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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, HONBLE & SHRI M. BALAGANESH, HONBLE
The aforesaid cross-appeals have been filed by the assessee as well as by the Revenue for Assessment Years 2010- 11 and 2012-13 and assessee has filed appeal for Assessment Year 2011-12 against separate impugned orders, all dated 26.03.2018 for quantum of assessment passed u/s 153A/143(3) of the Income Tax Act, 1961 (in short ‘the Act’) for Assessment Years 2010-11 & 2011-12 and u/s 143(3) of the Act for Assessment Year 2012-13. Since the issues involved in all the appeals are by and large common, therefore, they are heard together and are disposed of by way of this consolidated order.
2. We will first take up the cross appeals for Assessment Year 2010-11.
In its appeal, assessee has raised following grounds: - “1. The learned Commissioner of Income-tax (Appeals) erred in upholding the disallowance out of Legal & Professional fees paid to Mr. Shreenijin P.V. amounting to Rs. 3,00,000/- and Ms. Soni K.B. amounting to Rs. 3,00,000/- both aggregating to Rs. 6,00,000/- for the services availed.
It is submitted that the expenditure is incurred wholly and exclusively for the purpose of business of the appellant as such no disallowance is called for.”
Besides this, assessee has also raised additional grounds of appeal vide letter dated 17.01.2020, which reads as under:- A “The learned Commissioner of Income-tax (Appeals) erred in holding that the purchases made from (i) Nayan Gems (ii) Aadi Impex (iii) Sun Diam (iv)Kangan Jewels (v) Mohit Enterprises and (vi) Mukti Exports are 'accommodation entries' and thereby disallowing Rs. 32,77,445/- being 5% of amount of Purchase of Rs. 6,55,48,907/-.
It is submitted that appellant had purchased diamonds from the aforesaid party in normal course of business and the goods purchased were duly sold by the appellant. It is further submitted that the appellant had furnished full and complete details of 4 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. purchases from these parties and there is no reason for the learned Commissioner of Income-tax (Appeals) to hold that these are accommodation entries.”
4. Insofar as issue relating to disallowance out of legal and professional fees raised in ground no. 1, it has been admitted by both the parties that this issue stands covered in favour of the assessee by order of Tribunal dated 13.07.2022 for Assessment Years 2007-08 to 2009-10 in 3677 and 3678/Mum/2018 wherein on identical disallowance, Tribunal has deleted the said addition.
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 :-
“40. In AY 2007-08, assessee has raised one additional issue on account of legal and professional fees aggregating to Rs. 18 lakhs paid to Mr. Shrenijin P. V. and Ms. Soni K. B. Assessee has filed the following details before the AO, which are as under:-
Particulars Mr. Shreenijin Ms. Soni K.B. P.V. Agreement 98 to 101 135 to 138 Invoices raised by 102 to 124 139 to 161 them Ledger Account 125 to 126 162 to 163 Appellant’s Bank 102 to 124 139 to 161 Statement Form 16A evidencing 127 to 134 164 to 171 IDS 6 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd.
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:
AY 2007-08 2008-09 2009-10 2010-11 2011-12 Amou 18,00,00 24,00,00 24,00,00 6,00,000 72,00,00 nt (in 0/- 0/- 0/- /- 0/- Rs.)
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.
7 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. However, unfortunately, its endeavour was not successful and hence, no substantial services have been rendered by them. However, since the assessee was bound by retainership agreement, it was under an obligation to pay them. Lastly, the said two advocates are in no way related to the assessee or its promoters.
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.”
Accordingly, the aforesaid findings will apply in this year also and the disallowance made by the Assessing Officer stands deleted.
6. Insofar as issue relating to bogus purchases made from aforementioned 6 parties, i.e. Nayan Gems, Aadi Impex, Sun Diam, Kangan Jewels, Mohit Enterprises and Mukti Exports 9 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. are concerned, the assessee has challenged disallowance of 5% of such bogus purchases, whereas Revenue in ground no. 5 has challenged the balance deletion of purchases made by Ld. CIT (A). The Assessing Officer has made 100% disallowance of purchases, whereas Ld. CIT(A) has applied profit rate of 5% for the purpose of disallowance of such purchases. It has been admitted by both the parties that similar issue of disallowance was involved in earlier years right from Assessment Year 2006- 07 to 2009-10 wherein the Tribunal has discussed this issue in detail and has held that not only the purchases were genuine, but there was no material or information by the Assessing Officer from the parties from which assessee had made purchases and, in fact, assessee had submitted all the requisite details to substantiate the purchases.
