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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI ARUN KHODPIA
आदेश / ORDER PER ARUN KHODPIA, AM:
The present appeal filed by the revenue is directed against the order passed by the Ld.CIT(Appeals)/NFAC, Delhi dated 28.02.2025, for the assessment year 2012-13 as per the following grounds of appeal:
“1. " Whether on the facts and circumstances of the case and in law, Ld. CITIA) is right in restricting the addition to 3% of the total bogus purchase as against addition by the AO of 100% of bogus purchases even when Ld. CIT(A) itself agreed with the conclusion drawn by AO that the purchases were in fact bogus." 2. "Whether on the facts and in the circumstances of the case and in law, the order of the Ld. CIT(A) is perverse in not considering that Hon'ble Apex Court dismissed SLP filed by assessee against the order of Hon'ble High Court of Gujarat reversing the order of Ld. CIT(A). Ahmedabad, in the case of N K Protein Ltd. which is on the similar issue of bogus purchases and that this order of the Hon'ble High Court of Gujarat disallowing 100% of the bogus purchases was already law of the land when the Ld. CIT(A) pronounced its order. 3. "Whether on the facts and in the circumstances of the case and in law, the order of Ld CIT(A) is right in not considering that this was not a case of estimation of percentage of gross profit but of allowance and disallowance of an expenditure in books which was incurred flouting laws of the land?" 4. "Whether on the facts and in the circumstances of the case and in law, the order of Ld. CIT(A) is right in allowing the assessee to flout laws and escape by bringing under tax just a miniscule percentage of bogus purchases even when the conduct of the assessee constituted offence under indirect tax laws and no expenditure in relation to an offence is allowable under income tax e.g. Section 37 of the Income Tax Act, 1961.?" 5. " Whether on the facts and in the circumstances of the case and in law, the order of Ld. CIT(A) is right in not considering the preponderance of probabilities being against the assessee even when it is an established principle by Hon'ble Apex Court in various such cases including that of Sumati Dayal and Mang/ Jain HUF ?" 6. " Whether on the facts and circumstances of the case and in law, the decision of the Ld. CIT(A), is right in view of the latest decision of the Hon'ble Supreme Court in the case of M/s. N. K. Proteins Ltd. Va. Dy. CIT (2016) 292 CTR (Gut) 354, Dated. 16.01.2017, wherein the Hon'ble Court has held that once a findings of Act has been given that entire purchases shown on the basis of fictitious invoices and debited in the P & L account are established as bogus, then restricting the addition to a curtained percentage goes against the principles of section 68 and 69C of the Income Tax Act, 1961 ?" 7 . Whether on the facts and circumstances of the case and in law, the decision of the Ld. CIT(A) , is right in view of the decision of the Hon'ble High Court Mumbai , in the case of Pr. Commissioner of Income-Tax-5,Mumbai Vs. Kanak Impex (India) Ltd(2025)172 Taxmann.com 283 (Bombay) ) Dated. 03.03.2025, wherein the decision of 100% addition made by AO has been allowed, by rejecting the ITAT's decision of estimating the profit rate @12.5% on bogus purchases and thereby impliedly grant deduction of such unexplained expenditure incurred u/ s. 69C of the Act, eventhough the assessee failed to discharge its onus to prove the genuineness of alleged purchases and has offered no explanation of the sources of expenditure incurred on account of such purchases ?" 8. " Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is right in restricting the addition without appreciating the fact that in the case of M/s. Swetamber Steels Ltd. (Supra), the Hon'ble ITAT, Ahmadabad, had confirmed the disallowance of the bogus purchase, by stating that the purchases shown from respective parties were found non-genuine and the decision of the ITAT was upheld by Hon'ble Gujarat High Court and also by the Hon'ble Supreme Court 7' 9. The Tax-Effect involved in the instant case is Rs. Rs. 81,99,671/- , which is above the prescribed limit as per CBDT's Circular F.No.279/Misc.142/2007-11V(Pt) amended vide No 09/2024 dated. 17.09.2024 . Further, the case fall under one of the exceptions laid down in CBDT Circular No. 05/2024 Dated. 15.03.2024, wherein it is stated that in cases involving "Organized Tax Evasion".
The appellant craves lave to amend or alter any grounds or add a new ground which may be necessary.”
At the time of hearing it is noticed that on second oportunity also none appeared on behalf of the assessee. Accordingly, the matter is heard after recording submissions of the Ld. Sr. DR and perusing the material available on record.
The brief facts in this case are that the assessee had filed its original return of income on 26.08.2012 declaring a total income of Rs.44,95,288/- The same was processed u/s.143(1) of the Income Tax Act. 1961 ( for short ‘the Act’). Subsequently Information was received from DGIT (Inv.), Mumbai that a search and survey action was carried out in the case of Shri Bhanwarlal Jain group on 03.10.2013. The search action resulted into collection of evidence and other findings which conclusive, proved that he through a web of benami concerns run and operated by him, which were engaged in providing accommodation entries of bogus purchases and bogus unsecured loans and advances to various beneficiaries which included the assessee The assessee had made the following transactions as under:
Sr. No. Name parties Bill amount 1. Jewel Diam 1,91,09,901/- 2. Rose Impex 82,46,956/-
Total 2,73,56,857/-
On the basis of the information. the said case was selected for re- opening and notice u/s 148 of the Act was issued on 12 03.2019 and served upon the assessee. The assessee filed return on 27.03.2019, in response to the notice declaring income at Rs 44,95,288/-.
