DCIT CENT. CIR. 8(3) ERSTWHILE DCIT CENT. CIR. - 46, MUMBAI vs. ROSY BLUE (INDIA) PVT. LTD., MUMBAI

Facts in brief are that the Assessing Officer noted that assessee has paid amount aggregating to Rs.72 lacs to two professionals, Shri P.V. Shreenijin and Ms. K.B. Soni during Assessment Years 2007-08 and 2010-11. For Assessment Year 2010-11, the total amount paid was Rs. 6 lacs. The Assessing Officer held that in the statement of Shri Russell Mehta, Director of the assessee company recorded u/s 131 of the Act, he has accepted that the said Advocates have not provided any legal services to the company. However, during the course of assessment proceedings, assessee had submitted details and explanation stating that assessee utilised services of these two professionals as they were scouting for real estate in southern India to look after drafting of agreements, deeds, etc. and 5 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. various other issues relating to customs, excise, service tax matters, IPR related matters, VAT, professional tax, CSR, octroi, legal advice dealing with government in the States of Kerala, Tamil Nadu and Andhra Pradesh. However, the Assessing Officer has disallowed the said professional fees as assessee had not submitted any proof of legal advice. We find that this issue has been discussed by the Tribunal and has allowed similar payment of professional fees made in earlier years. The relevant observation reads as under :-

AO had made the disallowance on the ground that information has been received from the DCIT, CC-1, Ernakulam that M/s Rosy Blue (I) Ltd. has paid a total amount of Rs. 72 lakhs toShriP.V.Srr4eenijin and Smt. K. B. Sony during AY 2007-08 to 20010-11asprofessional fees paid. The year wise break-up of the payment are as follows:

AO has also referred the statement of Shri Russell Mehta, Director of the assessee company recorded u/s 131 wherein he has stated that the said advocates has not provided any legal services to the company, accordingly he made addition for sum aggregatingRs.18 lakhs claimed in the profit and loss account. The said addition has also been confirmed by Ld. CIT(A).

Ld. Counsel for the assessee submitted that assessee had entered into a retainership agreement for rendering services including drafting agreements/conveyance including verification of title, attending to customs, excise and service tax, IPR, VAT, profession tax, CST, Octroi and other related matters in the state of Kerala, Tamil Nadu, Karnataka and Andhra Pradesh. The Assessee had entered into the said arrangement as it intended to extend the scope of its business to those regions.

He further submitted that on 28.12.2010, that is almost eight months before the search action being carried out on the assessee on 25.08.2011, statement of its director was recorded under section 133 of the Act wherein, it has been alleged that he has accepted that the said advocates have not provided any legal services to the assessee company. It is only based on the said statement that the expenditure towards the legal and professional fees has been disallowed despite providing the relevant information and material. Disallowance of the said expenditure in the order passed under section 153A of the Act is not permissible because no incriminating material in relation to the said payment has been found in the course of the search. The statement of the director was already available before the search action.

On the other hand, Ld. DR strongly relied on the order passed by AO and Ld. CIT(A).

After considering the aforesaid submissions and perusal of the 8 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. material placed on record, we find that there is no dispute that the above 2 persons were legal professionals with whom assessee had entered into an agreement of retainership for rendering services for which they have raised their invoices and payments have been made through banking channel after deducting TDS. The details of the invoices with regard to both the aforesaid parties have been filed which are not in dispute. Now, whether rendering of the legal services had yielded any result or asking for any proof of any legal advice is immaterial. If there was a proper agreement of retainership for legal advice and for statutory compliances is given to certain professionals for rendering legal services and they have raised the bills and are completely unrelated parties, then disallowance cannot be made on the ground that assessee had not proved any rendering of any legal advice. Assessee has already explained the above reason as to why assessee had sought their engagement. Therefore, such addition is directed to be deleted.”

