DCIT, C-15(3)(1), MUMBAI vs. SANJIVANI PARENTERAL LTD.,, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI PAVAN KUMAR GADALE, JM ITA No. 4152 to 4154 /Mum/2019 (For A.Ys. 2010–11, 2009–10 & 2011–12 respectively) DCIT M/s Sanjivani Parenteral Ltd. Circle–15(3)(1) 205, P.N. Kothari Industrial Room no. 451, 4th Floor, Estate, Aayakar Bhavan, Vs. L.B.S Marg, Bhandup (W), M.K. Road, Mumbai-400 078 Mumbai-400 020 (Respondent) (Appellant) PAN No. AAACCS 2369 B CO No. 57/Mum/2020 (Arising out of ITA no. 4152/Mum/2019 for A.Y. 2010–11) CO No. 58/Mum/2020 (Arising out of ITA no. 4153/Mum/2019 for A.Y. 2009–10) CO No. 59/Mum/2020 (Arising out of ITA no. 4154/Mum/2019 for A.Y. 2011–12) DCIT M/s Sanjivani Parenteral Ltd. Circle–15(3)(1) 205, P.N. Kothari Industrial Room no. 451, 4 th Floor, Estate, Aayakar Bhavan, Vs. L.B.S Marg, Bhandup (W), M.K. Road, Mumbai-400 078 Mumbai-400 020 (Respondent) (Appellant) Assessee by : Shri Mehul Shah, AR Revenue by : Shri Hemant Kumar Chimanlal Leava, CIT DR Date of hearing: 05.07.2022 Date of pronouncement : 27.07.2022 O R D E R PER BENCH:

“1. On the facts and in the circumstances of the case and in Law, the Ld.CIT(A), Mumbai erred in estimating the gross profit at product percentage of 8.75% on circular transactions and directing the AO to restrict the addition to Rs.1,62,531/- as against Rs. 16,48,30,000/- stating that, "whilst the assessee has indulged itself into circular trading as was accepted before the survey team, without giving any findings as to how 8.75% GP can be taken since the

“1. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in partly upholding addition of Rs. 162,531 estimating benchmark gross profit of 8.75% against declared gross profit of 8.66% out of addition made by the Assessing Officer amounting to Rs. 164,830,000 being 100% of purchases involved in circular trading without appreciating that all material facts and evidences with respect to purchase and sale of goods were placed to prove the circular transactions during the course of reassessment, and without appreciating that, there cannot be sale without corresponding purchases, and without considering that he was expected to tax the income flowing from the circular trading transaction, and not the transaction itself.”

“4.2 Accordingly, show cause notice was issued to the assessee company on 18.11.2016, the relevant

FY. in which accommodation Amount in entry was involved (In Rs.) 2008-09 16,48,30,000 2009-10 12,12,89,600 2010-11 1,74,13,000 Total 30,35,32,600 2.1 The above conclusion that you have booked bogus purchases in your books also get strengthened from the various statements recorded during survey proceedings in your case at your office

2.3 During the post-survey proceedings, summons u/s.131 of the IT.Act were issued to M/s.Hercules Chem and M/s.Odyssey Chemicals to verify the sales made by the assessee company to them. However, the said parties could not be traced at the given address. Therefore, the contention of the assessee that the purchases from M/s.Dr. Datson Labs

2.4 In view of the above, you are hrereby show cause as to why the said bogus purchases as tabulated above should not be disallowed and added to the total income of respective assessment years in your case. "...........

3.4 However, the ADIT in survey report brought out that there is no truth in the contention of Mr.Ashwani Khemka. He had observed that the share price movement of the assessee company during the months September, 2008 to

3.2 In view of the above, you are hereby show cause as to why an amount of Rs. 1,18,00,000/- should not be treated as unexplained expenditure for A.Y.2009-10 on account of payment made for manipulation of share price of the assessee company as discussed above…………

4.3 The Authorized Representative of the assessee, Shri Amit Doshi, Chartered Accountant filed submission dated 06.12.2016 in respect of the issue raised. The relevant portion of said reply is reproduced herein under:

"Purchases from M/s. Dr.Datsun Labs Ltd.

