SUNJEWELS PRIVATE LIMITED,MUMBAI vs. DY. COMMISSIONER OF INCOME TAX - 3(2)(1), MUMBAI

Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 08.08.2024, partly allowed the assessee’s appeal.

Both the assessee as well as revenue are in appeal before us, challenging the impugned order of the ld. CIT(A).

The first ground of appeal

The learned Departmental Representative (ld. DR for short) on the other hand controverted the said fact and contended that the assessee has not fulfilled the conditions prescribed u/s. 72A r.w.r. 9C of the IT Rules, 1962. The ld. DR further stated that the assessee has failed to furnish form 62 for claiming benefit of set off of brought forward losses by the amalgamated company. The ld. DR relied on the order of the lower authorities.

We have heard the rival submissions and perused the materials available on record. The issue pertaining to this grounds is whether the assessee is entitled to claim of set off of brought forward losses of Rs. 2,52,04,181/- as on 31.03.2013 of the amalgamating company M/s. Aditi Jewels Pvt. Ltd. which has merged with the assessee company during the year under consideration as per the provisions of Section 72A r.w.s. 9C of IT Rules, 1962. It is trite to reproduce the said provision for ease of reference:

From the above, it is evident that Section 72A(2)(b)(iii) of the Act prescribes the amalgamated company should fulfil the conditions for ensuring the revival of the & 5244/Mum/2024 (A.Y. 2014-15) Sunjewels Private Limited business of the amalgamating company or to ensure that the amalgamation is for genuine business along with the other conditions prescribed u/s. 72A of the Act. Further, Rule 9C provides that the amalgamated company shall furnish a certificate in form 62 duly verified by an accountant with regard to the books of account and other documents along with the return of income containing the prescribed level of production for the year under consideration and for subsequent assessment years within 5 years from the date of amalgamation. The ld. AO rejected the assessee’s claim for failure to furnish form no. 62 and also for the reason that the assessee has failed to substantiate as to why form 62 was not filed before the ld. AO for the year under consideration. The ld. AR relied on the decision of the Hon’ble High Court of Madras in the case of Lotte India Corporation Ltd. (supra), where on identical facts it was held that when the amalgamated company has achieved 100% of the installed capacity of production and has complied with the other conditions then filing of form 62 which is only directory and the non-compliance of the same would not disentitle the assessee to claim carry forward losses to be set off. The relevant extract of the said decision is cited herein under for ease of reference: “6. The relevant provisions of section 72A read with rule 9C are very clear in this regard. These provisions clearly stipulate that after the merger, within four years, the amalgamated company should achieve at least 50% of the installed capacity of production. Though the learned Tribunal, in its order, has not discussed the facts and figures as discussed by the Commissioner of Income-tax (Appeals) in its order quoted above, it has observed that the non-filing of prescribed Form No. 62 for the third Assessment Year, after amalgamation, namely AY 2006-07, is not relevant, because the mark of 50% of installed capacity of production can be achieved at any point of time within four years after the date of merger, which is 1-4-2003 in the present case. Even though the exact date of crossing over the mark of 50% cannot be ascertainable in the present case, but the fact is undisputed that in the fourth year, the amalgamated company achieved more than 100% of its installed capacity of production. We do not think that the requirement of filing of the requisite information in Form No. 62 for the third assessment year can be said to be a condition precedent or a mandatory condition to allow the Assessee to carry forward such losses under section 72A of the Act. The & 5244/Mum/2024 (A.Y. 2014-15) Sunjewels Private Limited said condition of filing the Form No. 62, at best, is only directory and non-compliance thereof would not disentitle the Assessee to claim such carry forward losses to be set off against the profits of the Assessee company. There is no dispute before us that the fact of crossing of the 50% of installed capacity of its production stood achieved by the Assessee in the present case in the fourth year, as would be clear from the order of the Commissioner of Income- tax (Appeals) for AY 2007-08, which is produced on record and quoted above.”

It is observed that the ld. AO as well as the ld. CIT(A) has rejected the assessee’s claim of brought forward business losses only for non-filing of form no. 62, which the Hon’ble High Court has held to be not a mandatory condition when the assessee is said to have complied with the other conditions viz. the 50% of installed capacity of its production within 4 years after the merger as per the provisions of the Section 72A of the Act. By respectfully following the said proposition, we hereby hold that the assessee’s claim cannot be disallowed merely for non-filing of the form no.

Pertinently, neither the ld. AO nor the ld. CIT(A) has specified about the desired installed capacity and the assessee has also not brought the exact figures before us to show that it had crossed the mandatory 50% installed capacity within the specified time limit. We therefore are of the considered view that this issue is to be remanded back to the ld. AO to allow the claim of the assessee after satisfying that the assessee has fulfilled all the conditions prescribed u/s. 72A r.w.r. 9C of the IT Rule, 1962.