The facts in brief are that the Assessing Officer noted that information was received from the Investigation Wing that search and seizure action was carried out on Rajendra Jain group and other group from 03.10.2013. During the search and post search inquiries it was found that these concerns were engaged in providing accommodation entries in the nature of bogus sales. The Assessing Officer also noted that notice u/s 133(6) of the Act was also issued, however, whether such notices were complied with or not has not been mentioned by the Assessing Officer. The Assessing Officer has accordingly 10 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. made peak amount of investment made out of unaccounted money on the assessee and worked out the disallowance on account of purchases for various assessment years in the following manner :-

Ledger accounts of parties referred to in your notice 2. Purchase invoices confirming purchases of cut and polished diamonds 3. Name, Address and PAN of the broker to these transactions 15 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd.

Bank statements reflecting payments made for the purchases 5. Extracts of Stock records to substantiate receipt of goods and corresponding sales 6. Our sales invoice with relevant bank statements confirming receipt of sale proceeds into our bank account 7. Statement giving details of Cut and Polished diamonds purchased from alleged parties together with its subsequent movement with reference to sales In view of the above facts it is submitted that the all transactions from alleged parties are genuine and cannot be treated as bogus. Without prejudiced to our submissions it is submitted that goods received under purchases from above referred parties were sold and the entire sale proceeds have been duly accounted for and included in the taxable income in respective years, disallowance if any shall be restricted to peak amount involved. A statement giving invoice wise details of purchases together with details of each payment made against these purchases is enclosed which is self explanatory."

The AO has completely gone on a very wrong premise to observe that addition is being made, because the parties belong to Rajendra Jain Group and other groups. Here in this case, the information itself was received on 24.03.2014 and the assessment order passed on 31.03.2014. Thus, there was no occasion to send the notice u/s 133(6) to these parties. Whatever observation he has made with respect to notice u/s 133(6) which was made to the other parties with whom purchases has been debited, has been verified and confirmed by the parties on which, no addition has been made by the AO. In so far as genuineness of the purchases of these parties, we find from the perusal of documents enclosed in the paper book clearly establishes the purchases made are genuine and without any inquiry by the AO done, addition cannot be sustained.”

Thus, in view of the aforesaid fact and that the same issue is covered by the order of Tribunal in earlier years, the addition on account of bogus purchases is directed to be deleted. Accordingly, additional ground raised by the assessee is allowed and Revenue’s ground no. 5 is dismissed.

"Whether in the facts and the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 1,62,450/- on account of bogus purchases and restricting the disallowance to 5% ignoring the decision of the Hon'ble Gujarat High Court in the case of N.K. Proteins Ltd. Vs. DCIT in which upto 100% of bogus purchases were disallowed and in which SLP of the assessee is dismissed?"

Insofar as ground nos. 1 and 2 are concerned, the facts in brief are that assessee is owner of premises at 11, Chakravarty Road, Kandivali East, Mumbai. The Assessing Officer noted that in the course of search, statement of Shri Hitesh Mehta, Vice President was recorded and it was found that from the said business premises two entities, viz. R.B. Cutters Pvt. Ltd. and Krish Gems Pvt. Ltd. were carrying out job work from the said premises. These entities have further sub-contracted the job work to different parties. The total area of the said factory premises was 58905 sq. ft. The Assessing Officer also noted that there was agreement for usage of said factory whereby R.B. Cutters Pvt. Ltd. was using 41755 sq. ft., Krish Gems Pvt. Ltd. was using 12158.80 sq. ft. and Rosy Blue India Pvt. Ltd. was using 4991.20 sq. ft. He also noted that plant and machinery has been leased out to R.B. Cutters Pvt. Ltd. on Leave & Licence basis and the said plant and machinery was used by the said party for its business. The Assessing Officer noted that assessee has claimed depreciation on the said building right from Assessment Year 2006-07 to 2012-13 despite that the factory premises with all its fixtures was being 22 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. used by agency to whom job work was outsourced. He also noted that for leasing out said factory premises, assessee has received Rs.24,000/- annually. Thus, he held that the lease income of Rs.24,000/- falls under the head ‘Income from House Property’ or ‘Income from Other Sources’ and therefore, depreciation on leased premises cannot be allowed.

After hearing both the parties and on perusal of the material on record, we find that it is an undisputed fact that the factory premises belong to the assessee, for its own business activity of manufacturing, i.e. cutting and polishing of diamonds, assessee has outsourced the said activity to two entities who have carried out the job work from the said premises. Not only that, the plant and machinery installed therein also belongs to the assessee company on which depreciation has already been allowed by the Assessing Officer for which there is no dispute. Nowhere the job workers or contractors had any right or control over the premises albeit the entire activity carried out by them was under superintendence and control of the assessee company. Thus, it 25 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. cannot be held that the agreement between the said party and Assessee Company is tenancy agreement. Rs.24,000/- annually for such a huge premises of 58905 sq. ft. in such a prime location cannot be said to be rental value and same cannot be equated with tenancy. We do not find any infirmity in the order of Ld. CIT(A) that if the assessee is owner of the premises and the said premises is used for manufacturing of rough diamonds and cutting and polishing for its own captive consumption, depreciation of said factory premises cannot be disallowed. Accordingly, the order of Ld. CIT(A) is confirmed and ground nos. 1 & 2 raised by the Revenue is dismissed.

Insofar as disallowance u/s 14A read with Rule 8D is concerned, it is an admitted fact that assessee has received dividend aggregating to Rs.60,000/- for which the Assessing Officer has made disallowance under Rule 8D of Rs.39,00,623/-. The Ld. CIT(A) has restricted the disallowance to the extent of the dividend income. Now, it is well-settled that disallowance of expenses u/s 14A of the Act cannot exceed the exempt income and, therefore, we do not find any infirmity in the order of Ld. CIT(A) in restricting the disallowance u/s 14A of the Act to the extent of dividend income. Accordingly, ground nos. 3 & 4 raised by the Revenue is dismissed.

Lastly, coming to ground no. 6, Revenue has challenged decision of disallowance of Rs.1,62,450/- on account of bogus purchases. The Assessing Officer noted that assessee has made purchases from 4 parties – Janex Enterprises of Rs. 1,71,000/- which, as per information received from the Investigation Wing, was appearing in the list of suspicious dealers of Maharashtra VAT Department. Accordingly, the Assessing Officer made 100% disallowance of the said purchases. The Ld. CIT(A) has restricted the disallowance to 5% of the profit rate of such bogus purchases. First of all, we find that the Assessing Officer has merely relied upon the information that the said dealer appears in the list of suspicious dealers as notified by the Maharashtra VAT Department. However, he has also noted that assessee could not produce said parties and letters written to them were unserved. However, it is an undisputed fact that source of purchases are from the books and no discrepancy has been found on sales or manufactured products. In any case, it could be at best a case of suppression of profit for which already Ld. CIT(A) has confirmed disallowance @ 5% and we do not find any infirmity in the order of Ld. CIT(A). Accordingly, ground no. 6 raised by the Revenue is dismissed.

The sole ground raised by assessee in Assessment Year 2011-12 relates to disallowance made by Ld. CIT(A) @ 5% of alleged bogus purchases made by the assessee company. Both the parties agreed that the facts involved in the said issue are exactly identical to those decided by us in Ground no. 6 of Revenue’s appeal for Assessment Year 2010-11. Therefore, our decision therein shall apply mutatis mutandis to the present issue and accordingly, appeal of assessee is dismissed.

Ground nos. 1 and 2 of Revenue’s appeal for Assessment Years 2010-11 and 2012-13 being identical except for change in figures, our decision in the foregoing paragraphs in respect of Assessment Year 2010-11 shall apply mutatis mutandis to Assessment Year 2012-13 as well. Therefore, Ground nos. 1 and 2 of Revenue’s appeal for Assessment Year 2012-13 stands dismissed.

Ground nos. 5 & 6 of Revenue’s appeal in Assessment Year 2012-13 and ground nos. 3 & 4 of Revenue’s appeal in Assessment Year 2010-11 being identical except for change in figures, our decision in foregoing paragraphs in respect of Assessment Year 2010-11 shall apply mutatis mutandis to 28 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. Assessment Year 2012-13 as well. Therefore, Ground nos. 5 & 6 of Revenue’s appeal for Assessment Year 2012-13 stands dismissed.