It is alleged in your notice that purchases of Rs.30,35,32,600/- from the said party is accommodation entry. Our client strongly refute

1) During the survey carried out at our premises by the ADIT, Unit 2(2), Mumbai all the details were submitted and the corresponding sales were also confirmed. Contention of our client genuineness of the said transaction were also accepted by the visiting party.

2) If the purchases, as alleged are considered, then sale of the material is also under question. Logically the sale should also be removed. Also, if purchases are considered as accommodation entries, no sale can take place. The detailed chart showing movement of material on purchases to sale was also on record by the survey party.

3) Our client strongly refute the contention/statement by Shri Kannan K. Vishwanath, Managing Director. The said statement must have been given under duress and would like to request you to give our client an opportunity to cross examine him on the said transaction before you. At this stage we would like to re iterate that a copy of account duly signed and confirmed by them is also submitted in your office which confirms

We are enclosing the said chart containing details of purchases and sales again for your verification with a request to re-confirm the same again with these parties."

4.5 The above submission of the assessee is duly considered, but not accepted for the following reasons:

i. It needs to be mentioned that during the course of statements recorded during survey, Shri Ashwani Khemka was asked to substantiate these purchases shown to have been made from DDLL, he admitted that the assessee company having entered into accommodation entry of purchase bills from DDLL for which no physical delivery was received. However, Shri Ashwani Khemka failed to substantiate his plea that the said bogus purchases were part of turnover purposes only as corresponding bogus sales had been affected and no cogent documentary evidences in support of this claim were furnished.

It may also be noted that vide question No.14, Mr.Ashwin Khemka, Managing

Q.14: Kindly state whether any bills/vouchers pertaining to this circular trading is being maintained in this office? Ans.: No, sir the bills and vouchers for circular trading are sent to Rabale factory after necessary paperwork. These fictitious bills/vouchers are meticulously maintained to avoid fault finding, however, these are only paper entities as

Apart from the above sworn statement of Mr.Ashwin Khemka, at the time of survey action at the different premises of the assessee company, statement of various key persons engaged in issuing purchase orders, material receipt, quality control units etc. have been recorded u/s.131 of the 1.T.Act. Such personnel of the assessee company in their sworn statements during the survey action have clearly admitted of having not received the purchase material from DDLL during F.Ys.2008-09 to 2010-11. Shri Mahendra Kalwankar, Head of Quality Assurance and Director of the company, was recorded u/s.131 of the Act at the business premises of the assessee company's manufacturing unitat R-40, TTC Rabale Industrial Estate, Navi Mumbai-400 701. Shri Mahendra Kalwankar is responsible for signing the purchase order issued by assessee company in respect of material purchases by assessee company at Rabale unit. During the survey action, vide Q.No.19, Shri Mahendra Kalwankar was requested to furnish the details of any

"Q.19 Are you aware of a purchase party called Anjaneya Biotech P. Ltd./Anjaneya Life Sciences Ltd./Datsons Labs Ltd.? If so, what is the material supplied by such party?

Ans. No, and no such material has been received here."

Furthermore, the statement of Shri Vijay Soni, Accounts Manager of assessee company at Rabale Unit, was recorded u/s.131 of the Act. Vide question nos. 16,17,18 and 19 of the said sworn statement, Shri Vijay Soni was shown the bills and challans of DDLL and was requested to state whether the purchase material as indicated in the said bills had ever been received at the Rabale unit. In response, thereto, Mr. Vijay Soni stated that the said bills are sent to Rabale unit only for the purpose of accounting and the material as stated therein had never been

"Q.16 I am showing you the bills and challans of a purchase party called Anjaneya Biotech P. Ltd./Anjaneya Life Sciences Ltd. Are the purchases in the nature of raw material for manufacturing or trading?

Ans: The purchases are in the nature of trading. Only on one occasion they have given us material for manufacturing in FY2009-10 for Rs.22,93,200/-. I am submitting the ledger copy for the same as Annexure-1. Remaining transactions are trading activity.

Q.17 I am showing you a set of bills found in the accounts department at this unit pertaining to M/s.Anjaneya Biotech P. Ltd. (Vishwam, 8/B, Postal Colony, Chembur, Mumbai) for FY.2008-09 and 2009-10.

