount income on account of suppression of GP, etc. In the assessment order, AO has observed as under. "The assessee is involved in providing purchases accommodation bills, sales accommodation bills and misusing LC funding facility. The assessee company has total turnover of Rs 13870871523/- for the assessment year under consideration. Total bogus purchase with the searched entities is Rs. 1898128934/-and total bogus sales with the searched entities are Rs. 11043215122/ For the purpose of estimation of income, the higher of the two being Rs11043215122/-. is considered.
11 I do not agree with the decision of the AO to adopt the 'higher of sales and purchase values' for the purpose of estimation. According to me, since the profits are estimated on the sales, the figures of sales should be adopted for the said purpose. Besides,as per the modus operandi of the circular trading discussed in para 7.2.9 above, in the first step of circular trading, the company of the appellant group raises a sale bill on the company of the Jatia group. After the sale bill is raised, the payment is received from the bank of the buyer, through letter of credit. The money received from the banks is used by the appellant group for its own business or for circulating amongst within the group entities or to other non- group entities. The money remains with it for a period of around 180 days. The circle gets completed in the final step, when the entity of Jatia group raises the sale bill against entity of the appellant group and receives back the amount with some commission and LC charges. 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. As discussed in the paras above, the regular income arising out of the sale and purchase transactions gets automatically accounted for in the books. However, it is unlikely that the any assessee would undertake such activity on such a massive scale, unless there is some more added benefit in store for it. It is evident that the appellant group and the Jatia group have mutually got benefitted by extensively using/misusing the L/C facility. The appellant has reinvested the funds received from the LC facility in its own business and must have earned some income on the same. It has circulated the funds within its group entities and also with entities of other groups. There is an element of undisclosed commission income, which the appellant would have received from such other beneficiaries. In my view, the AO has rightly made the addition of such other income earned by the appellant on the circular transactions. However, I do not agree with the rate of 5% adopted by the AO. It is seen that the rate of 5% has been applied in all assessment orders passed from AY 2013-14 to AY 2019-20, resulting in the total addition of Rs 245,51,74,504/-, which in my view is unreasonable and excessive. Appellant has provided data on the Gross profits disclosed by similarly placed concerns, not belonging to the group. As per industry standards, the gross margin in the business of trading in metal is in the range of 0.17 to 0.63 percent. The rate of 5% adopted by the AO is clearly on the higher side. To meet the ends of justice, such additional income is re-estimated by adopting the average rate of profit as per industry standards. Considering the overall facts of the case, the additional income is estimated at 0.50% of the sales of Rs 1104,32,15,122/, which comes to Rs 5,52,16,076/-. The said addition of Rs 5,52,16,076/-shall comprise/cover the additional income earned by the appellant by 12 reinvesting the funds in the same business, the commission on accommodation entries of purchases and sales made/passed on to further the entries obtained from searched entities and any other unaccounted incomes like bill discounting income, interest received, discount income on account of suppression of GP etc. The appellant gets relief of Rs. 49,69,44,680/-."
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
13 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). 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.
14 20. 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 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.
15 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 16 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 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
17 197), 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 raised by the assessee and direct the AO to delete the additions.
26. Since, we have deleted the additions by considering the merits, therefore there is no need to adjudicate the other grounds raised by the assessee as the same become academic in view of our above detailed findings.
, 2141, 2142, 2143 & 2144/Mum/2025 & 2341, 2342, 2343, 2344, 2345 & 2346 /Mum / 2025, A.Ys 2013-14 to 2019-20.
As the facts and circumstances in these appeals are identical to for the A.Y 2013-14 (except variance in figures) and the decision rendered in above paragraph would apply mutatis mutandis for this appeal also. Accordingly, the grounds of appeal of the present appeal also stands allowed.
28. Since we have deleted the additions upheld by Ld. CIT(A) in assessees appeals, consequently, the appeals filed by the revenue stands dismissed.
In the result, all the appeals raised by the assessee are allowed and all the appeals filed by the revenue are dismissed.
Pronounced in the open Court on 22.08.2025.