During the course of search on the Bhanwarlal Jain Group, all the registered offices business premises and residential premises of various dummy directors, partners and proprietors including that of Bhanwarlal lain and its group Concerns were covered. At none of these premises. any stock of diamonds was found. The fact that none of the concerns had any stock of diamond as on 03/10.2013 i.e. the day when search commenced, raised a suspicion with regard to the genuineness of business activity of these concerns. During the course of search, evidences were found, persons were examined on Oath which established that Bhanwarlal Jain and Family had been using benarni concerns to give accommodation entries in the nature of bogus purchase and bogus unsecured loans to various beneficiaries. Examination on Oath of Trusted employees of Bhanwarlal Jain and family revealed the complete modus operandi used by Bhanwarlal Jain for giving such accommodation entries of bogus purchases and loans and advances to various beneficiaries.
The assessee produced books of accounts, sale purchase register along with sale and purchase invoices trying to support its claim that the purchases were genuine. It also submitted that the transactions were made through bank accounts and therefore claimed that the purchases were genuine. However the A.O did not accept the explanations of the assessee and held the entire purchases of Rs.2,73,56,857/- as bogus and added this amount u/s 69C of the Act.
Aggrieved the assessee carried the matter in appeal before the Ld. CIT(Appeals)/NFAC, who had restricted the addition to 3% of the total bogus purchases as against addition made by A.O of 100% of the bogus purchases.
The Revenue being aggrieved with the order of the Ld. CIT(Appeals)/NFAC has carried the matter in appeal before the Tribunal.
We have heard the submissions of the Ld. Sr. DR and perused the documents available on record as well as order of the Ld. CIT(Appeals)/NFAC. The Ld. CIT(Appeals)/NFAC while restricting the addition to 3% of the impugned bogus purchases has obseved as follows:
“8. Ground No 2 to 5: These grounds have been raised against the action of the A.O in making an addition of 100% of the amount of purchases amounting Rs. 2,73,56,857/- from M/s. Jewel Diam and M/s Rose Impex as income under section 69C of the Act.
8.1 I have perused the assessment order and the submissions of the appellant. Section 69C of the Act reads as under:- 69C. Unexplained expenditure, etc. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year. Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to the be the income of the assessee shall not be allowed as a deduction under any head of income. From a perusal of the provisions of section 69C it is clear that the, following conditions are required to be met:- (i) The taxpayer has incurred expenditure; (ii) he offers no explanation about the source of the expenditure or the part thereof; or (iii) the explanation offered by him is not in the opinion of the Assessing Officer satisfactory; 8.2 However the other essential ingredients of the section such as the burden of proof with regard to the source of the credits or unexplained money, test of satisfaction, are common to section 68 and section 69C and hence the judicial decisions on section 68 will also be relevant for section 69C respectively. 8.3 The Burden of proof is on the assessee who is required to offer an explanation to the satisfaction of the Assessing Officer so as not to attract the mischief of section 68 or for that matter section 69C. This aspect has been deliberated upon by the Hon’ble Supreme Court innumerous decisions. Relevant portion from following case laws are extracted below: i. Sreelekha Banerjee v CIT (1963) 49 1TR 112 (SC) “It seems to us that the correct approach to questions of this kind is this. If there is an entry in the account books of the assessee which shows the receipt of a sum or conversion of high denomination notes tendered for conversion by the assessee himself, it is necessary for theassessee to establish, if asked, what the source of that money is and to prove that it does notbear the nature of income. The Department is not at this stage required to prove anything. Itcan ask the assessee to bring any books of account or other documents or evidence pertinent to the explanation if one is furnished, and examine the evidence and theexplanation. If the explanation shows that the receipt was not of an income nature, theDepartment Gannet act unreasonably and reject that explanation to hold that it was income. If, however, the explanation is unconvincing and one which deserves to be rejected, theDepartment can reject it and draw the inference that the amount represents income eitherfrom the sources already disclosed by the assessee or from some undisclosed source. TheDepartment does not-then proceed on no evidence, because the fact that there was receiptof money, is itself evidence against the assessee. There is thus prima facie evidence against the assessee which he fails to rebut, and being unrebutted, that evidence can beused against him by holding that it was a receipt of an income nature. The very words “anundisclosed source” show that the disclosure must come from the assessee and not from theDepartment”. ii. Kale Khan Mohammad Hanif v CIT[1963] 50 ITR 1 (SC) “It is well established that the onus of proving the source of a sum of money found to havebeen received by the assessee is on him. If he disputes liability for tax, it is for him to showeither that the receipt was not income or that if it was, it was exempt from taxation under theprovisions of the Act. In the absence of such proof, the Income-tax Officer is entitled to treat itas taxable income”. (iii) Roshan Di Hatti v CIT [1977] 107 ITR 938 (SC) "Now, the law is well settled that the onus of proving the source of a sum of money found tohave been received by an assessee is on him. If he disputes the liability for tax, it is for him toshow either that the receipt was not income or that if it was, it was exempt from taxationunder the provisions of the Act. In the absence of such proof, the revenue is entitled to treat itas taxable income.To put it differently, where the nature and source of a receipt whether it be of money or ofother property, cannot be satisfactorily explained by the assessee, it is open to the revenueto hold that it is the income of