Ans.: No, and no such material has never been received here. The bills were sent to me from the head office (Mr. Hitesh Khona) and I have entered the transactions in the accounts.

Q.18 There are some other parties in the trading account ledger which I am showing to you currently. It includes parties such as Sharon Bio-medicine Ltd., Benzochem Lifesciences P. Ltd., Adiatika Pharma (P) Ltd., G.M.H.Laboratories, Unijules Lifesciences Ltd., Cheryl Laboratories Ltd. Has any trading activity happened with them?

Ans: All these are trading parties, whose bills are sent here for accounting purpose. The material is never received in the Rabale unit.

Ans: As the goods are not received in factory and received at the head office, the standard procedure of purchase including documentation is not followed. Only the bills are made available to me from head office and other documents related to delivery and tracking have not been sent to me from the head office. Therefore, it is not available with me. I do not know if these details are maintained at the head office. We maintain proper records of bills and other documents as made available to us.

4.6 From the above, it can be seen that there are enough evidences as discussed above, which were confronted during the course of survey proceedings and post survey proceedings, from which inference can be drawn that the purchases were bogus in nature and no physical delivery of goods were taken place. With regard to the bill to bill mapping of such transactions for establishing circular trading, the

4.7 During the post-search proceedings, summons u/s.131 of the I.T. Act were issued to M/s. Hercules Chem and M/s. Odyssey Chemicals to verify the sales made by the assessee company to them. However, the Inspector of Investigation Wing reported that the address of M/s. Hercules Chem and M/s. Odyssey Chemicals was incomplete and the said parties could not be traced. Thus, the assessee company had failed to substantiate its claim that circular trading transactions have taken place with supporting bills/vouchers. Further, the assessee has failed to furnish one to one correspondence between all purchases and sales. Therefore, the contention of the assessee that the purchases from M/s. Dr. Datson Labs Limited were a part of circular trading activity is not acceptable.

4.8 The assessee company in his reply dated 06.12.2016 in response to show cause notice issued has refuted the statement of Shri Kannan Vishwanath, Managing Director of DDLL recorded under oath u/s.131 of the Act on 23.06.2014 and assessee company contended in its reply that he must have been given the statement in unduress and requested to cross examine him. It is certainly an

4.9 The assessee company has also failed to furnish with conclusive documentary evidence the details of the parties to whom they have actually sold and delivered these materials. Thus, the assessee company in its submission has failed to prove the genuineness of the transactions made from the mentioned parties.

4.10 The first and foremost, the assessee has failed to establish genuineness of delivery of goods by any third parties evidence even after given ample opportunities.

4.11 The onus is on the assessee to prove that the purchases were genuine by producing the parties and related evidences The onus to prove the correctness and genuineness of any claim made by the assessee is the assessee itself as it is held in the case of CIT vs. Calcutta Sales Agency Ltd. 19 ITR 191. In this regard, it is also pertinent to mention that while dealing with the concept of burden of proof, onus of proving is always on the person who makes the claim and not on the Revenue. The Hon'ble Supreme court in the case of CIT VS Durgaprasad More 82 ITR 540 and Sumati Dayal Vs. CIT 214 ITR 801 has held that the apparent must be considered real until it is shown that there are reason to believe that the apparent is not real and that taxing authorities are entitled to look into surrounding circumstances to find out the

4.12 In the case of Indian Woolen Carpet Factory vs. Income Tax Appellate Tribunal [2002] 125 Taxman 763 (Raj) it was held as under:

4.13 In Sanjay Oilcake Industries vs. Commissioner of Income Tax [2009] 316 ITR 274 (Guj), it was held as under:

"Thus, it is apparent that both the commissioner (Appeals) and the Tribunal have concurrently accepted the finding of the Assessing officer that the apparent

4.14 Therefore, the genuineness of the purchase transactions from the above mentioned accommodation bill providers is not verifiable. The onus lies on the assessee to prove the genuineness of purchase transactions. In the absence of conclusive supporting documentary evidences and explanation by the assessee, the assessee's contention that the purchases made from the above parties are genuine is not acceptable.

