GEMORIOUM,JAIPUR vs. ITO, JAIPUR

PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 28th March,

2014 of ld. CIT (A)-II, Jaipur for the assessment year 2010-11. The assessee has

raised the following grounds :-

2 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

case. Relief may please be granted by considering the additional evidences while disposing off the appeal.

(b) In the facts and circumstances of the case and in law the ld. CIT (A) has erred in confirming the action of ld. AO to the extent of making addition of Rs. 9,40,000/- u/s 68 of the Income Tax Act, 1961 out of the total addition of Rs. 25,75,500/- made by the ld. AO. The action of the ld. CIT (A) is illegal, unjustified arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition of Rs. 9,40,000/-.

Particulars Expenses Disallowed Telephone expenses 72,758/- Transportation Expenses 80,724/- 21,400/- Vehicle repair Expenses 60,491/- Total : 2,13,973/- 21,400/-

The action of the ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the said disallowance of Rs. 21,400/-.

Ground no. 1 is regarding rejection of books of accounts under

section 145(3) and confirmation of trading addition by applying GP rate at

17.5%.

assessee does not press the issue of rejection of books of accounts under section

145(3) and, therefore, the assessee is agitating only the trading addition made by

applying the GP rate at 17.5% as against declared GP rate at 8.16%. The ld. A/R of

the assessee has submitted that after rejection of books of accounts, the AO has

adopted the GP rate at 17.5% by taking another entity instead of the past history of

3 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

the assessee’s GP rate declared. He has further contended that the AO has selected

one company for the purpose of applying the GP rate without explaining the basis of

the comparability of the said company, namely, M/s. Rainbow Jewellers. The ld. A/R

has pointed out that the AO has also not given the details of the nature of business

of said company whether it is a wholesaler or retailer and comparable to the

business of the assessee. In support of his contention, he has relied upon the

decision of the Coordinate Bench of the Tribunal dated 15.12.2017 in case of ACIT

vs. M/s. Allied Gems Corporation in ITA No. 794 & 795/JP/2011 and C.O. No. 76 &

77/JP/2011 wherein the Tribunal has held that the past history of the assessee’s

declared GP is relevant guidance for estimation of income of the assessee after

rejection of books of accounts.

2.1 On the other hand, the ld. D/R has submitted that the AO during the

assessment proceedings has noted that out of total purchases of Rs. 50,25,180/-

made during the year under consideration, 90% of the purchases are outstanding as on 31st March, 2010 and therefore, the purchases of the assessee were found to be

unverifiable. She has further contended that the AO has applied the comparable

case of GP instead of taking past history of the assessee because there is a history

of unverifiable purchases in the case of the assessee. Thus, the ld. D/R has

submitted that the AO is justified in taking the GP of the comparable case instead of

taking past history of the assessee which is not reliable. She has relied upon the

orders of the authorities below.

as the computation of income of the assessee on the basis of the best judgment,

there is no dispute that the assessee’s own past history of declared GP which is

4 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

accepted or the GP which has attained the finality can be considered as a proper

guidance for the estimation of income after rejection of books of account under

section 145(3). The Coordinate Bench of the Tribunal in case of CIT vs. Allied Gems

Corporation, while considering an identical issue has held in para 5 as under :-

“5. We have considered the rival submissions as well as relevant material on record. The Assessing Officer rejected the books of account by invoking the provisions of section 145(3). The issue of rejection of books of accounts is involved in the cross objection filed by the assessee, therefore, we deal with this issue while deciding the cross objection. Once, the books of accounts are rejected by the AO the only course of action left to the AO is to assess the income of the assessee on the basis of best judgment and GP rate is considered as proper and reasonable basis and guidance for the best judgment. Once, the books result are rejected the Assessing Officer cannot proceed to make an addition to the income offered by the assessee as per books result. However, the AO in the case of the assessee instead of applying the GP rate made on addition@ 25% of the purchases to the book results. This act of the Assessing officer itself contradicts the decision of rejecting the books of accounts and books result. The Tribunal in assessee’s own case for the assessment year 2006-07 has considered this issue and upheld the order of the ld. CIT(A) in para 2.20 and 2.30 as under:-

“2.20 Hence, there are certain concerns for which Revenue got evidence in the form of statement recorded in respect of such parties, opening balance is Rs. 37,06,175/- while the closing balance is Rs. 42,81,496/-. It means that there is an accretion of amount of Rs. 5.75/- lacs. It means that to this extent, accretion in purchase is without supporting the correct bills. Of course, total openting balance of all parties is Rs. 1,15,43,782/- and the closing balance is Rs. 1,33,36,193/-. However, looking to the accretion in the closing balance of the concerns for which

