ACIT-CIR.20(1), MUMBAI, MUMBAI vs. HITESH JOITKUMAR JAIN, MUMBAI

The AO noticed that out of the above, following six concerns have been identified by the Investigation Wing as concerns providing accommodation entries only without actually supplying materials:-

4.1. The assessee further submitted that all the payments for purchases have been made through banking channels. He also furnished confirmation letters obtained from the suppliers. The assessee also came to know that the AO has issued notices u/s. 133(6) of the Act to all the suppliers and they have also responded to the said notices and confirmed the sales made to the assessee.He submitted that the sales turnover has been duly reported to the Sales Tax authorities through VAT returns filed.

4.2. With regard to the statements recorded from Shri Ramesh Soni and Shri Praveen Jain during the course of survey action conducted in their respective hands, the assessee requested the AO to furnish the copies of the statements recorded from them and also provide with an opportunity to cross-examine them. The assessee contended that he has not purchased or sold any goods from/to the above said two persons. The assessee further submitted that he has stopped trading in diamonds after demonetization and started the business of trading in gold in the succeeding year and the turnover reported by him in the FY. 2017-18 was Rs. 48 crores. Accordingly, the assessee contended that there is no reason to suspect the transactions undertaken by the assessee.

4.3. As per the request made by the assessee, the AO provided copies of statements recorded from Shri Ramesh Soni and Shri Praveen Jain to him. In addition to the above, the AO also provided copy of statement recorded from one more person named Shri Sumit Surendrasingh Kavadia. The & 2639/Mum/2024 assessee, after going through the copies of statements given by above said persons, made following submissions before the AO:- (a) He did not have any dealing with the concerns belonging to Shri Praveen Jain. Further, Shri Praveen Jain has categorically stated that he is not involved in the transactions with M/s Dharmik Exports P Ltd. (b) Shri Ramesh Soni has retracted his statement and further, he has also filed a case against the income tax department. Further, he is not a director of the two companies who supplied goods to the assessee.Further, he has given the list of beneficiaries and the name of the assessee does not find place therein. (c) Shri Sunit Surendrasingh Kavadia is stated to be the operator of M/s Aprateen Gems P Ltd, but the assessee did not purchase any goods from the above said concern. Accordingly, it was contended that the statements given by above said persons cannot be relied upon by the AO to suspect the genuineness of purchases made by the assessee. At this stage also, the assessee again reiterated that he should be provided with an opportunity to cross examine the above said persons, if their statement is going to be relied upon by the AO.

& 2639/Mum/2024 Hence, the AO fully placed his reliance on the statements given by Shri Ramesh Soni, Shri Praveen Jain and Shri Sumit SurendrasinghKavadia to support his conclusions that the purchases were not genuine. With regard to the contention of the assessee that Shri Ramesh Soni has retracted his statement; the AO expressed the view that the statements are still admissible evidences, even if they are retracted later. The AO further held that the transactions carried on by the assessee should be examined by applying test of human probability and surrounding circumstances. Accordingly, the AO did not accept the contentions of the assessee and held that the purchases made by the assessee were not genuine. 5.1. With regard to sales reported by the assessee also, the AO found certain deficiencies, viz., the sales bills did not contain the address and phone number of buyers and further, the diamonds have been sold without GI certificate. The AO observed that the assessee has made huge sales from 01-08-2016 to 07-11-2016, but deposited cash only after announcement of demonetization. The AO also issued summons to the assessee and recorded a statement u/s 131 of the Act from him. In the statement, the assessee submitted that he had employed only two staffs in the Surat office and used his old computer system. According to the AO, the assessee could not tell full name of his employees and suppliers at the time of recording statement from him. Accordingly, the AO took the view that the sales reported by the assessee are not also genuine.

