DCIT, CENTRAL CIRCLE 7(1), MUMBAI vs. INSCO STEELS PRIVATE LIMITED, MUMBAI

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.

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.

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.

6 while invoking Sec. 145 of the Act, rejected the books of accounts.

"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".

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.

"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?"

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."

"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/-."

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.

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.

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.

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.

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.

28. Since we have deleted the additions upheld by Ld. CIT(A) in assessees appeals, consequently, the appeals filed by the revenue stands dismissed.

Pronounced in the open Court on 22.08.2025.