In the result, ground no. 1 filed by the assessee is allowed for statistical purpose.

Ground no. 2 pertains to disallowance of Rs. 42,68,634/- on account of bogus purchases made from M/s. Arihant Exports and Aadi Impex made by the ld. AO and restricted to Rs. 4,26,863/- by the ld. CIT(A) on 10% of the total purchase value of Rs. 42,68,634/.

Both the assessee as well as the revenue are in cross appeals before us, challenging the said disallowance. It is observed that the assessee has purchased raw materials from the & 5244/Mum/2024 (A.Y. 2014-15) Sunjewels Private Limited said parties which according to the sales tax authority are bogus purchases from hawala parties, where the ld. AO made this addition on the basis of the information received from the sales tax department that the purchases made by the assessee of Rs. 42,68,634/- are from hawala parties. The assessee contended that for A.Y. 2011-12 to 2013-14 addition on bogus purchases was restricted to 5% and the ld. CIT(A) on the other hand restricted to 10% of the total alleged bogus purchases. It is observed that based on the search action conducted by the investigation wing in the case of Shri Rajendra Jain and Shri Surendra Jain who are controlling and managing M/s. Arihant Export and Adi Impex as per their statement recorded on oath, it was found that the assessee was one of the beneficiaries of accommodation entries by way of bogus purchases of diamonds without any actual purchase. The assessee had furnished the details of all purchase invoices for diamonds bought from M/s. Aadi Impex and Arihant Exports along with purchase bills and has also given details of the export sales made by the assessee, where the ld. AO observed that the assessee has obtained accommodation entry of Rs. 1,94,232/- and 35,86,485/- respectively from the above said parties and even the amalgamating company M/s. Aditi Jewels Pvt. Ltd. is also said to have availed accommodation entry of Rs. 1,01,213/- and 75,125/- from the two concerns controlled and managed by Rajendra Jain group. The assessee contended that it had furnished the copies of all purchase bills in which the customs stamps are endorsed in all these bills after due verification of the materials that are purchased from M/s. Aadi Impex and M/s. Arihant Exports. The assessee is also said to have furnished details of the exports done by the assessee out of the diamonds purchased from these two entities. The ld. AO & 5244/Mum/2024 (A.Y. 2014-15) Sunjewels Private Limited rejected the assessee’s contentions by relying on the statement of Shri Rajendra Jain who had admitted to providing accommodation entries to various beneficiaries. It is also observed that the proprietor of M/s. Aadi Impex and M/s. Arihant Exports viz. Shri Anoop V. Jain and Shri Sachin Pareek had admitted that they were mere employees acting on the behest of Shri Rajendra Jain and Shri Surendra Jain whose modus operandi was to import rough and cut and polish diamonds for beneficiaries who do not want to disclose the materials imported in their books of accounts and in turn, the hawala companies issue bills to these parties for a specified commission. The ld. AO made 100% addition on the impugned purchases and the first appellate authority restricted the same to 10% of the bogus purchases on the ground that the ld. AO has merely made the addition on the basis of the earlier years assessment for A.Y. 2010-11, 2011-12 and 2013-14, where the addition was at 5% on the bogus purchases. The ld. CIT(A) relied on the decision of the Hon’ble High Court of Gujrat in the case of CIT vs. Simit P. Sheth 356 ITR 051 and Bholanath Polyfab Pvt Ltd. 355 ITR 290 (Guj.), where only the profit element arising out of the bogus transaction was added to the total income. The ld. DR for the revenue contended that the assessee has failed to produce VAT/TIN and PAN number of the sellers from whom the assessee is alleged to have purchased raw materials and on verification only the VAT number of M/s. Adi Impex was available, whereas the PAN of both parties were not available.