12. The Ld.CIT(A) also noticed that the AO has rejected books of accounts on one hand, but relied upon the same books of account on the other hand to compute the total income of the assessee in the assessment framed u/s 143(3) of the Act. He noticed that the AO has accepted the & 2639/Mum/2024 profits shown in the books of accounts, which was arrived at by taking into account the purchases and sales reported by the assessee for the year under consideration. Accordingly, the Ld CIT(A) held that the AO has blown both hot and cold at the same breath by observing that he is rejecting books, but relying upon same set of books to compute the total income. The ld CIT(A) held such an action of the AO is bad in law. In support of this proposition, the Ld CIT(A) relied upon the decision rendered by Amritsar bench of Tribunal in the case of Balwinder Kumar vs. ITO (2023)(151 taxmann.com 338).

13. In view of the above, the Ld.CIT(A) held that the rejection of books of accounts is not justified. He also held that the contentions of the AO that the entire purchases and sales are bogus cannot be accepted.

14. After having held so, the Ld.CIT(A), however, held that the assessee has not fully discharged his onus in respect of purchases amounting to Rs.20,29,50,000/- made from concerns alleged to be providing accommodation bills, i.e., from six concerns belonging to Shri Praveen Jain and Shri Ramesh Soni. Hence, the Ld.CIT(A) took the view that a reasonable profit percentage should be estimated on the above said purchases. The Ld CIT(A) estimated the profit @ 3% by considering two factors, viz., the VAT rate is 1% for diamond trade and further, the profit in this trade was reported as 2% to 3% by the Task Force group for diamond industry. The Ld.CIT(A) applied the said on the alleged bogus purchases of Rs.20,29,50,000/- and computed the profit of Rs.60,88,500/-. Accordingly, he directed the AO to assess the same. He also held that the source of cash deposits made into the bank account was out of business the assessee, i.e., out of sale proceeds and hence the provisions of sec.68 cannot be applied. Accordingly, he allowed the appeal in part.

& 2639/Mum/2024 15. As noticed earlier, the revenue is assailing the decision of Ld CIT(A) in deleting the addition made u/s 68 of the Act and the assessee is challenging the decision of Ld CIT(A) in making addition of profit element of Rs.60,88,500/- embedded in the alleged bogus purchases.

& 2639/Mum/2024 17.1. We noticed that the assessee had purchased diamonds from ten concerns, out of which following six concerns are identified as providing accommodation bills:- Shri Ramesh Soni :- Santosh Gems Pvt Ltd Dharmik Exports Pvt Ltd Shri Praveen Jain:- Kapil Gems Pvt Ltd Sejal Diamonds Pvt Ltd Kudrat Impex Pvt ltd Goldstone Exim Pvt Ltd. We notice that the AO had also placed reliance on the statement given by a person named Shri Srnit Surendrasingh Kavadia. However, it is noticed that the above said persons is alleged to be operating M/s Aparteen Gems P Ltd and the assessee has not purchased diamonds from that concern. Hence, we are of the view that the AO was not right in placing his reliance on the statement given by Shri Surnit Surendrasingh Kavadia. 17.2. With regard to the statements given by Shri Ramesh Soni and Shri Praveen Jain, the assessee has given replies as to why those statements should not be relied upon. We also noticed that the assessee had requested the AO to provide him with an opportunity of cross examining Shri Ramesh Soni and Shri Praveen Jain. But the same was not provided by the AO on the reasoning that they have to be considered as the witness of the assessee. We are unable to accept the above said reasoning of the assessee. It is the allegation of the AO that both the above said persons have admitted they were providing only accommodation bills through the & 2639/Mum/2024 concerns belonging to them. The said statements go against the stand of the assessee that the purchases made from those concerns are genuine and also contrary to the documents furnished by the assessee to prove the purchases. It is the AO, who has disregarded the various documents furnished by the assessee to prove the purchases. It is the AO who has placed his reliance on the investigation report and the statements given by the above said persons. Hence those persons shall become witness of the assessing officer only and not that of the assessee. It is well settled proposition of law that the AO is not entitled to rely on the documents collected behind the back of the assessee, unless those documents were confronted with the assessee. In the same lines, the AO is not entitled to place reliance on the statements given by third parties against the assessee, unless he provides for opportunity of cross examination as sought by the assessee. However, if the AO proceeds to make addition without confronting the materials with the assessee and without providing opportunity of cross examination, then the said addition cannot be sustained. It is sold held by the Hon‟ble Supreme Court in the case of Andaman Timber Industries (supra) as under:- “According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has & 2639/Mum/2024 simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them. As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice.” Hence, we are of the view that, in the facts of the present case, the AO could not have placed reliance on the statements given by Shri Ramesh Soni and Shri Praveen Jain. 17.3. Even otherwise, we notice that the assessee has pointed out that Shri Praveen Jain has denied his connection with any of the above said four concerns. It is also stated that Shri Ramesh Soni has retracted his statement and also filed a complaint against Revenue. The assessee has also submitted that both the parties have not specifically implicated the assessee or stated that the sales made to the assessee were bogus. On the contrary, the above said six concerns have confirmed the transactions entered with the assessee by duly replying to the notices issued by the AO & 2639/Mum/2024 u/s 133(6) of the Act. All these factors would show that the AO could not prove that the purchases made by the assessee were not genuine.