the assessee and no further burden lies on the revenue toshow that that income is from any particular source." iii. Sumati Dayal v. CIT [1995] 80 Taxman 89 (SC) “But, in view of Section 68 of the Act, where any sum is found credited in the books of theassessee for any previous year the same may be charged to income tax as the income of theassessee of that previous year if the explanation offered by the assessee about the natureand source thereof is, in the opinion of the Assessing Officer, not satisfactory. In such casethere is, prima facie, evidence against the assessee, viz., the receipt of money, and if he failsto rebut , the said evidence being unrebutted, can be used against him by holding that it wasa receipt of an income nature. While considering the explanation of the assessee theDepartment cannot, however, act unreasonably." iv. CIT v. P. Mohanakala [2007] 161 Taxman 169 (SC) “The expression “the assessees offer no explanation” means where the assessees offer noproper, reasonable and acceptable explanation as regards the sums found credited in thebooks maintained by the assessees. It is true the opinion of the Assessing Officer for notaccepting the explanation offered by the assessees as not satisfactory is required to bebased on proper appreciation of material and other attending circumstances available onrecord. The opinion of the Assessing Officer is required to be formed objectively withreference to the material available on record. Application of mind is the sine qua non forforming the opinion”. 8.4 From a careful perusal of the above decisions, it is established that primary onus toprove the source of the money and necessary evidences to support credit entries u/s 68 ofthe Act is on the assessee . The Hon’ble Supreme Court has further held that explanationoffered by the assessee should be carefully examined by the AO to ascertain whether all theingredients of the onus are proved by the assessee or not. Essentially, the explanation of theassessee is required to be tested on the touchstone of Genuineness, both of the parties aswell as the transaction. Thus it is for the assessee to produce the materials, evidence andan explanation that is comprehensive and accurate. 8.5 In the present case it is seen that that a search and survey action was carried out inthe case of Shri Bhanwar1al Jain group on 03.10.2013. the search action resulted intocollection of evidence and other findings which conclusively proved, that he, through a web ofbenami concerns run and operated by him, was engaged in providing accommodation entriesof bogus purchases and bogus unsecured loans and advances to various beneficiaries whichincluded the assessee. It was well established during the search and seizure operation thatthe concerns managed by Bhanwarlal Jain (henceforth- "Bhanwarlal Jain Concerns") were alldummy concerns operating solely with the purpose of facilitation of fraudulent financialtransactions which included providing accommodation entries in the form of unsecured loansto the interest parties, issuing of bogus sale bills to various parties etc. During the course ofsearch it was found that all name sake/dummy directors/partners/proprietors of variousconcerns belonged to the native place of BHANWARLALJain & family and had either knownBhanwarlal Jain personally or through their families. In their respective statements recorded,they had admitted that they were made directors, partners and proprietors of variousconcerns at the direction of Bhanwarlal Jain & Family which were eventually being managedand controlled by the latter. Examination on oath of all the name sake or dummy directors,partners, proprietors of various concerns revealed that they were merely employees ofBhanwarlal Jain & family and were looking after miscellaneous office work like depositingcheques in banks, handing over parcels to clients, making data entry etc. In case of certainemployees, their wives were also shown as directors, partners or proprietors in some of theconcerns. However, like their husbands, they were merely name lending directors, partnersand proprietors and the real control and management of all these concerns in which theywere named as directors, partners or proprietors lay in the hands of Bhanwarlal Jain Jain &family. Since, these persons were employees and were associated with the officework, theydid not have any in depth knowledge of diamond industry like assorting cutting,manufacturing etc. All the concerns were shown to be engaged in import of diamonds.However, when these name sake directors / partners / proprietors were specifically asked toexplain as to how they contacted the parties from whom the imports have been made in therespective concerns, they were unable to comment on the same. They all admitted of nothaving any personal contact with any of the importers either through phone or email. Theyalso admitted of not having visited any foreign country for the purpose of business. In theirrespective statements recorded under section 132(4) and section 132 of the Income Tax Act,1961, all the employees accepted and admitted that they were merely dummy directors /partners / proprietors of various concerns whose affairs were managed and controlled byBhanwarlal Jain & group concerns and that they worked on the instructions of BhanwarlalJain. The statements of all these employees were confronted to Bhanwarlal Jain. In hisstatement recorded under section 132(4) of the Income Tax Act, 1961, Bhanwarlal Jainadmitted that he managed and controlled the business affairs of all the concerns in which thepersons who were his employees were shown as directors, partners and proprietors. 8.6 In the assessment order, the A.O has enumerated in detail the modus operendi andevidences on the basis of which it was conclusively established that the companies/concernsof Shri Bhawarlal Jain including Rose Impex and Jewel Diam were only engaged in issuingbogus bills and did not engage in any diamond sale or purchase. These facts are provedbeyond doubt and cannot be controverted. Thus the purchases made by the assessee fromthese 2 concerns amounting to Rs. 2,73,56,857/- are proved to be non-genuine. 8.7 The appellant during the assessment proceedings as well as in the currentproceedings has sought to prove the genuineness of the transactions by submitting theinvoices, and details of payment made by cheque through the regular banking channels.