4.15 Another contention of the assessee that the payments were made through banking channel and therefore the purchases were genuine are also not tenable because of the following reasons:

(a) Merely because, the so called payment was made through banking channel, cannot establish that the transactions are

b) The Hon'ble ITAT, Jaipur in the case of M/s. Kachwala Gems vs. JCIT ITA No 134/JP/2002 dated 10.12.2003 affirmed by the Hon'ble Supreme Court in the case of M/s. Kachwala Gems vs. JCIT (2006) 206 CTR (SC) 585, 288 ITR 10 (SC) has held that even payment by account payee cheque is not sufficient to establish the genuineness of purchases.

c) In the most recent judgment delivered on 07.01.2015 by the Hon'ble Bombay High Court in the case of Shri Naresh Pahuja 54 taxmann.com 258, it has been held that mere routing of a gift through a banking channel would not by itself establish that gift was genuine. The Headnote of the above cited judgment is reproduced hereunder;

Section 68, read with section 254 of the Income-tax Act, 1961 Cash credits (gift) Assessment year 1995-96 Assessing Officer made addition in income of assessee as income from undisclosed sources holding that gifts

d) The Hon'ble Supreme Court, following the earlier decision in CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78, noted that where the conclusion of the Tribunal was not unreasonable or perverse or based on no evidence, no question of law as such would arise for consideration. The Hon'ble Court further observed thus:

"25. ...The doubtful nature of the transaction and the manner in which the sums were found credited in the books of accounts maintained by the assessee have been duly taken into consideration by the authorities below. The transactions though apparent were held to be not real one. May be the money came by way of bank cheques and paid through the process

4.16 As discussed above, there is no merit in the assessee's argument that the payment was made through banking channel is a sufficient reason to believe that the transactions from the above mentioned parties are genuine, especially when the entire gamut of facts and circumstances clearly indicate that these parties are non existing and bogus parties.

4.17 After carefully going through the submissions and discussion made in the above paras, it becomes crystal clear that:

(a) The primary onus is on the assessee to establish the genuineness of the transactions recorded in its books of account and assessee has failed to do so.

(b) Since the primary facts were in the knowledge of the assessee, it is the duty of the assessee to provide the correct details with regard to the impugned transactions, which has not been produced by the assessee.

(c) If the investigation conducted by the Department leads to doubt regarding the genuineness of the transactions, it is incumbent on the assessee to produce the parties along with the necessary documents to establish the genuineness of

(d) Payment by account payee cheque is not sacrosanct, as discussed above.

4.18 As the assessee could not discharge the onus. Therefore, the assessee did not fulfill the burden of proof on its part as well, that the purchases made from DDLL are indeed genuine purchases, Further, it is to be pointed out here that the assessee has not furnished any conclusive evidence to support its claim of the purchases made from the DDLL and hence, could not discharge the burden of proof cast upon it. The contention of the assessee in his submission primarily relates to sales having been effected and hence the alleged purchases cannot be doubted, which too has not been proven to be circular as discussed.

4.19 Taking into account the above facts and circumstances, the only fair conclusion that can be arrived in this case is that the assessee was indeed a beneficiary of the accommodation bills issued by the DDLL wherein there was not any actual / physical delivery of goods from the mentioned parties. An accommodation bill is obtained for introducing unaccounted goods into the accounting system. After considering the entire submission and documents produced by the assessee, it is crystal clear that the assessee did not purchase the goods from DDLL. Further, summons u/s. 131 of the IT.Act, 1961 were again issued during scrutiny proceedings to sale

4.20 In view of the above discussion, the disallowance on account of bogus purchases of Rs. 16,48,30,000/- is being made to the total income of the assessee company.

4.21 The penalty proceedings u/s 271(1)(c) of the IT Act, 1961 are being initiated separately for filing inaccurate particulars of income leading to concealment of income

Manipulation of share price:

5.1 The ADIT in survey report brought out that there is no truth in the contention of Mr. Ashwani Khemka. He had observed that the share price movement of

5.2 In response to the show cause notice issued, assessee company vide its submission dated 06.12.2016 contented that understanding with Shri Bipin Shah was never effectively carried out. Also there are no evidences on record to prove that share prices were actually manipulated. It's contention that increase in stock price, if any, is attributable to good market scenario and good results declared by the company and there were never any allegation in the life time of the company by Securities and Exchange Board of India (SEBI).