18. We shall now examine as to whether the assessee has discharged his onus to prove the genuineness of purchases. We noticed that the assessee has taken a building on rent in Surat for starting the diamond business. The assessee also obtained VAT registration from the Government of Gujarat. The purchases were made from ten companies, out of which the AO has identified only six companies as the concerns providing accommodation entries. The total purchases made by the assessee during the year is Rs.53.14 crores, out which the purchases made from the above said six companies was only Rs.20.29 crores. Hence, the AO could not have found fault with the purchases made from remaining four companies, which amounted to Rs.32.85 crores. Be that as it may, we notice that the assessee has furnished copies of purchase invoices for entire amount of purchases, their payment details, stock register and the details of sales made out of those purchases. All the suppliers have also responded to the notices issued by the AO u/s 133(6) of the Act during the course of assessment proceedings. 18.1. We shall now examine as to whether the purchases made from six concerns alleged to be operated by Shri Ramesh Soni and Shri Praveen Jain could be considered as bogus in nature. In the preceding paragraphs, we have held that the AO could not have placed reliance on the statements given by Shri Ramesh Soni and Shri Praveen Jain. We also noticed that both of them have not identified the assessee as one of the beneficiaries of accommodation entries in the statements given by them. All the six concerns have confirmed the transactions by furnishing the relevant documents to the AO in response to the notice u/s 133(6) of the Act during the course of assessment proceedings. During the course of remand & 2639/Mum/2024 proceedings also, M/s Santosh Gems Pvt Ltd and M/s Dharmik Exports Pvt Ltd, claimed to be controlled by Shri Ramesh Soni, have confirmed the transactions. Similarly, M/s Kapil Gems P Ltd and M/s Goldstone Exim P Ltd, claimed to be controlled by Shri Praveen Jain, have also confirmed the transactions. Thus, out of six concerns alleged to be providing accommodation bill, four concerns have confirmed the transactions of purchases made by the assessee on two different times. With regard to the remaining two concerns, the Ld CIT(A) has expressed the view that, since the enquiries made by the AO second time were during the course of remand proceedings and the said proceedings were conducted after expiry of seven years from the end of the year under consideration, the non- response to the summons issued by the AO during remand proceedings cannot be used against the assessee due to passage of time and further in view of the fact that those suppliers had already confirmed the transactions in the original assessment proceedings. 18.2. We also notice that the AO did not find any fault with the documents and registers furnished by the assessee to prove the purchases. The assessee has also maintained stock register showing purchase and sale of diamonds. The said stock register has not been doubted with. The purchases were reported to VAT authorities and there is nothing to show that the said returns filed by the assessee before VAT authorities were not accepted. There should not be any doubt that the assessee could not have sold diamonds without purchasing them. Hence, we agree with the view of ld CIT(A) that there is no valid reason to suspect the genuineness of purchases made by the assessee.

With regard to the non-supply of GI certificates, the assessee submitted that he has sold diamonds to small karigars and traders and they did not ask for the certificates. Hence, non-availability of GI certificates cannot be a ground to suspect the sales. With regard to the comments of the AO that the assessee has carried on diamond business only for a limited period, the assessee has submitted that he has closed down the diamond business during the year under consideration and started trading in gold bars in the & 2639/Mum/2024 succeeding year, wherein he could achieve a turnover of Rs. 48 crores. This fact shows that the assessee was continuing his business and it is not a case as observed by the AO. We notice that earlier the assessee has obtained VAT number from the State Government of Gujarat. The assessee submitted that all the sales were duly declared in the VAT returns filed with the VAT authorities of Gujarat and they also accepted the turnover. We notice that the AO has not commented anything on VAT registration and VAT returns filed by the assessee. Further, it is the prerogative of the assessee to regulate the manner of conducting his business. It is well settled proposition that the tax authorities cannot expect the assessee to conduct the business in the manner they want, unless there is statutory compulsion. The Hon‟ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT [2007] 158 Taxman 74 has held that it is for the assessee to take care of the business exigencies and the assessee is free to do his business as per his wisdom. We also notice that the AO did not conduct any enquiry with anyoneto support his conclusion that the sales declared by the assessee are bogus in nature. Hence, we are of the view that none of the reasons given by the AO to suspect the genuineness of sales would stand the test of law. Accordingly, all the reasoning given by the AO to disbelieve sales are liable to be rejected. Hence, we are of the view that the Ld.CIT(A) was justified in holding that the AO has drawn adverse inferences on the basis of suspicions, surmises and conjectures, which is not permitted under the law. It was held by the Hon‟ble Supreme Court in the case of Umacharan Shaw and Bros vs. CIT [1959] 37 ITR 271that the suspicion, howsoever strong it may be, it cannot take place of evidence.

21. We have noticed that the AO has accepted the book results, even after rejecting the books of accounts. It would mean that the AO has not actually rejected the book results. Thus, we notice that the AO has contradicted his own stand.

& 2639/Mum/2024 23. We shall now take up the appeal filed by the assessee, wherein he is challenging the profit estimated by the Ld.CIT(A) @ 3% on the purchases made from concerns alleged to be providing accommodation entries. When the assessee has furnished all the evidences to prove the purchases and when the AO did not bring any material to contradict the submissions made by the assessee, it would not be correct to estimate profit. Further, in the instant case, the Ld CIT(A) himself has given a finding that the purchases made from the concerns allegedly providing accommodation entries, cannot be considered as non-genuine. After having held so, we are of the view that the Ld CIT(A) was not justified in estimating profit on purchases made from those concerns. In this regard, we may refer to the decision rendered by Hon‟ble Bombay Court in the case of Ashok Kumar Rungta vs. ITO (2024)(167 taxmann.com 429)(Bom), wherein it has been held that the addition made by the AO on account of alleged bogus purchases is not sustainable if the AO has not brought any cogent and convincing evidence to prove his decision. The relevant observations made by Hon‟ble Bombay High Court are extracted below:-

“17. This very bench had occasioned to deal with a similar issue in the case of Principal Commissioner of Income-tax-1 Vs. SVD Resins & Plastics (P.) Ltd.2, where, repelling a challenge by the Revenue, to a decision of the ITAT curtailing the disallowance of allegedly bogus purchases to 12.5%, the following observations were made:-

"11. We may observe that in the facts of the present case, the basic premise on the part of the A.O. so as to form an opinion that the disputed purchases were [2024] 166 taxmann.com 242 (Bombay) October 15, 2024 Aarti Palkar J-904.ITXA.1753.2018.doc not having nexus with the corresponding sales, appears to be not correct. It is seen that what was available with the department was merely information received by it in pursuance of notices issued under section 133(6) of the Act, as responded by some of the suppliers. However, an unimpeachable situation that such suppliers could be labeled to be not genuine qua the assessee or qua the transaction entered with the assessee by such suppliers, was not available on the record of the assessment proceedings. It is an admitted position that during the assessment proceedings, the assessee filed all necessary documents in support of the returns on which the ledger accounts were prepared, including confirmation of the supplies by the suppliers, purchase bills, delivery bank statements etc. to justify the genuineness of the purchases, however, such documents were doubted by the AO on the basis of general information received by the AO from the Sales Tax Department. In our opinion, to wholly reject these documents merely on a general information received from the Sales Tax Department, would not be a proper approach on the part of the AO, in the absence of strong documentary evidence, including a statement of the Sales Tax Department that qua the actual purchases as undertaken by the assessee from such suppliers the transactions are bogus. Such information, if available, was required to be supplied to the assessee to invite the response on the same and thereafter take an appropriate decision. Unless such specific information was available on record, it is difficult to accept that the AO was correct in his approach to question such purchases, on such general information as may be available from the Sales Tax Department, in making the impugned additions. This for the reason that the same supplier could have acted differently so as to generate bogus purchases qua some parties, whereas this may not be the position qua the others. Thus, unless there is a case to case verification, it would be difficult to paint all transactions of such supplier to all the parties as bogus transactions.

