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Facts
The assessee, engaged in trading mobile phones and electronic items, filed its return. The case was reopened on the basis of information from a survey and search action indicating circular trading among related entities. The AO estimated commission income on this circular trading.
Held
The Tribunal held that the reopening of the assessment was not justified as the reasons recorded by the AO were based on surmise and guesswork, lacking concrete evidence of commission income. The AO's premise of commission being earned was not supported by material on record, especially in light of statements from involved parties indicating no benefit from such transactions.
Key Issues
Whether the reopening of assessment under Section 147 was based on valid reasons and sufficient material, and if the estimation of commission income on alleged circular trading was justified.
Sections Cited
147, 148, 143(3), 139(1), 133A, 131, 151, 69C, 153A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, „D‟ BENCH
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL & & & &
आदेश / O R D E R PER BENCH: The aforesaid appeals have been filed by the assessee as well as by the Revenue against separate impugned orders of even date 18/07/2024, passed by ld. CIT (Appeals)-54, Mumbai for the quantum of assessment passed u/s.147 r.w.s. 144 and for the A.Yrs. 2016-17 and 2017-18; and u/s.144 for the A.Y. 2018- 19. 2. Since issues involved in all the appeals are common, therefore, same have been disposed of by way of this consolidated order. 3. We will first take up the cross appeals of the assessee and Revenue for the A.Y. 2016-17. The revenue has challenged the order of the ld. CIT(A) restricting estimated expense @1% as against disallowance by ld. AO @3% of the circular trading on account of replacement for bank guarantee payment and restricting the expenses of salary and wages at 50%; whereas the assessee has challenged the validity of reopening u/s.148 on various counts including reasons recorded by the AO and addition of Rs.80,22,725/- which has been estimated @1% of the Mr. Dhiraj Harish Khialani quantum of circular trading and adhoc disallowance of 50% of salary and wages of Rs.51,31,610/- and commission of Rs.18,00,000/-.
The brief facts are that assessee is an individual having a proprietary concern, M/s. Krishna Enterprises and is engaged in the business of trading in mobile phones and other electronic items. He has filed the return of income u/s. 139(1) on 30/11/2016 declaring total income of Rs.1,16,09,610/-. The said return was duly processed and accepted u/s. 143(1). Later on, on the basis of information received, the case was reopened u/s.147 and notice u/s.148 was issued on the basis of following “reasons recorded”:- “1. The assessee is an individual whose proprietary concern, M/s Krishna Enterprises is engaged in the business of trading in mobile phones and other electronic items. The assessee has filed its return of income u/s 139(1) of the Income Tax Act on 30/11/2016 declaring total income of Rs.11609610/-. No assessment was done u/s 143(3) of the Income Tax Act, 1961.
Brief details of information received by the A.O.
Information has been received by the undersigned in connection with a survey conducted by the DDIT (Inv) Unit 5(1), Mumbai on M/s Priyanka Communications (India) Pvt Ltd on 18.05.2019. This survey case was transferred to the undersigned as part of the search conducted on M/s Perfect mobiles & Communication Private Limited and associated entities on 14.5.2019, vide order u/s 127(2) dated 20.10.2019. In addition, a survey on 15.4.2019 was conducted in connection with the search action on M/s KGR Enterprises Pvt Ltd, at the business premises of M/s KGR Enterprises Pvt Ltd, which is also Mr. Dhiraj Harish Khialani the business premise of the assessee. This survey revealed that M/s KGR Enterprises Pvt. Ltd., M/s Krishna Enterprises and M/s Priyanka Communications (I) Pvt. Ltd were indulging in circular trading of goods. In order to investigate the issue and to gather evidences of these non-genuine transactions, during the survey action u/s 133 A of the Act conducted at the business premises of M/s Priyanka Communications (1) Pvt. Ltd on 18.05.2019, further enquiries were done. It was found that none of the three entities: M/s KGR Enterprises Pvt. Ltd., M/s Krishna Enterprises and M/s Priyanka Communications (1) Pvt. Ltd have booked profit on these transactions. Shri Amol Naik, Godown Incharge, working with M/s Priyanka Communications (1) Private Limited for the past 6 to 7 years preceding the survey, in his statement recorded u/s 131 of the Act, had admitted that they were instructed by the management to make entries in the inward register and outward register regarding movement of goods irrespective of whether the material was received or despatched from or to M/s KGR Enterprises Pvt Ltd and M/s Krishna Enterprises. Additionally, it was found that the entries in the inward register were not entered in the computer of Shri Amol Naik with respect to the transactions with the abovementioned four entities. Transactions amounting to Rs 460,26,21,643 that have been undertaken between M/s Priyanka Communications (1) Pvt. Ltd, KGR Enterprises Pvt Ltd and M/s Krishna Enterprises have not been proven to be genuine by the assessee during the course of survey or post-survey proceedings. In the absence of the furnishing of relevant details by the assessee, it is imperative to estimate the profit earned out of the said circular trading.
During the course of survey and post-survey proceedings, M/s KGR Enterprises Private Limited provided the following information regarding the sales and purchases made with M/s Priyanka Communications (1) Pvt. Ltd by the assessee for AY 2016-17:
Mr. Dhiraj Harish Khialani Entity trading Amount of Amount of with the M/s Sales Purchases Priyanka Communications (I) Pvt. Ltd for AY 2016-17 Krishna 36,80,67,841 106,14,54,012 Enterprises The sum of purchases and sales undertaken by the assessee with M/s Priyanka Communications (1) Pvt. Ltd for AY 2016-17 amounts to Rs 142,95,21,853/-
Enquiries made by the A.O, as sequel to information received:
Return of income for AY 2016-17 in the case of the assessee was perused and it was found that the assessee has not declared any income on account of circular trading in its return of income
4. Findings of the A.O.
It is clear that the assessee has also not offered any income out of such circular trading with M/s KGR Enterprises Pvt Ltd and M/s Priyanka Communications (1) Pvt. Ltd in its return of income. Such circular trading must have been undertaken with a profit motive in mind, and a commission must have been charged by the assessee on inflated purchases and sales booked by it. This commission charged is to be considered at least at 3% of total purchases and sales for the AY 2016-17 from these two entities, which amounts to Rs 4,28,885,655/- (3% of Rs 142,95,21,853/-)
5. Basis of forming reason to believe and details of escapement of income: On the basis of the aforesaid tangible material available with me and after conducting own independent enquiry, I have reason to Mr. Dhiraj Harish Khialani believe that income chargeable to tax, as mentioned in the information available, have escaped assessment for A.Y. 2016-17 within the meaning of section 147 of the I.T. Act, 1961. A notice u/s 148 r.w.s 147 is, therefore, required to be issued to re-assess such income and also any other income chargeable to tax which has escaped assessment.
Applicability of provisions of section 147/151 to the facts of the case: Considering the fact and circumstances of the case, provisions of clause (b) of explanation 2 to section 147 are applicable in the instant case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped the assessment. Therefore, assessment for AY 2016-17 needs to be re-opened by issue of notice u/s 148 of the IT Act, 1961.
As less than four years have lapsed from the end of assessment year under consideration, in compliance to the Proviso to Sec. 151(2) of the Income tax Act 1961, permission of the Additional Commissioner of Income tax, Range 6 under Pr.CIT (Central)-3, Mumbai is hereby sought to re-open the case of the assessee for A.Y. 2016-17 by issue of notice u/s. 148 of the Income tax Act 1961”
From the perusal of the „reasons recorded‟ it is seen that, the reasons u/s 147 have been recorded on the basis of information received from Investigation Wing, wherein it was intimated that survey conducted on Priyanka Communications (India) Pvt. Ltd and KGR Enterprises Pvt. Ltd, it was allegedly found that (i) M/s Priyanka Communications (India) Pvt. Ltd.; (ii) M/s KGR Enterprises Pvt. Ltd; and (iii) Messrs Krishna Enterprises (proprietary concern of the assessee) were engaged in circular trading. The „reason to belief‟ which has been given in para 4 of Mr. Dhiraj Harish Khialani the reasons, it is seen that the ld. AO has observed that such circular trading must have been undertaken with a profit motive in mind, and commission must have been charged by the assessee on inflated purchases and sales booked by it. This commission charged is to be considered at least @ 3% of total purchases and sales for the AY 2016-17 from these two entities, which amounts to Rs 4,28,885,655/- (3% of Rs 142,95,21,853/-. Thus, the ld. AO has presumed that circular trading must have been undertaken with a profit motive in mind and commission “must have been” charged by the assessee on the purchase and sale. Further, he has presumed that the commission charged is to be considered at least at 3% of total purchase and sales. Ergo, this reason is purely based on his guess work and conjecture that circular trading might have resulted in some kind of commission income.
6. Apart from that, it is seen that ld. AO has relied on information emanating from the survey proceedings, however, it has been pointed out by the ld. Counsel that on perusal of the statements on oath of Mr. Kailash Karamchandani (on page nos. 2 to 5 of the assessment order) and of the assessee (page nos. 6 to 9 of the assessment order), it can be seen that; (i) the circular trades are at the same price (refer Q. 62 of statement on oath of Mr Kailash Karamchandani on page 5 of the assessment order) and (ii) they both have stated that "there is no benefit" accruing to the assessee and KGR (refer Q. 65 of statement on oath of Mr. Kailash Karamchandani on page 5 of the assessment order and of Mr Dhiraj Khialani and assessee on page 9 of the Mr. Dhiraj Harish Khialani assessment order). Accordingly, he submitted that how such information would lead to conclusion that income of the assessee has escaped assessment. He further submitted that in the reasons recorded, ld. AO has not mentioned as to what material was available with him; or how based on such statement, ld. AO was relying to conclude that income of the assessee has escaped assessment, because in the statement they have said no benefit was given to the assessee . The crux of his argument was that ld. AO has not applied her mind independently to ascertain whether the information is sufficient for drawing reasonable inference that income of the assessee had escaped assessment rather than recording reasons without application of mind. Nowhere in the reasons, ld.AO has mentioned any evidence to support the averment that income of the assessee chargeable to tax has escaped assessment and it is merely based on case that assessee “must have” earned commission and from where ld. AO has gathered that assessee had earned 3% commission on the alleged circular trading. Thus, the reasons recorded are in accordance with the law.
On the other hand, ld. DR submitted that the very fact that assessee was involved in circular trading, that itself goes to show that in circular trading there has to be element of commission otherwise why the purchase and sale have been made on the same rate or quantity from one company to another which are interlinked with each other. Accordingly, in the reasons recorded, the ld. AO has to only record his primafacie belief and not to establish the exact escapement of income.
Mr. Dhiraj Harish Khialani 8. We have heard both the parties and also perused the relevant finding given in the impugned orders. From the perusal of the reasons, it is seen that the same is based on survey from 15/04/2019 in connection of search action of M/s. Teja Enterprises Pvt. Ltd. wherein, it was found that three entities namely Teja Enterprises Pvt. Ltd., M/s. Krishna Enterprises and M/s. Priyanka Communications (India) Pvt. Ltd., were engaged in circular trading. Nowhere, in the reasons, he has referred how these statements are incriminatory. If there was any circular trading then, whether during the course of survey or in the statement, something has mentioned or found that either there was some kind profit element which has not been disclosed in the circular trading or there was any kind of commission income which was paid or to be paid on sale or purchase. In fact, in the statement on oath of Mr. Kailash Karamchandani which has been reproduced in the assessment order, it is seen that he has categorically stated that circular trading has been done on the same price and have also admitted that there is no benefit accrued to the assessee or KGR. This statement per se cannot be said to be incriminating to hold that there was some element of commission income. It is merely a guess work and conjecture by the AO to infer that assessee might have received some commission income. Apart from that, on the one hand, ld. AO postulates that there might be profit motive behind circular trading and secondly, there might be commission earned by the assessee, which he estimated / guessed at 3% of total purchases and sales. It is a well settled proposition that once the ld. AO has certain information or material then, ld. AO has to apply his Mr. Dhiraj Harish Khialani mind whether such information or material has some element of income which has escaped assessment. The element of income escaping assessment should have live link nexus with the material / information coming on record. In other words, the material itself should indicate specific nature of income and not that income has to be inferred by some guess work based on some estimate. The very premise of the ld. AO that commission “must have been” charged by the assessee of inflated purchase and sales, goes to show that there is no evidence or material that there is involvement of any commission income. Once in the statement recorded during the survey, there is no whisper that any commission was paid or any material was found that any commission was paid or there is any element of profit, ld. AO cannot infer any commission income or profit especially when in the statement the person has categorically said there is no benefit from such transaction either to the assessee or to the concerned entity. Circular trading per se may create a doubt but that does not lead to concrete inference that assessee is benefitted by such circular trading. There could also be a possibility that the other concern might have done circular trading for its benefit and assessee is merely a pass through or conduit. Howsoever strong presumption may be but same cannot be the basis for reason to believe based on a guess work of conjecture that there might be some commission income which has been earned. Moreover, there is always a difference of opinion with regard to quantum of commission or whether there would be any element of commission or there is any some other kind of benefit. Here in this case, the ld. AO has estimated 3% of Mr. Dhiraj Harish Khialani total purchase and sale whereas ld. CIT (A) has estimated 1%. This itself goes to show that the entire reasons recorded is based on surmise and estimated guess work. Accordingly, the reasons recorded by the ld.AO do not clothe the ld. AO the jurisdiction to reopen the assessment u/s.147 merely based on some guess work or estimate. Accordingly, on the reasons recorded, the entire re-assessment proceeding deserves to be quashed.
Our reasoning for quashing the assessment is also fortified by the fact that in the case of KGR Enterprises, assessment order u/s 153A has been passed wherein the ld. AO has mentioned that trades were done to save on bank guarantee commission and there is no allegation or addition in the order of KGR Enterprises for payment of any such commission by KGR Enterprises to the assessee. If in the assessment order of the entity from which ld. AO has alleged that assessee might have received commission, no such finding or allegation have been made for payment of any commission has been paid to assessee, then how ld. AO can presume that assessee might have received the commission. Thus, we hold that reasons recorded do not justify reopening of the assessment. Accordingly, the entire re- assessment order is quashed.
Similarly, in A.Y.2017-18, exactly same reasons have been recorded by the ld. AO that assessee might have earned commission @3% on sale and purchases. In view of our finding given that reasons recorded are not sustainable and do not vest with jurisdiction to the AO to reopen the case will apply mutatis mutandis in this year also. Accordingly, the reopening u/s.147 Mr. Dhiraj Harish Khialani and the re-assessment order passed u/s.147 r.w.s. 144 for A.Y. 2017-18 is quashed.
Since we have quashed the entire proceedings u/s.147, the merits of the addition have become purely academic. 12. In the result appeal of the assessee for A.Y.2016-17 & 2017- 18 are allowed and Revenue‟s appeals for A.Y. 2016-17 & a.y. 2017-18 are dismissed.
In so far as A.Y.2018-19 is concerned, the assessee has challenged the estimate of expenses @1% and department has challenged the reduction of commission from 3% to 1%. Apart from that assessee has also challenged the adhoc disallowance of 50% of salary and wages and the Revenue is also in appeal.
The brief facts are that the ld. AO based on the information received on the basis of survey conducted by DDIT (Investigation)-Unit-5 on M/s. Priyanka Communications (India) Pvt Ltd, found that three entities M/s. KGR Enterprises Pvt..Ltd., M/s..Krishna Enterprises (assessee) and M/s. Priyanka Communications (India) Pvt. Ltd, were doing circular trading. From the information it was found that item sold to M/s. Priyanka Communications (India) Pvt Ltd, have reached to final place of M/s.KGR Enterprises Pvt. Ltd., through M/s. Krishna Enterprises. The same quantity of stock was sold by M/s. KGR Enterprises to M/s. Priyanka Communications (India) Pvt. Ltd, and on the same date, KGR Enterprises has purchased the same amount of stock from M/s. Krishna Enterprises for the same amount. In the statement of Kailash Karamchandani recorded Mr. Dhiraj Harish Khialani u/s.131, had explained the transaction and the relevant questions and answers have been reproduced in the assessment order. Thus, ld. AO has concluded that there was circular trading amongst these three entities and thereafter, he has estimated 3% of commission both on sales and purchases and worked out commission income of Rs.1,51,63,935/- on total sale and purchase of Rs.505,46,45,064/-. Thereafter, ld. AO has also disallowed salary and wages and commission debited to the profit and loss account of Rs.24,02,441/- and Rs.19,33,333/- respectively. The ld. AO in his rectification order had enhanced addition of Rs.28,89,80,016/- by taking quantum of sales and purchase aggregating to Rs.963,26,67,223/-.
The ld. CIT (A) held that there cannot be any doubt that the Circular trading has been entered by these three entities and only dispute is with regard to estimate of such expenses. The ld. CIT (A) has reduced the commission @1% after observing and holding as under:- “In this regard it is seen that the jurisdictional Hon'ble Mumbai ITAT has adopted a rate ranging from 0.15% of sales and purchases to 2% of the sales and purchases for estimating the expenses incurred in respect of such kind of bogus trading. In the case of Goldstar Finvest P. Ltd. Mumbai vs DCIT (ITA NO.74/Mum/2015], the Hon'ble Mumbai ITAT has adopted a rate of 0.15% for estimating the unexplained expenses in the case of Spanco Ltd Vs Department of Income Tax [ITA No.1128/Mum/2012], the Hon'ble Mumbai ITAT has adopted the rate of 0.25%. However, in the case of ITO 10(2)(4), Mumbai vs Moonlight Electrical [ITA No. 7344/Mum/2016], the Hon'ble Mumbai ITAT has adopted the rate of 2% for estimating the unexplained expenditure for such kind of bogus trading. It is also seen that the Hon'ble Ahemdabad ITAT in the case of Arman Fashion Pvt Ltd v ITO [ITA no. 2400 and 2407/Ahd/2012] in a Mr. Dhiraj Harish Khialani similar case of bogus circular trading for fulfilling the "turnover" criteria of banks for getting finance, had restricted the addition made by the AO by adopting the rate of 0.05% of the total turnover It is also seen that the Hon'ble Ahemdabad ITAT in the case of JCIT (OSD) v Pradip Overseas Ltd [ITA No. 790/Ahd/2018] in a yet again similar case of circular trading had estimated the expenses by adopting the rate of 0.3% of the circular trading purchases. As already mentioned above, on similar grounds, in the case of the other trading partner ie KGR Enterprises Pvt Ltd, the rate of 1% had been adopted at the end of the appellate proceedings before CIT(A) vide appellate order dated 02.02 2024. 8.3.4 Thus one thing which clearly emerges is that the rate adopted by the AO for estimating the expenses is indeed on a higher side. Also it is also seen that the appellant has not denied the fact that there was circular trading Once it is established that circular trading had been entered into, it is but obvious that expenses would also have been incurred for this purpose. It is also clear that the appellant has not been able to demonstrate as to how such expenses in respect of such circular trading have been incurred and recorded in the books of accounts. Accordingly, respectfully following the Hon'ble Mumbai ITAT and the Ahmedabad ITAT and after considering the facts and circumstances of the case, it would be fair and reasonable if the rate of 1% is adopted for estimating the unexplained expenditure u/s 69C of the Act in respect of such circular trading As already mentioned above, on similar grounds, in the case of the other trading partner ie KGR Enterprises Pvt Ltd, the rate of 1% had been adopted at the end of the appellate proceedings before CIT(A) vide order dated 02.02.2024. Accordingly, the addition made by the AO is restricted to 1% of the sales and purchases in respect of such circular trading. As already mentioned the addition is, however, to be made u/s 69C of the Act.
With regard to disallowance of salary and wages and disallowance of commission Ld. CIT (A) has sustained the addition by reducing the disallowance restricted to 50%. Thus addition has been sustained on adhoc basis.
Mr. Dhiraj Harish Khialani 17. We have heard both the parties and also perused the relevant finding given by ld. AO and ld. CIT(A). As noted in the earlier appeals, the entire premise of the ld. AO to impute 3% commission on entire sales and purchase is based on the fact that during the survey it was found that three entities namely KGR Enterprises Pvt. Ltd.; Priyanka Communications (India) Pvt. Ltd., and M/s.Krishna Enterprises(assessee) were indulged in circular trading and same quantity and value of goods were purchased and sold amongst each other. According to the ld. AO, M/s.KGR Enterprises might have paid commission @3% and therefore, he has estimated 3% commission, both on purchase as well as on sales. The ld. CIT (A) has reduced the estimate of commission from 3% to 1% following certain decisions of the Tribunal.
Now, whether at all there could be any estimated commission on such circular trading or not, then there has to be some finding or information in the case of KGR Enterprises that it has paid certain commission or there is any material or evidence found in the course of search / survey in the case of KGR Enterprises that some unaccounted commission has been paid. As noted earlier, in the various statements including of Kailash Karamchandani, director of M/s. KGR Enterprises Pvt. Ltd., nowhere he has stated that any kind of commission was paid to the assessee, in fact he has stated that there is no benefit being pressed on to any of the parties nor there is any profit element. This entire exercise of circular trading was done by KGR for the purpose of saving on by replacement of bank guarantee Mr. Dhiraj Harish Khialani payment. It has been brought on record that same Assessing Officer while making the assessment in the case of KGR Enterprises Pvt. Ltd. in the assessment order u/s 153A has neither held nor observed that any kind of commission was paid to Krishna Enterprises by KGR Enterprises. From the perusal of the assessment order of KGR Enterprises Pvt. Ltd., (the copy of which has been placed from paper book from pages 20-41 wherein the order u/s.153A has been passed), there is a detailed discussion about this circular trading, and ld. AO has referred to various statements and inquiries conducted. In that case, nowhere ld. AO has made any allegation or addition has been made for payment of any such commission to the assessee. In that case ld. AO has estimated expenses @3% of total sale and purchase booked through circular trading. If in the case of KGR, it has been found that KGR itself was the beneficiary of circular trading and expenses has been estimated in the case of KGR and there is no finding that KGR has paid any kind of commission to the assessee nor there is any addition made there, then in the case of the assessee no commission / income can be presumed or estimated on sales and purchases. In such a situation and circumstances no addition can be made in the hands of the assessee. Accordingly, addition made by the ld. AO and partly sustained by the ld. CIT (A) on adhoc basis is deleted.
In so far as adhoc addition on account of salary and wages no specific finding has been given that the expenses debited to the profit and loss account are not verifiable or was nor for the purpose of business. At least prima facie something should have Mr. Dhiraj Harish Khialani stated or any specific defect should have been pointed out that the details are not properly maintained or the expenses on account of salary are not subject to verification. If the assessee has showing huge turnover from trading of mobile and electronic gadgets and salary and commission payment is commensurate with the earlier years then no adhoc addition can be made. Accordingly, adhoc addition under the head salary and commission is deleted.
In the result, appeals of the assessee are allowed and appeals of the Revenue are dismissed. Order pronounced on 30.05.2025.