During scrutiny proceedings, the assessee submitted that:

"Understanding with Mr. Bipin Shah:

During the survey proceedings loose paper containing understanding with Mr. Bipin Shah was found. However, our client would like to place on record that was only and understanding which was never effectively

Increase in stock price, if any, is attributable to good market scenario and good results declared by the company. There is not an iota of evidence to conclude that price was manipulated by the company and there are never any allegation in the life time of the company by the watch dog of stock market namely, Securities and Exchange Board of India (SEBI),

5.3 The assessee's contention is not acceptable in view of above discussion. Thus, it is clear that there is unexplained expenditure to the tune of Rs. 1,18,00,000/- by the assessee company for manipulation of share price and the same needs to be disallowed as per the provisions of section 69C of the 1.T.Act, 1961.”

“5.1 I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position.

5.2 Ground No. 1- Addition of Rs.16,48,30,000 as Bogus Purchase

5.2.2 The goods were claimed to have been sourced from Aanjaneya Biotech Private Limited that later on changed its name to Dr. Dastons Labs Limited (and Group) and were sold to Hercules Chem and Odyssey Chemicals. The survey action on Dr. Daston Labs Limited wherein Managing Director of said Company gave a statement that the transaction was circular in nature which triggered survey action on the Appellant. The Appellant submitted address, copies of purchase bills, sale bills, and bank statements demonstrating payments having been made by cheque to the AO during the proceedings. The Appellant also submitted tabulated statement of the entire movement of goods right from sourcing the goods to sale of goods.

5.2.3 The Appellant submitted following documents in its initial submission dated September 13, 2017:

a. Statement of payment received from Hercules Chem and Odyssey Chemicals and payments made to Aanjaneya Biotech Private Limited;

c. Purchase invoice from Aanjaneya Biotech Private Limited;

d. Statement indicating purchase and sale of goods;

e. Copy of Annual Report and Tax Audit Report of the Appellant for financial year 2008-09 (Assessment Year 2009-10);

f. VAT confirmation certificate from Dr. Daston Labs Limited (formerly known as Aanjaneya Biotech Private Limited);

g. Copy of account of the Appellant in the books of Aanjaneya Biotech Private Limited;

h. Copy of MVAT Returns of Aanjaneya Biotech Private Limited and VAT paid challans;

i. Fresh certificate of incorporation evidencing change of name from Aanjaneya Biotech Private Limited to Dr. Dastons Labs Limited

J. A few Survey documents that the Appellant had evidencing impounding of documents;

5.2.4 The Appellant was specifically queried as to which documents were not placed on records of the AO and formed the additional evidences before this office. Later on, the Appellant vide letter dated September 27, 2017 segregated and submitted certain documents which were admitted as additional

j. VAT confirmation certificate from Dr. Datsons Lab Limited (formerly known as Aanjaneya Biotech Private Limited) indicating that they were registered under the MVAT Act 2005

k. Confirmation from Aanjaneya Biotech Private Limited as to entering in of transactions with Your Appellant

l. Copy of VAT Returns filed by Aanjaneya Biotech Private Limited

m. Fresh certificate of incorporation for change of name

n. Complete Chart showing details of purchases, sales, Gross Profit made on each of the transaction, and percentage of Gross Profit

o. Mapping of Sales vis-à-vis purchases

p. Returns of Central Excise showing trading turnover made

q. Copies of bank statements showing details of receipts from debtors and payments made to creditors indicating the same amounts being received and disbursed under the circular trading:

r. Agreement with Bipin Shah to arrange funds for expansion of the Company for which he was to be paid professional fees. It was further mentioned that share prices were to be raised to Rs.60 to enable the

5.2.5 From the documents submitted, I find that the transactions of purchase from Aanjaneya Biotech Private Limited have been confirmed by the said Company, and even the AO, during Remand Proceedings, has not raised any adverse inference on this. It has also bought to the notice that Aanjaneya Biotech Private Limited has filed its VAT Returns and discharged VAT liability as evidenced by VAT payment challans, and the AO has not commented on the same in Remand Proceedings, although it was case of the AO that purchase were bogus in nature.