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 :-
“…………The peak was accordingly calculated for the purchases made from the above mentioned bogus parties. The peak calculation was based on the following basis- a) Cash has been paid on date on which the bogus purchase bill has been entered in the books of accounts; b) Cash has been received back by the assessee on the date on which the cheque has been issued by it to bogus parties. c) Ledger accounts of all the above mentioned hawala parties have been merged to work out the actual cash receipt or payment made by the assessee on day to day basis.
The working of peak calculation is given in Annexure A1 to this order. The peak so calculated for the is as under ROSY BLUE (INDIA) PVT LTD Summary of Year wise Peak Credit Period Purchases 2006- 33,56,044 33,56,044/- 07 11 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. 2007- 73,74,298 40,18,254/- 08 2008- 35,29,709 - 09 2009- 70,81,256 - 10 2010- 334,07,103 2,60,32,805/- 11 2011- 165,69,752 - 12 Total 3,34,07,103/- The Ld. CIT (A) though accepted that assessee had filed complete details of stock register, purchase bills and all other details during the course of assessment proceedings and that Assessing Officer has not disputed the corresponding sales made by the assessee company, however, following certain decisions and looking to the fact that are for Assessment Years 2013-14 and 2014-15 has computed the disallowance @ 5% of the bogus purchases.
7.1 From the material placed on record before us as well as in the earlier years we find that assessee had made purchase from various parties for Assessment Years 2006-07 to 2012-13 aggregating to Rs.6,55,48,907/- which are as under :-
S.No. Particulars Whether notice issued Rs. u/s 133(6) A Alleged Bogus Purchases 1 Nayan Gems No 1,68,592 2 Aadi Impex No 97,83,282 3 Sun Diam No 13,53,760 4 Kangan Jewels Pvt. No 99,204 Ltd. 5 Mohit Enterprises No 4,94,44,302 6 Mukti Exports No 46,99,767 Total 6,55,48,907 It has been brought on record that notice u/s 133(6) of the Act were issued to 53 parties right from Assessment Year 2006-07 to 2012-13, however, no addition in respect of purchases from these parties have been made in any of the assessment years and the purchases from these parties have been accepted. Insofar as the alleged bogus purchases made from the aforementioned 6 parties are concerned, neither any inquiry has been made nor was any notice u/s 133(6) of the Act issued by the Assessing Officer. The search in the case of Rajendra group was carried out on 03.10.2013 and the information 13 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. which was received by the Assessing Officer on 25.03.2014 and the assessment order has been passed on 31.03.2014. Thus, there was no occasion for the Assessing Officer to carry out any inquiry or issue notice u/s 133(6) of the Act. On the contrary, the assessee before the Assessing Officer had given following submissions as well as details of purchases made from said parties which are reproduced hereunder :-
“Rosy Blue India Pvt. Ltd is engaged in the business of cutting and polishing rough diamonds and export of cut and polished diamonds. We are the sight holder of diamond Trading Co Ltd UK since 1979. We have our own manufacturing facilities at Kandivali, Mumbai and at Indore, MP. In addition to this we have a team of freelance artisans doing cutting and polishing of rough diamonds mainly for our company. Our turn over is in the range of 2,500 Crores to 3,000 Crores comprising mainly of exports all over the world. In order to meet market requirements we do purchase cut and polished diamonds from local market. These purchases are mainly carried through brokers. We confirm that we had purchased cut and polished diamonds from the parties listed in your above referred notice. All transactions with these parties are genuine and cannot be alleged as bogus mere on the statement of a person. We are not aware under what circumstance and coercion the persons referred to in your notice have made statements based on which you have concluded that our purchases from these parties are bogus or non genuine. It 14 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. will be necessary to re-examine these parties to bring the truth on record, whether it was their purchases which were bogus or the sales to us.
We reiterate that all our purchases from these parties are genuine and real in as much as we had received cut and polished diamonds which have been sold in international/local markets. These transactions can be verified from the stock records regularly maintained by us. All purchases were duly recorded in these books of account. We have maintained and regular books of account which have been audited by an independent firm of chartered accountants. We have made sales out of these purchases which are duly confirmed by the entries in regular books of account. All payments for these purchases were made by account payee cheques drawn on national banks. We have maintained full and complete records of purchases and sale of cut and polished diamonds. Complete quantity tally of purchases and sale are on record. In order to substantiate transactions with these parties we are enclosing herewith the following further documents/details.