8.8 The appellant has also contended that the additions made are bad in law as the facility of cross examination was not provided of the persons whose statements were relied upon by the Assessing Officer. The issue of the availability of statements and the facility of cross examination was considered by the Hon’ble Kolkata High Court in its order dated 14.06.2022 in the case of Pr.CIT vs Swati Bajaj. The observations of the Court are reproduced below: “55. The first argument on behalf of the assessee is that the copy of the investigation report was not furnished to them despite specific written request made on behalf of the assesses to furnish the copy of the report, the statements recorded and provide those persons from whom statements were recorded to be cross examined on behalf of the assessee. There is no dispute to the fact that the copy of the statement said to have been recorded during the course of investigation has not been furnished to the assessees and the request made by some of them for cross examining of those persons was not considered. The question would be as to whether the non-compliance of the above would render the assessments bad in law. The argument of the revenue is that the assessments cannot be held to be illegal merely on the grounds that the copy of the report was not furnished as the respective assessing officers have clearly mentioned as to the nature of investigation done by the department and as there port itself states that the investigation commenced not from the assessees end but the individuals who dealt with these penny stocks who were targeted. It is equally true invariably in all cases, the statement of the stock brokers, the entry operators or the Directors of the various penny stock companies does not directly implicate ITAT NO. 06 OF 2022 AND ETC BATCH the assessee. If such being the situation, the assessee cannot be heard to say that the copy of the entire report should have been furnished to him, the person from whom the statements were recorded should have been produced for cross examination as admittedly there is nothing to implicate the assessee Smt. Swati Bajaj of insider trading or rigging of share prices. But the allegation against the assessee is that the claim for LTCG/LTCL is bogus. As pointed out by Mr. Rai, learned senior standing counsel, the investigation report is general in nature not assessee specific. Therefore, we are required to see as to whether non- furnishing of the report which according to the revenue is available in the public domain would vitiate the proceedings on the ground that the assessee was put to prejudice.
In State Bank of Patiala and Others Versus S.K. Sharma, the Hon'ble Supreme Court pointed out that violation of any and every procedural provision cannot be said to automatically vitiate the domestic enquiry held against the delinquent employee or the order passed by the disciplinary authority except in cases falling under no notice, no opportunity and no hearing categories. Further it was held that if no prejudice is established to have resulted from such violation of procedural provisions no interference is called for, against the ultimate orders. The test laid down was whether the person has received a fair hearing considering all things as the ultimate test is always the test of prejudice or the test of fair hearing as. Further the Hon'ble Supreme Court pointed out a distinction between a case of no opportunity and a case of no adequate opportunity and while examining the latter case, it was held that the violation has to be examined from the stand point of prejudice, in other words the Court or the tribunal ITAT NO. 06 OF 2022 ANDETC. BATCH has to see whether in the totality of the circumstances, the delinquent officer/employee did or did not have a fair hearing and the orders to be made shall depend upon the answers to the said query. Further it was held that there may be a situation where interest of the state or public interest may call for curtailing of rule of audi alteram partem andin such a situation the Court may have to balance public/state interest with the requirements of natural justice and arrive at an appropriate decision.
In a very recent decision of the Hon'ble Supreme Court in M.J. James after referring to a catena of decisions on the point the Hon'ble Supreme Court pointed out that natural justice is a flexible tool in the hands of the judiciary to reach out in fit cases to remedy injustice. The breach of the audi alteram partemrule cannot by itself, without more lead to the conclusion that prejudice is thereby caused. Where procedural and /or substantive provisions of law embodied the principles of natural justice, their infraction per-se does not lead to invalidity of the order passed. The prejudice must be caused to the litigant, except in the case of a mandatory provision of law which is conceived not only in individual interest but also in public interest. Further by referring to the decision in State of Uttar Pradesh Versus Sudhir Kumar Singh 88, it was held that the" prejudice" exception must be more than a mere apprehension or even a reasonable suspicion of a litigant, it should exist as a matter of fact or to be cast upon a definite in ference of likelihood of prejudice flowing from the non-observance of natural justice.