5.2.6 The very basis on which the Department holds the purchases to be bogus is for the following reasons.

a. The selling party is declared by the MVAT Department as suspicious in nature:

b. The reason for such declaration is either such party has not file VAT Returns or not discharged VAT liability:

c. The purchasing party has claimed set off which is withdrawn and the purchasing party is asked to pay VAT.

5.2.7 Section 48(5) of MVAT Act provides that if the State has not received tax into their treasury, set-off

5.2.8 It is important to note that the AO has not brought any such finding that the selling party was declared as "Suspicious" dealer by the MVAT department. On the same lines, it is not a case of the AO that the Appellant was called upon by the MAVT Department to pay MVAT in place of the selling party as no set off (input credit) of the Appellant was withdrawn

5.2.9 Next point that is worth noting is that there may be a case wherein an Assessee may just obtain bills of purchases in order to inflate the purchases and thereby reduce the taxable income without accounting for corresponding sales. The Appellant has duly submitted the manner of disposal of goods and also profit on each transaction. All these transactions are verified by the AO as recorded by the AO in paragraph 5.6 of the Remand Report.

5.2.11 The Hon'ble Supreme Court in the case of PCIT vs. Tejua Rohitkumar Kapadia SPECIAL LEAVE PETITION (CIVIL) Diary No(s). 12670/2018 (Arising out of impugned final judgment and order dated 18- 09-2017 in TA No. 691/2017 passed by the High Court Of Gujarat At Ahmadabad), has held that Purchases cannot be treated as Bogus if (a) they are duly supported by bills, (b) all payments are made by account payee cheques, (c) the supplier has confirmed the transactions, (d) there is no evidence to show that the purchase consideration has come back to the assessee in cash, (e) the sales out of purchases have been accepted & (f) the supplier has accounted for the purchases made by the assessee and paid taxes thereon

5.2.12 In this case, the Appellant himself has admitted before the survey team that it is indulged into circular transactions forming a sort of cartel where the same goods were rotated without effecting actual delivery. This fact was confirmed by Dr. Daston Labs Limited also during the course of survey on them. In fact, the very basis of conducting survey on the Appellant was information received from Dr. Daston Labs Limited. Therefore, unilaterally concluding that the purchases were bogus because no delivery of goods took place is unrealistic. If this view is adopted, even sales made in the process were also not genuine. Therefore, in my opinion what was

5.2.13 Overall Gross Profit comparison of the Appellant (including other transactions as well as circular trading transactions) of various years is as under:

Year Sales Gross Profit Gross Profit % 31.03.2009 1,038,763,531 72,976,744 7.03% 31.03.2010 1,391,678,464 160,410,018 11.53% 31.03.2011 1,440,962,506 142,809,317 9.91% 5.2.14 As for circular trading, from the details submitted as verified by the AO during remand proceedings, it can be seen that the Appellant has shown profit ranging from @ 1.96% to 16.67%. From the charging pattern, it is very apparent that the purchases are made at a fixed rate for a few months and the sales are made at fixed rate for a few months and Gross profit of exact percentage is derived for particular period. It is pertinent to observe that name of the product is Quinine Sulphate throughout the impugned assessment year; and the Gross profit made initially was 1.96%, which rose to 16.67%, which declined in 9.09%, again rose to 16.67%, which fell down to 2.91% in financial year 2009-10 (Assessment Year 2010-11) throughout, which rose to 4.76% in financial year 2010-11 (Assessment Year 2011-12). Such unrealistic movement fetching exactly the same percentage of profit from period to period in a systematic way leads to an inference that