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."
Nowhere these documents have been rebutted by the Assessing Officer at any point of time. Even the Ld. CIT(A) has just made ad hoc addition of 5% despite accepting the fact that neither any inquiry was made nor there is any discrepancy in the details of purchases submitted. The Tribunal in order dated 14.07.2022 in assessee’s own case for Assessment Years 2006- “25. We have heard both the parties and perused the relevant findings given in the impugned order as well as material placed on record. In so far as addition on account of unapproved purchases, it has been brought on record that only purchase which is in dispute is purchases made from Vitrag Jewels of Rs. 33,56,044/-, out of total purchases made during the year of Rs. 704.80 crores. Rest of the parties mentioned in the assessment order, no such purchases has been made, nor has been found from any material coming on record. For proving the genuineness of the purchases, assessee as noted above had filed purchase invoices, corresponding export sales, Bank statement evidencing Payment to Vitrag Jewels, copy of ledger account, extract of stock records to substantiate the goods and corresponding sales, statement giving details of cut and polished diamond purchases, etc. The AO has noted the name of various parties in the assessment order as noted supra. However, nowhere has he given the quantification of purchases from these parties. In fact it has been clarified that out of these parties, assessee had made purchases only with Vitrag Jewels and not from any other parties mentioned in the 17 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. list. As brought on record, notice u/s 133(6) were sent to the parties from whom assessee had made purchases which has not been disputed and no addition has been made in those cases; and in case of Vitrag Jewels, no notice u/s133(6) was issued. The AO came to know about this information only on 24.03.2014 and order was passed in 31.03.2014, therefore he had no occasion to issue the notice to the said party. The entire premise of the AO is coloured by the fact that assessee had made purchases from the entities controlled by Rajendra Jain Group and other accommodation entry provider group. He had not even examined whether assessee had made purchases from any of these parties which has been mentioned at page no. 7 of the assessment order. All other parties to whom notices were issued u/s133(6)have given their response and no addition has been made by the AO. Thus, the entire premise for making addition has no legs to stand once the purchase made from Vitrag Jewels, AO has not made any enquiry or sent notice u/s 133(6). Once the assessee had filed all the details of purchases, stock register and corresponding sales and the entire transaction are through banking channel and there is no discrepancy found either in the quantity of purchases or sales, then the addition on some hypothetical working peak investment as done by him cannot be sustained. The same is directed to be deleted.
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.
ITA NO. 4094/MUM/2018 (Revenue appeal) :
1. “Whether in the facts and the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the disallowance of Rs. 87,72,620/- on account of depreciation on Kandivali Factory premises when the said premises along with all its fixtures is being used by agencies to whom job work is outsourced by the assessee?
2. "Whether in the facts and the circumstances of the case and in law, the Ld. CIT(A) is justified treating receipts from job contractors amounting to Rs. 24,000/- as business income instead of income from House Property considering the said premises at Kandivali along with all its fixtures have been leased to the outsourcing agents (job contractors)?"
3. "Whether in the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the disallowance u/s 14A r.w.r Rule 8D(2)(iii) made by the Assessing Officer to Rs. 60,000/- without appreciating the fact that the disallowance u/s 14A of the Act has been carried out as per the formula laid down in Rule 8D of the Income tax Rules and by following the CBDT Circular No. 5/2014 dated 11/02/2014 wherein it had been held that disallowance u/s 14A r.w.r 8D can be even made when the assessee had not earned any exempt income during the year."
4. "Whether in the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance u/s 14A r.w.r.Rule 8D(2)(ii) of Rs. 15,50,601/- made by the Assessing Officer by relying on decision of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd (313 ITR 340) without appreciating the fact that the said ratio is laid down prior to the introduction of Rule 8D for computation of disallowance and hence no presumption with regards to the same remains?"
5. "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.2,27,55,360/- 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?"
"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?"
As noted above, we have already decided ground no. 5 on account of bogus purchases and the same 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.
10.1 The Ld. CIT(A) noted that as per the audited finance and as per the records, the premises is owned by the assessee company, i.e. Rosy Blue India Pvt. Ltd. which is used for carrying out manufacturing activities of cutting and polishing of diamonds from the said premises. The Ld. CIT(A) noted certain clauses in the agreement and came to the conclusion that once the factory is owned by the assessee and shown in the Schedule of Fixed Assets, depreciation has to be allowed. The relevant finding reads as under :
“6.5 On this issue, it is important to examine, the relevant clauses of the agreement between the Appellant (First Part) with Job Contractors (Second Part), which are reproduced hereunder: "Clause 5 - The party of the Second Part to arrange the said machines in the said premises according to their requirements so as to enable them to link the manufacturing activities in the most practical manner after taking the approval of the party of the First Part.
23 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. Para 10 - The Party of the Second Part shall process the goods, supplied by the Party of the First Part only and shall not process the goods of any third party without written consent/permission of the Party of the First Part. Para 27 - That the legal possession and the control of the said Licensed Premises shall always remain exclusively with the Party of the First Part and the Party of the Second Part is only user and conductor of the said licensed Premises. There is no intention between the parties hereto to create any relationship of Landlord and tenant by execution of this agreement of leave and licence." 6.6 On perusal of the agreement with job contractors, it is apparent that the appellant company is owner of the premises and the entire premises is used for its own business. These agreements make it clear that the job contractors have no rights or control over the premises. Their entire activities in the premises are controlled by the appellant. This arrangement cannot be termed as a tenancy. A meager compensation of Rs. 1,000/- per month for occupying 12,000 to 41,000 sq. fts. of space in a prime location in Mumbai cannot be equated as tenancy. 6.7 The Para 10 of the agreement clearly reveals that the job contractors shall process the goods, supplied by the Appellant Company only and are not permitted to process the goods of any third party. This particular arrangement of the appellant with the job contractors have been entered into for the purpose of security of the high value goods, in which the appellant is dealing. The 24 ITA Nos. 3679,6756, 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. Appellant Company has for it's own business convenience has housed some of the job contractors within the factory premises and each one of the job contractor is working under the strict control and surveillance of the Appellant Company. 6.8 Considering the fact that the appellant is the owner of the premises and is using the said premises for manufacture of rough diamonds for its captive consumption, I am of the considered opinion that the appellant is entitled to depreciation on the factory premises. The compensation of Rs.24,000/- recovered from its job contractors is part and parcel of its business activities and shall be included in the business income.”
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.
26 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd.
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.
27 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd.
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.
ITA No. 4096/MUM/2018 (Revenue appeal) :
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.
ITA No. 3680/MUM/2018 (Assessee appeal) :-
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 :
30 3680, 4094 & 4096/Mum/2018 M/s. Rosy Blue (India) Pvt. Ltd. Total sales Consideration : Rs.2749,75,03,530/- Value per carat : Rs.24,347.7/- Gross Profit Ratio : 4.92% Cost per carat : Rs.23,149.8/- Disallowance on account of stock discrepancy : 23,149.8/- * 539.05 carats = Rs.1,24,78,900/-
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:
"Q.4 In the search carried out u/s 132 at the following premises of Rosy Blue (I) Private limited which is 1608- 1609, Prasad Chambers. Tata Road no.
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:
Sr. Sr. No. As per Valuation Reference in my No. Report of Laxmilal Kothari valuation in the dated 26/08/2011 wealth tax return 1 Gross weight 140 grams 9 2 Gross weight 122.010 8 grams 3 Gross weight 27.010 6 The above is thus reflected in my wealth tax return. However, the following stands un-reconciled as of now as no documents or papers are readily available with me. I will submit the explanation in the due course of time.
S.No. Particulars Value (Rs.) 1 18 Carat gold weighing 2,72,766/- 139.880 gms 2 18 Carat gold weighing 2,83,764/- 145.520 gms 3 Pure Gold weighing 19.280 gms 50,128/- 4 Wire and Round dot weighing 9,775/- In the meantime, I state that I will submit a pay order of Rs. 6,58,108/- by 31st October, 2011 and request you kindly release the all the above items valued at Rs. 77,57,539/-. 19.2 From the above, it is clear that Shri Russell Mehta has never accepted that the said stock is un-reconciled. What he has stated is that at that point of time, he was not in a position to furnish any re-conciliation statement. The Appellant has given detailed reasoning for the discrepancy, during the course of the assessment proceedings on this issue. 19.3 I have taken note of the fact that as per the stock register it had gold of 656.20 gms as on 1-4-2011. The gold found on the date of search was only 304.68 gms, which is less than the book stock. In view of these facts and circumstances, I hold that entire gold valued at Rs. 6,58,108/- stands explained. Accordingly, the addition of Rs. 6,58,108/- made on this account is hereby deleted. Thus, the Ground No. 7 of the present appeal is allowed.”
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.