Ground no. 7 of Revenue’s appeal in Assessment Year 2012-13 and ground no. 5 of Revenue’s appeal in Assessment Year 2010-11 being identical except for change in figures, our decision in foregoing paragraphs in respect of Assessment Year 2010-11 shall apply mutatis mutandis to Assessment Year 2012-13 as well. Therefore, Ground no. 7 of Revenue’s appeal for Assessment Year 2012-13 stands dismissed.

Since the facts relating to the disallowance of bogus purchases raised by assessee vide additional ground in Assessment Year 2012-13 and 2010-11 being identical except for variance in figures, the additional ground raised by assessee in Assessment Year 2012-13 is allowed applying our decision in the foregoing paragraphs while dealing with appeal for Assessment Year 2010-11.

Insofar as ground no. 1 raised by assessee as well as ground nos. 3 & 4 raised by Revenue in Assessment Year 29 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. 2012-13 relating to alleged shortage of carats of cut and polished diamonds between physical and book stock is concerned, the facts in brief are that during the course of search carried out at the office of assessee company on 25.08.2011, the total stock as per book was 307486.89 carats whereas the total physical stock found from various premises was 292461.95 carats. Before the Assessing Officer, assessee filed detailed reconciliation of stock at various premises and according to the assessee only discrepancy was that physical stock was less by 60.11 carats as compared to stock as per books. However, the Assessing Officer worked out the discrepancy in the following manner :- Physical Stock : 2,92,461.95 carats Less : Goods received from 42,968.30 carats outside: Add : Goods sent outside : 58,532.29 carats 3,08,025.94 carats Less : Stock as per books 3,07,486.89 carats Stock Discrepancy (excess) : 539.05 carats Thus, the stock of diamonds is excess by 539.05 carats. The cost of diamond per carat is worked out as under : Total Sale of Cut & Polished 11,29,367.75 carats Diamonds :

Insofar as discrepancy of gold is concerned, the Assessing Officer noted that during the course of search, Shri Rusell Mehta in his statement recorded u/s 132(4) of the Act admitted that stock of 658108 remained unexplained and accordingly the Assessing Officer added the same. The Ld. CIT(A) after noting down the reconciliation inventory which has been incorporated by him at page 22 of his order and after considering the explanation given by the assessee has observed as under :- “15.2 However, the A.O did not accept the reconciliation statement and further, calculated the difference of 539.05 Ct, which is tabulated as under: S. Description Quantity of Diamonds No. (In Carats) 1 Shortage as per reconciliation (60.11) statement 2 Goods received from Orra on 872.11 approval 15.3 The AR has explained that diamonds amounting 872.11 Ct were received from M/s Orra Fine Jewellery Pvt Ltd, a subsidiary of the Appellant. As these goods belongs to M/s Orra Fine Jewellery Pvt Ltd and were received on approval basis, the same cannot be included in the inventory of the Appellant Company. It has been contended that M/s Orra Fine Jewellery Pvt Ltd is assessed to tax by the same AO and was also covered in the simultaneous search operation. 15.4 It has been stated by the Appellant Company that diamonds amounting 872.11 Cts were duly recoded in the stock records of M/s Orra Fine Jewellery Pvt Ltd. The Jhangad (Delivery Memo) of M/s Orra Fine Jewellery Pvt Ltd confirming that goods were sent to Appellant Company were found during the course of search operation from the office of M/s. Orra Fine Jewellery Pvt Ltd and is a part of the seized papers. In these circumstances, it has been contended by the Appellant that the goods amounting 872.11 ct found in the premises of the appellant stands duly explained and there is no reason to make an addition for the same. 15.5 After going through the entire material on record on this issue, I am of the considered opinion that diamonds amounting 872.11 Cts are duly recoded in the stock records of M/s Orra 32 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. Fine Jewellery Pvt Ltd. and hence are explained. The same have come to the appellant through a Jhangad (Delivery Memo) of M/s Orra Fine Jewellery Pvt Ltd and hence were found in the appellant's premises. Thus, the diamonds amounting 872.11 Cts can't be treated as unexplained stock of the appellant. 15.6 The AR of the Appellant has pointed out that the difference of 272.95 Cts is a result of an error on Page 16, 17 and 46 of consignments parcels prepared by the department during the course of search. This was duly pointed out and explained to the search party in details at pages 156-211 of the reconciliation. The same was explained to AO vide letter dated 16-2-2015. I have perused the statements of various executives handling stocks, which was recorded during search operation, none of them had confirmed or accepted unaccounted stocks. Thus, this amount of 272.95 Cts is also explained. 15.7 For shortage of 60.11 Ct., the Appellant has given certain general reply that this is due to weighing errors such as calibration, human error due to handling of large quantities at a time etc. However, no documentary evidence has been produced by the Appellant to support the contentions. In the absence of any concrete evidence, the appellants' contention cannot be accepted. The A.O. has worked out the average value of diamonds at Rs.23.149.80 per Cts. Thus, the addition of Rs. 13,91,534/- in respect of un- reconciled stock of 60.11 33 ITA Nos. 3679,6756, 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. Cts is upheld and confirmed. The rest of the addition made by the A.O. is accordingly, deleted. Thus, the Ground No. 6 of the present appeal is partly allowed.”

After considering the submissions made by the parties and on perusal of material referred to before us, we find that the assessee had, in fact, submitted the reconciliation of stock as on date of search and also the explanation as noted by the Ld. CIT(A) in the following paras. Once the major discrepancy with regard to gold received from Orra Fine Jewellery Pvt. Ltd. has been found to be reconciled and duly recorded in the stock record of the said company, which has been accepted by the Ld. CIT(A), then, it cannot be treated as unexplained stock. Further, the difference of 272.95 carats has been shown as a result of an error of the consignment parcel prepared by the Department during the search which was also pointed out before the search party. This has been duly verified by the Ld. CIT(A) and such finding of fact of Ld. CIT(A) is confirmed. Insofar as shortage of 60.11 carats of diamonds is concerned, the Ld. CIT(A) has confirmed the said addition on the ground that no documentary evidence have been filed. Thus, we do not find any infirmity in the order of Ld. CIT(A) and no factual fallacy has been demonstrated before us by the Department

Lastly, with regard to unexplained stock of gold, the relevant observation and finding of Ld. CIT(A) reads as under :- “19.0 I have carefully considered the facts of the case as mentioned in the assessment order and the submissions of the appellant. 19.1 The AO has made an addition of Rs. 6,58,108/- on account of unexplained stock of gold, on the ground that Mr Russell Mehta in his statement recorded on 24-10-2011 had admitted that, nature and source of Gold stock amounting to Rs. 6,58,108/- remains unexplained. Hence, the addition of Rs. 6,58,108/- is made on account of gold stock discrepancy. The AR pointed out that the A.O. has erroneously interpreted the statement of Shri Russell Mehta. To clarify the same, the relevant extracts of the statement recorded on 24-10-2011 (Question 4) is reproduced below:

Opera House, Mumbai-400 004 by search party AO-1, gold kept under prohibitory order which was worth Rs. 77,57,539/- weighing 608.57 grams. Shri Bharat Ishwarlal Patel. General Manager related to stock and sales taken u/s 35 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. 132(4) in his answer to Q 14 has accepted the same and he has stated that he is not in a position to explain the above discrepancy. Kindly explain. Ans. The explanation is as under:

It has been clarified that Shri Russell Mehta never accepted that stock of gold of 658108 was unreconciled. He 37 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. merely stated that he was not in a position to furnish reconciliation at that point of time. During the course of assessment proceedings, the assessee has given detailed reasoning which has been incorporated at pages 24 and 25 of the appeal order from which it is clear that as per stock register, assessee company had gold of 656.20 gms. As on 01.04.2011 and the gold found during the search was only 304.68 gms. which is less than the book stock. Thus, the Ld. CIT(A) has rightly deleted the said addition. Accordingly, ground no. 4 raised by the Revenue is dismissed.

In the result, revenues appeal are dismissed and assessee/s appeal are allowed.