Period % of Total Sales Total Gross Profit Purchase Profit F.Y. 2008-09 (AY 2009-10) 17/05/2008 to 1.96% 65,254,500 63,975,000 1,279,500 23/08/2008 05/09/2008 to 16.67 19,680,000 16,400,000 3,280,000 29/09/2008 02/10/2008 to 9.09% 64,053,000 58,230,000 5,823,000 24/11/2008 06/12/2008 to 16.67% 31,470,000 26,225,000 5,245,000 17/01/2009 Average Profit (I) 8.66% 180,457,500 164,830,000 15,627,500 F.Y. 20099-10 (A.Y. 2010-11) 05.05.2009 to 2.36% 440,000 429,600 10,400 05.05.2009 05.09.2009 to 2.91% 124,485,800 120,860,000 3,625,800 28.11.2009 Average Profit (II) 2.91% 124,925,800 121,289,600 3,636,200 F.Y. 2010-11 (A.Y. 2011-12) 06.04.2010 to 4.76% 18,283,650 17,413,000 870,650 18.04.2010 Average Profit (III) 4.76% 18,283,650 17,413,000 870,650 Total Average (I) + (III) 6.22% 323,666,950 303,532,600 20,134,350 5.2.15 Above table indicates that, the sales and purchases are entered in a pre determined pattern with a regulated price band. Moreover, there cannot be such a huge variation in profitability percentage in the same period for the same product as can be seen from the pattern of profit going up and down unless there is a clear artificial mechanism introduced.

5.2.16 In light of the above, I conclude that whilst the Appellant has indulged itself into circular trading as was accepted before the survey team, the AO except alleging that the purchases are bogus has not

5.2.17 In view of the above findings of facts and relying on the judicial precedents, I am of the considered opinion that the entire sale of the Appellant cannot be taxed as 'Income' of the appellant only the net profit part can be taxed.

5.2.18 Reliance is placed on the decision of hon'ble Income Tax Appellate Tribunal –

Ahmadabad in the case of Arman Fashion Pvt. Ltd., v. ITO ITA No.2400 and 2407/Ahd/2012 wherein it was held that, "Ethical aspects of such an exercise can be debated and there may be adverse consequences under other acts/rules for such conduct. However, as for Income Tax Act is concerned, what is required to

(i) All the parties from whom the assessee had made purchases were assessed to tax and were disclosed in their trading account.

(ii) The parties from whom the assessee had made purchases had only wrongly classified in their books of accounts as loan instead of showing the balance due to the assessee as receivable from the assessee as debtors.

(iii) In such circumstances, the transactions of the purchases and sales made by the assessee need not be doubted.

(iv) However, during the year the assessee had a turnover of Rs. 18.23 Crores with gross profit at 0.04% and net profit at 0.02%. During the subsequent assessment year, the turnover declared

(v) From the above facts, the income of the assessee could not be to the extent of 25% of unverifiable purchases. Further, drawing support from the other decisions of the ITAT Ahmadabad Benches, net profit could be estimated at 0.05% on the total turnover of Rs. 18.23 Crores.

5.2.19 On analyzing the Appellant's data, it is inferred that there is huge variation) gross profit margin for each year and there is no uniformity in trading results from circular trading. Accordingly, respectfully following the decision of Hon'ble Ahmadabad ITAT in the case of Arman Fashion Private Limited (supra), I resort to estimation of profit percentage.

5.2.20 The maximum profit offered is 8.66% and minimum profit offered is 1.96% for the impugned assessment year, I estimate a percentage of 8.75% on circular transactions. The rationale for adopting 8.75% is that even section 44AD of the Act gives a benchmark rate of 8%. Since the Appellant has indulge into circular trading, in order to plug any possible leakage of revenue, the estimation of 8.75%

Asst Year sales Gross Profit Gross Estimated Net profit % addition @ addition 8.75% on sustained sales 20099-10 8,04,57,500 1,56,27,500 8.66% 1,57,90,031 1,62,531 5.2.21 Having discussed the above, I hereby direct the AO to restrict the addition to Rs. 1,62,531 only. This ground of appeal is partly allowed.