Therefore, the assessees have to specifically point out as to how they were prejudiced on account of non-furnishing of the investigation report in its entirety, failure to produce the persons from whom the statements were recorded for being cross examined would cause prejudice to the assessee as nowhere in the report the names of the assessees feature. The investigation report states that the investigation has not commenced from the individuals but it has commenced who had dealt with the penny stocks, concept of working backwards. This is a very significant factor to be remembered. Therefore, there has been absolute anonymity of the assessee in the process of investigation. The endeavour of the department is to examine the "modus operandi" adopted and in that process now seek to identify the assessees who have benefited on account of such "modus operandi". Therefore, considering the factual scenario no prejudice has been established to the assessee by not furnishing the investigation report in its entirety nor making the persons available for cross examination as admitted by the department in substantial number of cases the assessees have not been specifically indicted by those persons from whom statements have been recorded.
We are conscious of the fact that there may be exceptions however nothing has been brought before us to show that there was an exception in any of these appeals heard by us. In a few cases the assessee has been made known of the statement of the Director of the penny stock company or the stock broker, entry operator despite which those assessees could not make any headway. While on this issue, we need to consider as to whether and under what circumstances the right of cross examination can be demanded as a vested right. In Kishanlal Agarwalla, the Hon'ble Division ITAT NO. 06 OF 2022 AND ETC. BATCH Bench of this Court pointed out that no natural justice requires that there should be a kind of formal cross examination as it is a procedural justice, governed by the rules and regulations. Further it was held that so long as the party charged has a fair and reasonable opportunity would receive, comment and criticize the evidence, statements or records on which the charges is being against him, the demand and tests of natural justice are satisfied.
In Bakshi Ghulam Mohammad 89 the Hon'ble Supreme Court held that the right of hearing cannot include the right of cross examination and the right must depend upon the circumstances of each case and must also depend on the statute under which the allegations are being enquired into.
Having noted the above legal position, it goes without saying there is no vested right for the assessee to cross examine the persons who have not deposed anything against the assessee. The investigation report proceeds on a different perspective commencing from a different point and this has led to the enquiry being conducted by the assessing officer calling upon the assessee to prove the genuineness of the claim of LTCG.
In the light of the above conclusion we hold that the decision in Gorkha Security Services does not lend any support to the case of the assessees and is distinguishable.
The copy of the recommendations of SIT on black money as contained in the third SIT report as published by the Press Information Bureau, Government of India, Ministry of Finance, dated 24.07.2015 was placed AIR (1967) SC 122 ITAT NO. 06 OF 2022 AND ETC.BATCH before us with reference to the misuse of exemption on LTCG for money laundering and the recommendations are as hereunder:………….
From the above it is seen that there is a discussion about the "modus operandi" adopted and the SIT opines that there is an urgent need for having an effective, preventive and punitive action in such matters to prevent recurrence of such instances. This is a relevant aspect to be borne in mind.
Thus, the report submitted by the investigation department cannot be thrown out on the grounds urged on behalf of the assessees. The assesses have not been shown to be prejudiced on account of non- furnishing of the investigation report or non-production of the persons for cross examination as the assessee has not specifically indicated as to how he was prejudiced, coupled with the fact as admitted by the revenue, the statements do not indict the assessee. That apart, we have noted that the investigation has commenced targeting the individuals who dealt with the penny stocks and after examining the modus seeing the cash trail the report has been submitted recommending the same to be placed before the DGIT (investigation) of all the states of the country. It is thereafter the concerned ITAT NO. 06 OF 2022 AND ETC. BATCH assessing officers have been informed to consideras to the bonafideness and genuineness of the claims of LTCG/LTCL of the respective assessees qua the findings which emanated during the investigation conducted on the individuals who dealt with the penny stocks. Therefore, the assessments have commenced by the assessing officers calling upon the assessee to explain the genuineness of the claim of LTCG/ LTCL made by them. In all the assessment orders, substantial portion of the investigation report has been noted in full. A careful reading of the some would show that the assessee has not been named in the report. If such be the case, unless and until the assessee shows and proves that she/he was prejudiced on account of such report /statement mere mentioning that non- furnishing of the report or non-availability of the person for cross examination cannot vitiate the proceedings. The assessees have miserably failed to prove the test of prejudice or that the test of fair hearing has not been satisfied in the individual cases. In all the cases, the assessees have been issued notices under Sections143(2) and 142(1) of the Act they have been directed to furnish the documents, the assessee have complied with the directions, appeared before the assessing officer and in many cases represented by Advocates/Chartered Accountants, elaborate legal submissions have been made both oral and in writing and thereafter the assessments have been completed. Nothing prevented the assessee from mentioning that unless and until the report is furnished and the statements are provided, they would not in a position to take part in the inquiry which is being conducted by the assessing officer in scrutiny assessment under Section 143(3) of the Act. The assessee were conscious of the fact that they have not been named in the ITAT NO. 06OF 2022 AND ETC. BATCH report, therefore made a vague and bold statement that the non furnishing of report would vitiate the proceedings. Therefore, merely by mentioning that statements have not been furnished can in no manner advance the case of the assessee. If the report was available in the public domain as has been downloaded and produced before us by the learned standing counsel for the revenue, nothing prevented the assesses who are ably defended by Chartered Accountants and Advocates to download such reports and examine the same and thereafter put up their defence. Therefore, the based on such general statements of violation of principles of natural justice the assessees have not made out any case.
While on this issue, it is important to take note of the decision in T. Takano. In the said case, the SEBI took a stand that the investigation report under Regulation 9 of the SEBI Regulations could also include sensitive information about the business affairs of various entities and persons concerned and if disclosed it would affect their privacy and the competitive position of other entities. While considering the correctness of the submissions made on behalf of the SEBI, the Hon'ble Supreme Court held that if the disclosure of the report would affect third party rights the onus then shifts to the appellant to prove that the information is necessary to defend the case appropriately. On facts it was found that the appellant therein did not sufficiently discharge his burden by proving that the non- disclosure of the information would affect his ability to defend himself.
In the cases on hand, undoubtedly the report contains information about various penny stocks companies about the directors of the companies and also the stock brokers, entry operators and others who have been ITAT NO. 06 OF 2022 AND ETC. BATCH named in the report. It is an admitted case that the names of the ssesses do not figure in the report. Therefore, non-furnishing of the report has in no manner prejudiced the rights of the ssesses to discharge the onus cast upon them in terms of Section 68 of the Act.
It is equally not in dispute that whatever information which was required to be made known to the assessee has been informed to the assessee by the assessing officer by issuance of a notice to each of the assesses to which they have responded by submitting their replies. Therefore, in the absence of any prejudice caused to the assessee on account of non-furnishing of the entire report, the assesses cannot be a heard to say that there has been violation of principles of natural justice and their right to defend themselves was in any manner affected. At this juncture, it would be of much relevance to refer to the decision in K.R. Ajmera. The question of law which arose for consideration before the Hon'ble Supreme Court was as to what is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/manipulative practices under the SEBI Regulations and for violating the code of conduct of the SEBI (Stocks brokers and Sub-brokers) Regulations. It was pointed out that the code of conduct for stock brokers lays down that they shall maintain high standard of integrity, promptitude and fairness in the conduct of all investment business and shall act with due skill and care and diligence in the conduct of all investment business. The Code also enumerates different shades of duties of stock brokers towards the investor and those duties pertain to high standard of integrity that the stock broker is required to maintain in the conduct of his business. It was further pointed out that it is ITAT NO. 06 OF 2022 AND ETC.BATCH a fundamental principle of law that prove of an allegation levelled against a person may be in the form of direct substantive evidence or as in many cases such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/ charges made and levelled. It was further held that direct evidence is a more certain basis to come to a conclusion yet in the absence thereof the courts cannot be helpless. It was further pointed out that it is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion. The above tests laid down by the Hon’ble Supreme Court were applied to the facts of the case in K.R. Ajmera andit was noted that the scrips in which trading had been done wherefore illiquid scrips meaning thereby that such scrips though listed in the BSE were not a matter of every day buy and sell transactions. Further it was held that trading in such illiquid scrips is not impermissible yet voluminous trading over a period of time in such scrips is a fact that should attract the attention of a vigilant trader engaged in such trades. It was further pointed out that though proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume and trading can reasonable point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the brokers / sub-broker and may be between the ITATNO. 06 OF 2022 AND ETC. BATCH brokers/sub-broker and the client or it could be between two brokers/sub-brokers engaged in the buy and sell transactions. Further it was pointed out that when over a period of time such transactions have been made between the same set of brokers or a group of brokers a conclusion can be a reasonable reached that there is a concerted effort on the part of the brokers concerned to indulge in synchronized trade the consequences of which is large volumes of fictitious trading resulting in unnatural rise in hiking the price/value of the scrips. In the said case, it was argued that on a screen- based trading the identity of the second party to be a client or the broker is not known to the first party/client or broker. This argument was rejected as being irrelevant. It was pointed out that the screen-based identity system keeps the identity of the parties anonymous and it will be too naïve to rests the final conclusions on said basis which overlooks a meeting of minds elsewhere. Further it was held that direct proof of such meeting of mind elsewhere would rarely be forth coming and therefore the test is one of the preponderance of probabilities so far as the adjudication of a civil liability arising out of violation of the Act or to the Regulations. Further it was held that the conclusion has to be gathered from various circumstances like that volume of trade effected; the period of persistence in trading in particular scrips; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors.
Thus, the legal principle which can be culled out from the above decision is that to prove the allegations, against the assessee, can be inferred by a logical process of reasoning from the totality of the attending facts and ITAT NO. 06 OF 2022 AND ETC. BATCH circumstances surrounding the allegations/charges made and levelled and when direct evidence is not available, it is the duty of the Court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be what inferential process that a reasonable/prudent man would apply to arrive at a conclusion. Further proximity and time and prior meeting of minds is also a very important factor especially when the income tax department has been able to point out that there has been a unnatural rise in the price of the scrips of very little known companies. Furthermore, in all the cases, there were minimum of two brokers who have been involved in the transaction. It would be very difficult to gather direct proof of the meeting of minds of those brokers or sub-brokers or middlemen or entry operators and therefore, the test to be applied is the test of preponderance of probabilities to ascertain as to whether there has been violation of the provisions of the Income Tax Act. In such a circumstance, the conclusion has to be gathered from various circumstances like the volume from trade, period of persistence in trading in the particular scrips, particulars of buy and sell orders and the volume thereof and proximity of time between the two which are relevant factors. Therefore, in our considered view the methodology adopted by the department cannot be faulted. ……………………….. ITAT NO. 06 OF 2022 AND ETC. BATCH In our opinion right to cross-examine the witness who made adverse report is not an invariable attribute of the requirement of the dictum, "audialteram partem". The principles of natural justice do not require formal cross-examination. Formal cross examination is a part of procedural justice. It is governed by the rules of evidence, and is the creation of Court, It is a part of legal and statutory justice therefore it cannot be laid down as a general proposition of law that the revenue cannot rely on an evidence which has not been subjected to cross examination. ……………………….. We find that the Assessing Officer in the assessment order has referred to the general modus operandi of the bogus accommodation entry and thereafter, he has further referred to statement of the parties who has provided accommodation entry through managing and controlling the shares of the companies, in which the assessee has also transacted. The Assessing Officer thereafter asked the assessee to justify the rationale behind investment in these penny stock companies not having financial worth, however, the assessee failed ITATNO. 06 OF 2022 AND ETC. BATCH to justify the same. The Assessing Officer provided as why the investment in the shares transacted by the assessee was not justified in view of the comparison of the other shares available. The Assessing Officer also pointed out the price fluctuation in the shares of the companies over a period, dividend history and other financial parameters to substantiate that there was no term capital loss against receipt of cash money. The Ld. Assessing Officer accordingly concluded that the addition was made on the basis of the material available on record, the surrounding circumstances, the human conduct and preponderance of probabilities. In view of the above facts and circumstances and in law, we find that in instant case addition in dispute is not solely on the basis of the statement of persons and the Assessing Officer has relied on other materials. The statements of the persons who controlled the business of providing accommodation entry have been corroborated with the material, surround circumstances and preponderance of probability. We accordingly uphold the finding of the CIT(A) on that issue in dispute. The relevant grounds of the appeal of the assessee are accordingly rejected. 8.9 From the above detailed analysis given by the Hon’ble Court on the right of cross examination and applying it to the facts of this case it is seen that there is no indication that the investigations in the case of Bhawarlal Jain and group were only targeted at the appellant but instead it is clear that they were generic in nature. The investigations were concerned with the broader and larger issue of bogus accommodation entries to help the intended beneficiaries. The endeavour of the department in the course of the investigations was to unearth the "accommodation entry and bogus purchases scam”, and in that process to identify the assessees who had benefited on account of such "modus operandi". Therefore, considering the factual scenario no prejudice has been established to the assessee by not furnishing statement of the employees or parties or for not making him available for cross examination .The Hon'ble Supreme Court has held In Bakshi Ghulam Mohammad 89 that the right of hearing cannot include the right of cross examination and the right must depend upon the circumstances of each case and must also depend on the statute under which the allegations are being enquired into. Furthermore, the Hon’ble Kolkata High Court in Swati Bajaj (supra) has held that “right to cross- examine the witness who made adverse report is not an invariable attribute of the requirement of the dictum, "audi alterampartem". The principles of natural justice do not require formal cross-examination. Formal cross examination is a part of procedural justice. It is governed by the rules of evidence, andis the creation of Court, It is a part of legal and statutory justice therefore it cannot be laid down as a general proposition of law that the revenue cannot rely on any evidence which has not been subjected to cross examination.” Accordingly, I am of the opinion that by not providing the statement of the persons and not allowing the facility of cross examination would not render the assessment order bad in law. The contentions of the appellant on the accounts are rejected. 8.10 Lastly the appellant has also contended that since the sales have not been disputed by the A.O, and the books of account have not been rejected, the entire purchase amount cannot be added as has been done by the A.O. 8.11 There is merit in the contention of the appellant on this account. The A.O has not disputed the sale of the diamonds and it is an undisputed fact that without purchases there cannot be sales. Further, the appellant has submitted details to show that against each purchase from M/s Jewel Diam and M/s Rose Impex there is a corresponding sale. Furthermore, the A.O has not disputed the quantitative stock tally or drawn any other adverse inferences from the books of account which were not rejected. The appellant has maintained that the purchase and sales were properly recorded in assessee’s stock register, purchase register and sales register which have not been commented upon by the A.O. This leads to the ultimate conclusion that although the goods were in fact purchased as evidenced by the details submitted, and then subsequently sold as reflected in the financial statements, which has not been disputed by the A.O, the goods were purchased in the grey market by the assessee and not from either Jewel Diam or Rose Impex. Accordingly, it can only be concluded that then entire purchase considerations cannot be disallowed as unexplained expenditure u/s 69C.
8.12 Accordingly, what remains to be decided is the additional income to be attributed to the appellant on account of the purchase of the goods from parties other than Jewel Diam or Rose Impex. The appellant has contended on the basis of certain judicial decisions that since in this case the GP earned on sale of the bogus purchases Gross profit earned from the sale of alleged bogus purchases is around 15.79% which is much higher Gross profit earned from the sale of normal purchases ie.8.52%, hence no GP addition or any other addition should be made in the hands of the assessee. This contention cannot be accepted. It has been conclusively proved that the purchases from the alleged parties i.e., Jewel Diam or Rose Impex are bogus and hence the conclusion is that the purchases from other anonymous parties. It only prudent and rational to infer that the appellant would not have done this if there was no cost advantage for adopting this dubious method to obtain the diamonds which were subsequently sold. Hence a certain percentage of the purchases is required to be retained u/s 69C as the payment made, for the out of the books purchases would have been made in cash out of unaccounted income. The percentage to be applied depends on the trade being carried out by the assessee, in this case trading in diamonds. 8.13 The Hon’ble Jurisdictional Mumbai ITAT in the case of Chaitali Gems ITANo.3927/Mum/2023 vide order dated 23.04.2024 has held as under: 07. We have carefully considered the rival contention and perused the orders of the lower authorities. The fact shows that in the present case on dispute facts shows that assessee has purchased diamonds from two different entities amounting to Rs. 13,165,072/-. An accommodation entry provider operated both these entities. Assessee has exported these diamonds and realized export proceeds. Quantitative details of purchases in carats are also shown. On page number 57 of the paper book, it was shown that 270.99 carats of diamonds purchased on 25/5/2009 from one party or exported on 1/6/2009. Similarly other purchases of diamonds from alleged bogus suppliers were also exported in the same quantity. Assessee has also produced the stock register where one to one core relation between the alleged bogus purchases compared to exports was established. The learned CIT - A has noted that assessee has made only these diamonds purchased from alleged bogus suppliers has exported for Rs. 14,829,571/- where the cost of goods sold is1,31,65,072/-. Therefore, the gross profit on by the assessee is 11.22%. Net profit shown as per the trading and profit and loss account at page number 65 is 5.28%. Identical facts and circumstances in earlier years, the learned CIT-A has confirmed the addition to the extent of3% of bogus purchases. However, for this year, the learned CIT - A made the addition differently by considering the rate of the carrots purchased from one bogus supplier with the rates of another bogus supplier and the difference amount is confirmed and addition on account of bogus purchases. We do not agree with the approach of the learned CIT – A because when both the suppliers are allegedly bogus, rates paid to one party cannot be compared with rates paid to another bogus party for the reason that both are tainted transactions. We find that in the present case the decision of the honorable Bombay High Court in [2019] 103 taxmann.com 459 (Bombay) Mohd haji Adam also does not apply for the reason that honorable High Court held that Where there was no discrepancy between purchases shown by assessee and sales declared, no question of law or on form Tribunals order restricting addition made by AO on account of bogus purchase by bringing gross profit rate on purchases at same rate as applied in other genuine purchases. In this case there are no genuine purchases. The other judicial precedents relied upon by the assessee are also considered where varying rates of additions are confirmed depending on the facts and circumstances of the case of each of the assessee in the range of 1%- 12.5 % . Therefore, in absence of similar facts, those cannot be applied blindly. As stated above the facts in the case of the assessee are unique where only alleged bogus purchases of diamonds are exported in the same quantity and there are no other genuine purchase transactions. Therefore, only the facts in the case of the assessee in earlier years could be a guiding factor. Further in the case of the assessee in earlier years assessment year 2008 - 09 and 2007 - 08 the learned and CIT - A has restricted the addition to the extent of 3% of the bogus purchases which is not disputed by the revenue, therefore, we also find it reasonable to retain the addition to the extent of 3% of the bogus purchases. Accordingly, appeal of the assessee is partly allowed. Accordingly, applying the above ratio to the present case, it is held that the addition of unexplained investment u/s 69C is upheld and confirmed to the extent of 3% of the bogus purchases ie. 3% of Rs 2,73,56,857/- amounting to Rs 8,20,705/- and the balance amount stands deleted. The Grounds of Appeal are Allowed in Part.”
10. Considering the totality of facts and circumstances and order of the Ld. CIT(Appeals)/NFAC, we are of the considered view that the Ld. CIT(Appeals)/NFAC after relying on various judicial pronouncements had restricted the addition to 3% as against 100% of the bogus purchases made by the A.O, in terms of acceptance of sales of the assessee with no rejection to the stock / inventories recorded and the books of the assessee. It is also a fact on record that in the case of the assessee in earlier assessment years 2008-09 and 2007–08, the learned CIT(A) has restricted the addition to the extent of 3% of the bogus purchases which was not disputed by the revenue, therefore, dehors any further fresh facts, decision or evidence to dislodge the conviction of Ld CIT(A) which could have brought on record by the revenue, we find it reasonable to retain the addition to the extent of 3% of the bogus purchases. Accordingly, we finding no infirmity in the view taken by the Ld. CIT(Appeals)/NFAC, so we upheld the same. Thus, the Grounds of appeal No.1 to 9 raised by the revenue are dismissed as per our aforesaid observations, whereas Ground No. 10 being general in nature, warrants no adjudication.
In the result, appeal of the revenue is dismissed, in terms of our 11. aforesaid observations.
Order pronounced in the open court on 21st August, 2025.