***** 16. The assessee has happily accepted such finding as this has benefited the assessee, looked from any angle. However, in a given case if the Income-tax Authorities are of the view that there are questionable and/or bogus purchases, in that event, it is the solemn obligation and duty of the Income- & 2639/Mum/2024 tax Authorities and more particularly of the A.O. to undertake all necessary enquiry including to procure all the information on such transactions from the other departments/authorities so as to ascertain the correct facts and bring such transactions to tax. If such approach is not adopted, it may also lead to assessee getting away with a bonanza of tax evasion and the real income would remain to be taxed on account of a defective approach being followed by the department." [Emphasis Supplied] 18. The aforesaid analysis would squarely apply to the facts of the instant case. Not only has the Assessing Officer not conducted the exercise as expected of him, the CIT-A has effected a summary measure of disallowing 10% of the expenses and the ITAT has been happy to endorse the same as an equitable middle ground. Such an approach cannot be endorsed as a process known to law to disallow expenses on the premise of their being bogus.

19. Another decision of a Division Bench of this Court in the case of Principal Commissioner of Income-tax Vs. Shapoorji Pallonji and Co. Ltd.3 is noteworthy. The relevant portions are extracted below:-

“17. On further appeal before the Tribunal by the respondent - assessee, Tribunal held as under: "16. Having heard rival submissions, we are of the view that there is merit in the submissions made by the assessee. We notice that the AO has simply relied upon the Sales Tax Department report about suspicious dealers, without making independent inquiries. On the contrary, the assessee has furnished all the materials to prove the genuineness of purchases and the AO has failed to show that those materials were bogus. Under these set of facts, we are of the view that there is no justification in doubting the genuineness of purchases made by the assessee. Further, these alleged bogus purchases forms a minor fraction of total volume of the assessee company and it is stated that there is no day to day involvement of the management. It was further submitted that the assessee is & 2639/Mum/2024 having strict internal controls. Hence we are of the view that the AO has not made a proper ground in support of the disallowance. Accordingly we set aside the order passed by Ld. CIT (A) on this issue and direct the AO to delete the addition of Rs.3,23,944/-."

19. We are in agreement with the views expressed by the Tribunal. Merely on suspicion based on information received from another authority, the assessing officer ought not to have made the additions without carrying out independent enquiry and without affording due opportunity to the respondent - assessee to controvert the statements made by the sellers before the other authority. Accordingly, we do not find any good ground to entertain this question for consideration as well." [Emphasis Supplied] 20. The Supreme Court dismissed the Special Leave Petition challenging the aforesaid decision. In the instant case, the onus of bringing the purchases by the Appellant-Assessee under cloud was on the Respondent-Revenue, which has not discharged this burden in the first place. Apart from the inputs being received from the investigation wing, there is nothing concrete in the material on record that was used to confront the Appellant-Assessee. If the counterparties in these purchases could not be produced years later, simply adopting a 10% margin for disallowance, without any cogent or convincing evidence, in our opinion, would be unreasonable and arbitrary. It is repugnant for the ITAT to uphold such an addition of 10% of the allegedly bogus purchases to the income of the Appellant-Assessee, despite returning a firm finding that the AO Order was untenable not being backed by cogent and convincing evidence.