5.3 Ground Nos. 2 & 3 - Addition of Rs.1,18,00,000 as unexplained cash expenditure

5.3.1 Brief facts of the case are that, during the course of survey, a lose paper was found wherein the survey team observed that an understanding with one Bipin Shah was reached for manipulating stock prices. The Appellant explained to the survey team that no such understanding was ever implemented, and none of the Appropriate Authority like Stock Exchange or SEBI charged the Appellant with an allegation of price manipulation in the Stock Market. The AO alleged that market price during this period had rose by around 50% to which the Appellant explained that market price is driven by the market forces and the Appellant Company had no role to play. The Appellant argued that the understanding did not take final shape, and was not acted upon. It was also submitted that, in any case the Appellant

5.3.2 On a perusal of the impugned order, I find that the AO has not given his calculation to arrive at the figure of Rs. 1,18,00,000. The matter was sent on remand, but the AO has not given any comments on this issue.

5.3.3 Before this office, the appellant filed the detailed submissions which have been taken on record. The same are not repeated here for the sake of brevity.

5.3.4 The AR of the Appellant placed on record copy of the agreement, which was available with the AO, duly signed and sealed by the Survey Team, between the Managing Director, Mr. Ashwin Khemka and Bipin Shah dated September 6, 2008. The crux of this agreement is that, Bipin Shah would help the raise funds to the tune of Rs. 10 crore either through preferential allotment or rights issue over the period of 12 months. In order to achieve this objective, he will move the stock market price to make it to Rs. 60 to Rs. 80 in next six months. The modes-operandi was to acquire 12 to 15 lac shares from market in next six months for which financial requirement was

5.3.5 During the course of hearing, the Appellant submitted that whilst there was an agreement entered between Managing Director, Mr. Ashwin Khemka and Bipin Shah, the Appellant was neither beneficiary of this deal nor had anything to do with it. Further, the share price movement between April 2008 to April 2010 along with daily price movement between 01/08/2008 to 30/04/2009 were submitted before this office. The high and low stock market price of the Appellant are tabulated hereunder:

submitted before this office. The high and low stock market price of the Appellant are tabulated hereunder:

Month High Price Low Price August 2008 26.40 20.20 September 2008 31.50 20.50 October 2008 30.00 19.05 November, 2008 24.00 14.35 December 2008 17.40 13.90 January, 2009 17.00 13.50 February 2009 15.90 11.55 March, 2009 14.70 10.00 April 2009 18.46 11.05 Even in subsequent period, the Appellant has submitted that the share prices did not rise to the level of Rs. 60 to 80 per share.

5.3.7 The Appellant further submitted that even if it was assumed that the screen management charges were paid for six months, the same could not exceed Rs.9,00,000 (Rs.1,50,000 per month 6). On the contrary, the AO has made an addition of Rs. 1,18,00,000 without providing any calculation of the same.

5.3.8 I have considered the facts of the case and the details and documents produced before me. On a perusal of the impugned assessment order, the AO has made an addition of Rs. 1,18,00,000 based on the agreement without giving any rationale as to the addition. Separately, the agreement was executed between Mr. Ashwin Khemka and Bipin Shah; and the Appellant was not a beneficiary to it except that its share price would have or were intended to have been increased to meet the projections. In reality, basis the data submitted by the Appellant, such share prices were never reached on the stock exchange. Further, the Appellant could not also benefit with the increased price as it was not permitted to buy its own shares. Also, there has not been any increase in capital either by way of preferential allotment or

5.3.9 Now coming to the addition made of Rs.1,18,00,000, the AO has not placed any document on record to establish how the said amount has been arrived at. Even if it is assumed that the screen management charges were paid, the same could not be more than Rs.9,00,000 for six months but by no stretch of imagination would have gone to Rs. 1,18,00,000/- (which requires 79 months of operating being 1,18,00,000 1,500,000) which was not even the agreement period.

5.3.10 Considering the above facts and circumstances, in the absence of any detailed evidence or documents by the AO on the addition made and not establishing the fact that how the Appellant Company was beneficiary of this agreement, I hereby delete the addition made by the AO of Rs. 1,18,00,000/-. These grounds of appeal are allowed.

Order pronounced in the open court on 27.07.2022.

Sd/- Sd/- (PAVAN KUMAR GADALE) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 27.07.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT DR, ITAT, Mumbai 5. 6. Guard file. BY ORDER, True Copy//

Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai