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Facts
The assessee appealed an order confirming additions made by the Assessing Officer (AO) on account of alleged bogus purchases from an entity managed by Rajendra Jain. The AO disallowed the entire purchases based on an Investigation Wing report stating the entity provided accommodation entries. The assessee provided invoices, payment proofs, and sales details, claiming the purchases were genuine.
Held
The Tribunal held that the lower authorities were not justified in making a 100% disallowance solely on the basis of an Investigation Wing report without independent verification. It noted the assessee had provided documentary evidence of purchases and payments. Citing various High Court and Tribunal decisions, the Tribunal restricted the disallowance to 6% of the impugned purchases, representing the profit element.
Key Issues
Whether the entire amount of alleged bogus purchases can be disallowed without independent investigation, or if only the profit element embedded in such transactions should be taxed.
Sections Cited
144, 147, 254(1)
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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee is directed against the order of Ld. CIT(A)/NFAC dated 10.02.2025 for assessment year (AY) 2011-12. The assessee has raised following grounds of appeal:
“1(a) The Ld. Assessing Officer erred in reopening the case without reasons to believe that the income of the Appellant had escaped assessment. (b) The assessment order dated 15.12.2018 passed by the Ld. Assessing Officer u/s. 144 r.w.s 147 of the Act is invalid, non-est and bad in law. 2.(a) The Ld. CIT(A) erred in law and facts in confirming the action of Ld. Assessing Officer in making addition amounting to Rs. 13,82,306/-, being the amount of alleged bogus purchases, without appreciating the facts and circumstances of the case and without providing the Appellant adequate opportunity of being heard.
(b) The Ld. CIT(A) erred in law and facts in confirming the action of Ld. Assessing Officer in merely placing reliance on the unconnected and uncorroborated statement of Shri Rajendra Jain without providing the Appellant a copy thereof or an opportunity of cross examination. 3. All the above grounds are independent and without prejudice to each other. 4. The Appellant craves leave to add, amend, delete and modify the above grounds of appeal.”
2. Rival submissions of both the parties have been heard and record perused. At the beginning of submission, the learned authorised representative (ld. AR) of the assessee submits that he is not pressing ground no. 1 of appeal.
Considering the submission of assessee, ground no. 1 of the appeal is dismissed as not pressed. Ground no. 2 relates to addition of Rs. 13,82,306/- on account of alleged bogus purchases shown from Adi Impex an entity managed by Rajendra Jain and his associates. The Assessing Officer made disallowance or entire purchases from Adi Impex. The ld. AR of the assessee submits that they have proved the purchases by providing tax invoices and corresponding sales, payments were made through banking channel. The assessee has also shown sales against the purchases. The assessee proved beyond doubt about the purchases as genuine. No independent investigation was carried out by assessing officer. The assessing officer solely relied upon the report of Investigation Wing without providing copy of it. The ld. CIT(A) has not given any relief despite the facts that the assessee has proved the purchases and source thereof. The ld. CIT(A) in a worst situation should have restricted the addition to the extent of profit element embedded in such type of doubted transaction. In support of his submissions, the ld. AR of the assessee relied upon the decision: Sethia & Sons Jewellers vs ACIT (ITA No. 414/M/m/2025) Haryana Jewellers P. Ltd. vs ITO Ward-11(1) (ITA No. 2315/Del/2018) ACIT vs Dhiraj Parbal Gothi (ITA No. 580/Mum/2025) ITO vs Khimchand Okchand Bhansali (ITA No. 6546/Mum/2024) 3. On the other hand, the learned Senior Departmental representative (Sr DR) for the revenue submits that the assessing officer while passing the assessment order made addition by disallowing certain purchases shown from Rajendra Jain and others. On Rajendra Jain and others, a search action was carried out by Investigation Wing on 03.10.2013 wherein it was found that Rajendra Jain and his associate were indulging in providing accommodation entry. During search action it was conclusively proved that Rajinder Jain was proving accommodation entry through various entity managed by his associates or family members. The assessee has shown purchases of diamonds from Aadi Impex, which was managed by Rajendra Jain and his associate. Aadi Impex was used for providing accommodation entry. The assessing officer on the basis of report of Investigation Wing made addition by disallowing 100% of purchases shown from Aadi Impex. Though, the assessee made his claim before assessing officer by showing purchase and sale register, and invoices and claimed that payments were made through banking channel. However, fact remains the same that department was having sufficient material to prove that purchases shown from Aadi Impex is nothing but accommodation entry to inflate the expenses. The assessee has shown purchases only to inflate the expenses. To support his submission, the ld Sr DR for the revenue relied on the decisions of Hon’ble Bombay High Court in PCIT Vs Kanak Impex in income Tax Appeal No. 791 of 2021.
I have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. I have also deliberated on various case laws relied by ld. AR of the assessee. I find that assessing officer made addition by disallowing 100% of purchases shown from Aadi Impex. The assessing officer made addition by holding that Aadi Impex is an entity managed by Rajendra Jain and his associates. The AO solely relied on the report of investigation wing. I find that during assessment, the assessee furnished purchase bills, ledger and payment of purchase consideration through banking channel. The reply of assessee was disregarded. The assessing officer mainly relied upon the representative of Investigation Wing and made addition of 100% of purchases by rejecting books of account. The assessing officer has not specified cogent reason to reject the books of account. The sales of assessee was not disputed. The assessing officer simply held that books of account maintained by assessee is manipulated and unreliable. No supporting material is brought on record by carrying out any independent investigation or verification of fact. The ld. CIT(A) confirmed the action of assessing officer without referring the submission of assessee. The Assessing Officer and ld. CIT(A) relied upon the decision of N.K. Protein vs DCIT in Tax Appeal No. 240-242 of 2003 dated 20.06.2016. The facts of N.K.
Protein Ltd. vs DCIT (supra) is at variance. N.K. Protein was engaged in the manufacturing activity. However, the assessee in the present appeal is a trader. The sale of trader/ assessee is not disputed. The sale is not possible in the absence of purchases. Thus, in my view, the lower authorities were not justified in making 100% of disallowance of purchases solely on the basis of report of Investigation Wing.
Rajendra Jain and his associates were searched on 03.10.2013. On the same day, Bhanwarlal Jain, Sohanlal Jain, Dharmi Chand Jain and their associates were also searched. On the basis of said search action, cases of several hundred traders who had made transactions of purchases or sale and were trading diamonds and jewellery, were reopened. Majority of such, assessee’s were carrying their business activities in Surat. The Surat Bench of Tribunal after hearing similar appeals of assesses who were beneficiary of similar purchases in a series of decision disallowed, restrict or enhanced similar addition to the extent of 6.00 % of such purchases. The decisions of Surat Bench in a number of cases were challenged before Gujarat High Court wherein 6.00 % of disallowance made by Surat Bench was upheld. Hon’ble Gujarat High Court in Surya Impex reported vide PCIT Vs Suyra Impex (2023) 148 taxmann.com 154 (Gujarat) held that where AO received report from Investigation Wing that assessee-firm received accommodation entries in form of bogus purchases from one J group and made 100 per cent addition with respect to said purchases, however while dealing with case of J group and other parties involved in providing such entries AO chose to make addition at rate of 3 per cent to 5 per cent, Tribunal was justified in limiting addition in hands of assessee at rate of 6 % of impugned purchases. Further in Pr. CIT v. Pankaj K. Choudhary [R/Tax Appeal No. 617 of 2022, dated 7-3-2023], Hon’ble Gujarat High Court held that in respect of bogus purchases, the addition at the rate of 6% of bogus purchases is fair and reasonable.
The relevant part of decision in PCIT Vs Surya Impex (supra) is extracted below:
We have given it the due consideration and also noticed that a detailed order passed by the CIT (Appeals), where it has noticed two aspects; (i) that the opportunity to cross-examination was not provided, and (ii) there had been no independent inquiries made by the Assessing Officer. It relied on the report of the Investigation Wing, Mumbai. The CIT (Appeals) was of the opinion that the Assessing Officer has not discussed any of the details, books of accounts, documents, etc.; and that he is not even examined or found any defects in the stock registers, books of accounts, as also other documents. The appellant has also produced day-to-day stock registers, details of purchases and sales, the trading account and the stock registers has shown that there is NIL opening and closing stock, which means that the purchases made during the year are all sold during the year. Also reasoned out that if the sales are treated as genuine and the impugned purchases are treated as bogus then the stock will go into negative to the extent of impugned purchases. The day-to-day stock register shows the receipts and issue of diamonds and stock in hand along with name of party to whom purchase and sale is made. The stock register is both for rough diamonds and polished diamonds. The statement of Shri Bhanwarlal Jain and the report of the Investigation Wing was much relied upon. As against that, the CIT (Appeals) noticed the copies of purchase bills, copy of bank statements showing the payment, day to day stock registers showing incoming and outgoing diamonds and the daily stock tally, confirmation of the party from whom the said purchases were made. Thus, having noticed that all payments were made from bank accounts and all these evidences had not been discussed by the Assessing Officer, with no word as to why these documentary evidences were not acceptable by the Assessing Officer, the CIT (Appeals) chose to follow the cases of beneficiaries of accommodation entries of said Bhanwarlal Group cases, where the Assessing Officer (ACIT/ITOs) have not made 100% disallowances, but the disallowances ranging from 3% to 5% of the impugned purchases. The relevant observations made by the CIT (Appeals), Surat in relation to the same in paragraph 0.7 to 0.9 as under :
"0.7 The AR has brough to my notice that on identical facts, there is a binding decision of Hon'ble Gujarat High Court in the case of M/s. Mayank Diamond Pvt. Ltd., reported in 2014 (11) TMI 812 (Guj.) in Tax Appeal No. 200 of 2003 dated 7-11-2014. In that case, the appellant was engaged in trading of polished diamonds. The learned Assessing Officer came to the conclusion that purchases amounting to Rs. 1,86,36,447/-are bogus and disallowed the same. The learned CIT (Appeals) dismissed the appeal, however, the Hon'ble ITAT gave partial relief to the assessee by directing the learned Assessing Officer to make addition @12.5%. On appeal, the Hon'ble High Court of Gujarat has held that '….Gross Profit rate of 5% is the average rate of the industry and we think it fit to make addition on account of % gross profit rate. ...'
0.8 Also, the AR brought to my notice the decision of the Commissioner of Income Tax, Mahidharpura, (AT 2007-08) dated 21-3-2016, wherein on identical facts and after considering the above legal positions, the learned CIT (Appeals), has taken a view that the decision of the Hon'ble High Court of Gujarat in the case of M/s. Mayank Diamond (P.) Ltd., (supra) is binding and hence, confirmed the disallowance of 5% of the impugned purchases. 0.9 During the appeal proceedings, the AR has produced before me the copies of assessments done by many learned Aos at Mumbai, in the case of beneficiaries of accommodation entries of the same Bhanwarlal Group cases. In cases identical to the appellant, the learned AO (ACIT/ITOs) have not made 100% disallowances even if they have held that purchases are bogus. They have made disallowances ranging from 3% to 5% of the impugned purchases. A chart showing the details of those assessments is annexed as Annexure 'A'. Similarly, the learned Commissioners of Income-tax (Appeals) in Mumbai have confirmed disallowance @ 3% in different cases. A table showing details is annexed as Annexure 'B'. The annexures may be treated as integral part of this order. From the above, it is clear that the learned Aos and learned CsIT (Appeals) are of the view that the beneficiaries of accommodation entries have made a benefit of 3% to 5% of the impugned purchases."
This is dealt with again in extenso by the Tribunal as under :
"19. We find that the Assessing Officer made addition solely on the basis of third party information/report of investigation wing, Mumbai. The report of investigation, Mumbai was not provided to the assessee. During the assessment, the assessee demanded the copy of statement of Bhanwarlal Jain and his cross examination, copy of such statement was not provided to the assessee. The Assessing Offcier, nowhere rejected the demand of assessee. We find that the assessee filed detailed evidence consisting details of purchase, PAN and addresses of parties, purchase invoice, stock register, day to day register and sales register. No comment was made by Assessing Officer on the documentary evidence furnished by assessee. The sales of assessee was not disputed. No sale is possible in absence of purchase. The Assessing Officer estimated addition on account of purchases without rejecting books of accounts of assessee. The learned CIT(A) restricted to addition to the extent of 12.5% of the total purchased shown by taking view that the assessee shown G.P of less than 1.15%. In our view the disallowance restricted by Ld. CIT(A) is on higher side. The profit margine in the industry is 5% to 7%. It is settled law in case of disputed purchases shown from such hawala dealers on the profit element embedded to avoid the possibility of revenue leakage is to be disallowed. No doubt made the assessee has shown extremely low G.P i.e. 1.15% only, yet the disallowance at rate of 12.5% is on higher side. This combination is similar cases, wherein the purchases are shown from Bhanwarlal Jain for providing accommodation entry, have restricted or enhanced the addition to the extent of 6% of impugned or disputed purchases. Therefore, taking the consistent the disallowance of purchases in the present case is also restricted to 6% of the disputed purchases. In the result, the grounds of appeal raised by assessee is partly allowed."
11. Having found that the Assessing Officer has chosen not to reject the books of accounts of the assessee and had made the estimated additions of the pieces of the purchases. Both, the CIT (Appeals) and the Tribunal, have concurrently and rightly held to make the additions, which the CIT (Appeals) had done @ 12.5% of the impugned purchases, which have been reduced and restricted to 6%. It will not be out of place to make a mention that the Assessing Officer's inquiry was based on the report of the Investigation Wing, Mumbai, the copy of the statement of Shri Bhanwarlal Jain and others had been asked for by the assessee, which also had not been provided nor was he allowed a cross-examination. This, of course, could have been a reason for the Authority concerned to restore the matter back to the Assessing Officer, however, noticing the elaborate evidence consisting the details of purchase, PAN, etc., coupled with the Assessing Officer and the CIT (Appeals) dealing with the case of Shri Bhanwarlal Jain and others involved therein, if addition directed of 6% of the disputed purchases by noting that the profit margin in the said industry is 5% to 7% without even going by the estimation of the possible profit margin in the industry, suffice to note that in all cases relating to Shri Bhanwarlal Jain, both, the Assessing Officer and the CIT (Appeals), Mumbai, have chosen to make addition @ 3% to 5% of the bogus purchases. That view of the matter, no purpose is going to be served in interference. There are concurrent findings with sound reasons. We have also given an opportunity on 3-1-2023. An explicit order noting that there is a reference of group of cases of Shri Bhanwarlal Jain and others. The Revenue is not in a position to bring before this Court as to what had happened to all those cases that whether they travelled to the High Court or to the Hon'ble Apex Court.
12. This Court in Tax Appeal No. 200 of 2003 in case of Mayank Diamonds (P.) Ltd. (supra) was required to decide the estimation of the gross profit @ 12.5% against the gross profit of 1.03% shown by the assessee. The Court allowed the gross profit rate of 5% holding that 12.5% is drastically higher. In N.K. Industries (P.) Ltd. (supra), where the Court had considered the addition of entire amount on the ground that the fictitious purchases is a factually different than what was already held at Mayank Diamonds (P.) Ltd. (supra). In the other cases of Shri Bhanwarlal Jain also, addition rates are 3% to 5% where no further challenge possibly is there or it has not been processed further. This Court finds that no question of law, much less any substantial question of law arises for consideration of this Court.
Considering the fact that in case of similar beneficiary, purchases shown from the entity managed by Rajendra Jain and his associates, disallowances were restricted to 6.00% on the principle that in income tax proceedings, only profit element embedded in such type of transaction can be brought to tax to avoid the possibility of revenue leakage instead of taxing the entire transaction. Majority of Surat Bench decision on similar addition/disallowance was authored by undersigned. Thus, a taking consistent view, the disallowance of 6.00% of Rs. 13,82,306/- is upheld and remaining 94% of purchases expenses are deleted. The AO is directed to tax only 6.00% of Rs. 13,82,306/-. In our humble view, the ratio of said decision is not applicable on the facts of present case as facts of the present case are at variance. In the said case, assessment was completed under section 144 wherein assessee failed to substantiate the purchases. However, in the present case, the assessee has furnished details of purchases before assessing officer. In the result, grounds of appeal of assessee raised by the assessee are partly allowed.
In the result, the appeal of assessee is partly allowed.