In the above facts of this issue, it is observed that the ld. AO has made 100% addition on the alleged bogus purchases by relying on the statement of Shri Rajendra Jain and Shri Surendra Jain. The ld. CIT(A) though has admitted the same to be bogus purchases & 5244/Mum/2024 (A.Y. 2014-15) Sunjewels Private Limited has restricted the disallowance to 10%. Admittedly, the issue of bogus purchases was there in the assessee’s case for A.Y. 2010-11, 2011-12 and 2013-14, where the department has made an addition of 5% to the total bogus purchases. Further, it is observed that there is no discussion by the ld. CIT(A) with regard to the evidences that were filed by the assessee pertaining to the purchases and the corresponding sales made by the assessee. The ld. AO has also failed to give a detail finding as to the evidences that were furnished by the assessee. Even before us, the assessee has failed to establish by way of cogent evidence that these were genuine purchases. In the absence of complete documentary evidences as to the alleged purchases, we find no justification in restricting the disallowance to certain percentage, herein this case, 10% by the ld. CIT(A) by relying on certain decisions. We would also place our reliance on the recent decision of the Hon’ble Jurisdictional High Court in the case of PCIT vs. Kanak Impex (India) Ltd. [2025] 172 taxmann.com 283 (Bombay) and the subsequent decision in the case of Drisha Impex Pvt. Ltd. [2025] 173 taxmann.com 571 (Bombay), wherein it was held that in case of disallowance on bogus purchases, addition should not be made by estimating profit but on the entire alleged bogus purchases, where the assessee has failed to establish the source of expenditure or the explanation offered by the assessee is not to the satisfaction of the ld. AO. Further, it held that the expenditure claimed by way of bogus purchases shall be deemed to be the income of the assessee which ought not to be allowed for deduction under any head of income. Though the decision in Kanak Impex (Supra) was on the basis of non co-operation of the assessee to discharge the onus, the subsequent decision in the case of Drisha Impex (Supra) has & 5244/Mum/2024 (A.Y. 2014-15) Sunjewels Private Limited dealt with the same by relying on the legal proposition laid down by the Hon’ble High Court in the case of Kanak Impex (Supra). In the present case in hand, the assessee has failed to establish the genuinity of the alleged bogus purchase and the lower authorities have also failed to discuss the reliability of the evidences furnished by the assessee in detail. For this reason, we deem it fit to remand this issue back to the file of the ld. CIT(A) to consider the documentary evidences of the assessee and if required shall admit any further evidences which is deemed fit and to decide the issue afresh in the light of the decision of the Hon’ble Jurisdictional High Court in the case of Kanak Impex and Drisha Impex (supra).

In the result, ground no. 2 of the assessee’s appeal and ground no. 1 of the revenue’s appeal are allowed for statistical purpose.

Ground no. 2 of the revenue’s appeal is on the addition/disallowance made u/s. 14A r.w.r. 8D of the Act. It is observed that the assessee company has earned dividend income of Rs. 3,16,64,056/- from mutual funds which has been claimed exempt in the computation of income u/s. 14A. The assessee submits that the investment in mutual funds and equity shares as on 31.03.2013 was Rs. 13,36,29,385/- and Rs. 19,23,67,484/- as on 31.03.2014. The assessee further stated that it had incurred PMS expenses of Rs. 3,19,964/- STT and other expenses are Rs. 3,38,987/- aggregating to Rs. 6,58,951/- and made suo moto disallowance on the same. The assessee is said to have worked out the disallowance of expenses as per Rule 8D(2)(iii) at Rs. 7,64,992/- which is 0.5% of the average value of investment as per the current investment details in note 13 of the balance sheet as on 31.03.2014, which includes mutual funds and investment in PMS & 5244/Mum/2024 (A.Y. 2014-15) Sunjewels Private Limited and as per Rule 8D(2)(ii) at Rs. 97,578/- being disallowance of interest expenses incurred on PSL/EBRD loans. The ld. AO made a disallowance of Rs. 9,30,613/- after reducing the suo moto disallowance made by the assessee amounting to Rs. 6,58,951/- from the total disallowance of Rs. 15,89,564/-.

Aggrieved the assessee was in appeal before the first appellate authority, who had deleted the impugned addition/disallowance on the ground that the ld. AO has invoked the provision of Rule 14A r.w.r 8D without recording his dissatisfaction as to the correctness of the claim made by the assessee in accordance with the decision of the Hon’ble Apex Court in the case of Godrej Boyce and Manufacturing Co. Ltd. and vs DCIT (394 ITR 449 SC). Further, the ld. AO has failed to consider that only the average value of those investment which has yielded exempt income should have been considered in light of the decision of the Hon’ble Delhi High Court in the case of ACB Ltd. TS 176 HC 2015 DEL.

From the above facts and on perusal of the rival contentions, it is observed that the ld. AO has invoked Section 14A r.w.r. 8D mechanically without recording his dissatisfaction as to the correctness of the claim of the assessee. It is a settled proposition of law by the Hon’ble Apex Court and various High Courts that the ld. AO will have to mandatorily record his satisfaction as to why Section 14A r.w.r. 8D is to be invoked. In the present case in hand, we find that the ld. AO has failed to record the dissatisfaction as to the claim of the assessee. On this observation, we find no infirmity in the order of the ld. CIT(A) in deleting the impugned addition/disallowance. We therefore deem it fit to dismiss ground no. 3 and 4 raised by the revenue.