5 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

Revenue has material, the addition confirmed by the ld. CIT(A) is reasonable………………. …………………………………………………………… 2.30 The Hon’ble P & H High Court in the case of Uplakesh Metal Industrial V CIT 177 taxman 298 held that issue decided by this is in the realm of appreciation evidence. The find of Tribunal as mentioned in this judgment is as under:- "However, in our opinion the observation of the Assessing Officer that the assessee was prima facie required to prove the genuineness of the transaction and identity of the creditors is not misplaced because there is no distinction laid between the trade creditor and the non-trade creditor and we are further of the opinion that in case the assessee claims liability of payment to the trade creditors shown in the balance-sheet, the assessee is definitely required to prima facie prove the identity of the trade creditors as well as the genuineness of the transaction. In this case, admittedly the assessee has neither been able to disclose the complete addresses of the trade creditors nor is able to give the complete addresses of the consignors nor the name has been mentioned on the challan forms, so the verification of the same by the Assessing Officer became totally impracticable on account of lack of this complete information supplied by the assessee. It means that the assessee failed in establishing the genuineness of the so called trade creditors appearing in its books of account. We are further of the opinion that since in the instant case of the assessee, the point under consideration before us is regarding the genuineness of the liability amounting to Rs. 1,75,26,586 shown by the assessee in its balance-sheet as trade creditors, so it was not relevant for us to consider as to whether the purchases made by the assessee were genuine or not or to whether the assessee has inflated those purchases or not. It is also not material to consider whether the GRs from sale-tax department were verified or not, so, the CIT(A) on considering these points was not justified in deleting the impugned addition without discussing as to whether the liability of trade creditors shown by the assessee in the absence of furnishing complete addresses of trade creditors/consignors and the payment vouchers was genuine or not."

6 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

While evaluating the material collected by the Revenue on the touch stone on human probability and considering the accretion in the closing balance in respect of parties for which Revenue has material in thejform of statement. We fell that the ld. CIT(A) was reasonable in confirming the addition of Rs. 5.00 lacs. Hence both the grounds of assessee as well as Revenue are dismissed.” We further noted that when the corresponding sale is not in dispute then the question is only regarding the correct amount of purchases and verification of the same. The ld. DR has relied upon the various decisions of Hon’ble Gujarat High Court however, we find that in all those decisions there was a finding of facts that the assessee inflated the purchases upto 25% and therefore, it was not a case of non verification of the purchase and rejection of books of accounts but the fact was established in the investigation that the assessee inflated the purchase price and accordingly the addition of 25% being inflated purchases was made and upheld by the Tribunal which was again upheld by the Hon’ble High Court. On the contrary in the case of the assessee the AO not given any finding of inflated purchases by the assessee but doubted the very transaction of purchases due to non production of these parties before the AO. The AO has not given the finding that the prices of the goods was inflated by the assessee but the AO doubted the genuineness of the purchases on the ground that the suppliers were found to be accommodation entries providers. When the AO rejected the book results u/s 145(3) of the Act, then the AO after rejection of the books of account can proceed to make the assessment on the basis of best judgment instead of resorting make the addition to the book results. Accordingly, in the facts and circumstances of the case and in view of the decision of this Tribunal in assessee’s own case for A.Y. 2006-07 we do not find any error or illegality in the orders of the ld. CIT(A) in restricting the addition to the average GP rate based on the past history. Hence, the grounds raised

7 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

in the Revenue appeals are rejected being without any substance or merits.”

Though there are disputes regarding the verifiability of the purchases made by the

assesee even in the past years, however, when the issue of applying the GP rate has

already been settled in the process of appeals and has attained the finality then the

GP which has attained the finality or was accepted by the AO can be considered for

the purpose of estimation of income of the assessee for the year under

consideration. Accordingly, we direct the AO to compute the income of the assessee

by taking the average GP of the past years of the assessee which is accepted and/or

attained finality. Hence this issue is set aside for limited purpose of applying the

average GP for computation of income of the assessee.

Ground No. 2 is regarding the addition of Rs. 9,40,000/- made under

section 68 of the IT Act confirmed by ld. CIT (A).

has introduced the deposit of Rs. 25,75,500/- on account of partner’s capital and

further Rs. 9,40,000/- as unsecured loan. When the assessee has failed to furnish

any explanation and supporting evidence, the AO made the addition of these

amounts as unexplained credit under section 68 of the IT Act. On appeal, the ld.

CIT (A) has deleted the addition to the extent of Rs. 25,75,500/- on account of the

capital introduced by the partner. However, the ld. CIT (A) has confirmed the

addition under section 68 of the Act on account of the loan taken by the assessee

from M/s. Royal Jaipur Durbar Hotels Pvt. Ltd. Before us, the ld. A/R of the

assessee submitted that the assessee has produced the bank account statement of

8 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

the loan creditor which reflects the payment of the money through cheque and,

therefore, when the transaction of loan amount received by the assessee through

banking channel then the assessee is not required to explain source of the source.

In support of his contention, he has relied upon the decision of Hon’ble Jurisdictional

High Court in the case of Aravali Trading Co. vs. ITO, 187 Taxman 338 (Raj.) as well as the decision dated 3rd May, 2016 in case of Principal CIT vs. M/s. Shubh Mines

Pvt. Ltd. in DBIT Appeal No. 96/15. Placing reliance on these decisions, the ld. A/R

has submitted that once the existence of person in whose name the credits are

found in the books of accounts is proved, the assessee is not required to prove

source from which the creditor could have acquired money to be deposited with it.

Thus the ld. A/R has forcefully contended that once the assessee has produced the

records to establish the identity of the creditor and bank statement, then no further

evidence is required to be produced in support of the claim.

4.1. On the other hand, the ld. D/R has submitted that the assessee has failed to

produce even the confirmation of the loan creditor as well as PAN. The loan creditor

company is a related party of the assessee as one of the partners of the assessee

firm is a Director of the said company. Therefore, the non production of confirmation

and PAN clearly shows that the assessee has failed to discharge its onus. The ld.

D/R has referred to the bank statement of the loan creditor and submitted that the

cheques were issued immediately after the deposit of an identical amount in cash in

the bank account of the company and, therefore, this is not a case of payment of

loan by the company from the known source but cheques were issued just after

deposit of cash of like amount. Hence the assessee has failed to establish source of

cash credit. In support of her contention, the following decisions are relied on :-

9 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

Blessing Construction vs. Income Tax Officer 32 taxmann.com 366 (Gujarat)

Dayal Singh and Sons vs. Commissioner of Income Tax 20 taxmann.com 687 (P&H)

Umesh Krishnani vs. Income Tax Officer 35 taxmann.com 598 (Gujarat)

record. The assessee has shown the cash credit of Rs. 9,40,000/- being loan taken

from M/s. Royal Jaipur Durbar Hotels Pvt. Ltd. There is no dispute that the primary

onus is on the assessee to establish the genuineness, creditworthiness and identity

of the creditor. The assessee has produced bank statement from which the said

company has issued the cheques for payment of the amount. However, apart from

the bank statement, the assessee has not produced any other documents. The ld.

CIT (A) has specifically pointed out that even the confirmation with PAN was not

filed by the assessee and, therefore, the assessee has failed to discharge its primary

onus. We further note that when the partner of the assessee is one of the Directors

of the loan creditor company, then the burden lies on the assessee to prove the

genuineness of the transaction beyond any iota of doubt. The assessee has not

explained any reason for not furnishing the confirmation and PAN of the loan

creditor despite the fact that the partner of the assessee is also a Director of the

said company. The relevant transactions of the payments received from the said

company as per the bank statement at page 81 of the paper book are as under :-

“To: M/s ROYAL DARPAR HOTELS PRIVATE LIMITED 46, GULISTAN-E-SHAMEEN, GOVINDPURI WEST, AMER ROAD, JAIPUR JAIPUR, RAJASTHAN

10 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

302006

STATEMENT OF ACCOUNT FOR THE PERIOD OF 01-10-2009 TO 30-10-2009

Date Particulars CHQ No/ REF. No. Withdrawals deposits balance

01-Oct-2009 B/F 3224.92Cr

19-Oct-2009 CASH 475000.00 478224.92Cr

19-Oct-2009 TRF to CD244 504601 475000.00 3224.92Cr

21-Oct-2009 CASH 265000.00 268224.92Cr

22-Oct-2009 CASH 200000.00 468224.92Cr

24-Oct-2009 TRF to CD244 504602 465000.00 3224.92Cr

Page Total 940000.00 940000.00 3224.92Cr Grand Total: 940000.00 940000.00 3224.92Cr

Funds in clearing: 0.00 Total Available Account: 3224.92Cr

Unless the constituent notifies the bank Immediately of any discrepancy found By him in this statement of account, It will be taken that he has found the account correct. Date Stamp Manager “

Thus it is clear that before issuing the cheque there is a deposit of equal amount in cash on 19th October, 2009 and further when a cheque of Rs. 4,65,000/- was issued, an identical amount was deposited in cash on 21st and 22nd October, 2009. From

the entries in the bank account of the loan creditor it clearly reveals the fact that the

cheques were issued only for the amount which was deposited in cash just prior to

the date of cheque, otherwise the balance in the said account was only Rs. 3,224/-.

Hence the bank statement produced by the assessee does not support the case of

11 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

the assessee in explaining the source of credit rather it speaks against the assessee

and creates doubt about the genuineness of the transactions. Despite the addition

made by the AO and confirmed by the ld. CIT (A), the assessee has not produced

any of the supporting evidence even before us to explain the source of credit. The

Hon’ble Gujarat High Court in case of Blessing Construction vs. ITO (supra) while

dealing with an identical issue of cash credit has observed in para 4 to 7 as under :-

“4. The assessee carried the issue in appeal. The Commissioner(Appeals) re- examined the entire issue at length. He observed as under :

"5. I have carefully considered both the positions. I have also examined the relevant documentary evidences furnished by the AR including account confirmations, copies of Income-tax returns of the depositors, their balance-sheets, P & L accounts, and capital accounts as also their bank statements. The first depositor was Shri Hasmukh R. Mehta, against whom the loan of Rs.3 lakhs was shown. His bank statement with HDFC Bank shows, amongst other transactions, a deposit of Rs. 3 lakhs on 29.6.2006 by cheque. The loan was given to the Assessee by cheque on 4.7.2006. It cannot therefore be said that unexplained cash was deposited in the account of Shri Hasmukh R. Mehta before giving the said loan to the Assessee. The next depositor was Shri Jimit M. Mehta, his bank account showed a deposit of Rs.1,50,000/- in cash on 24.3.2005. On the very next day, he issued a cheque of Rs.1,50,000/- to the assessee. Prior to the said deposit, his balance was only Rs. 2,056.20 with no major credits. The extract of his cash book shows no cash balance prior to depositing such cash into his bank account. Next was Smt. Kokilaben M. Mehta; a loan of Rs. 1,50,000/- was showed in her name. On 6.11.2004 the said sum was deposited in cash in her bank account with Bank of baroda. On 8.11.2004 the cheque was issued to the assessee. The balance in her account prior to this transaction was only Rs.1,444.95. Her cash book shows capital buildup from stitching and embroidery income every month. The return of the income filed by her for the A.Y. 2005-06 declared an income of only Rs.51,904/-. It is a clear case of accommodation entry being provided to the assessee. She simply did not have the requisite creditworthiness to give the loan. 6. Coming to M/s. Nirav Gems, who claimed to have given a loan of Rs.1,50,000/- the situation was exactly the same. Cash of Rs. 1,50,000/- was deposited on 8.11.2004 and the loan was given on the very next day. Before the deposit, the balance in its account with Dena Bank, Rampura Branch was only Rs. 4,008.87. He also build up his capital by showing diamond brokerage

12 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

income of approximately Rs. 3,000 per month. Once again, this is another case of accommodation entry being provided to the assessee. Shri Nirav M Mehta who claimed to have given a loan of Rs. 1 lakh to the assessee, cash was deposited on 6.11.2004 in his bank account with Dena Bank and the loan was given to the assessee on 9.11.2004. His account shows similar transactions of rotating money at regular intervals. The average balance prior to the said deposit was approximately Rs. 2,000-Rs. 3000. Shri Sevantilal A. Mehta had a balance of Rs. 5557 before depositing cash of Rs 1 lakh on 15.1.2005 and giving the said sum as a loan to the assessee on 18.1.2005. Smt. Sushilaben R. Sanghvi had a balance of Rs. 550.05 before cash of Rs. 1,50,000 was deposited in her account and a cheque of the said sum issued to the assessee on 18.1.2005. Smt. Taraben A. Mehta had a balance of Rs. 2,557.35 as on 9.11.2004. On 24.1.2005, i.e. more than two months later, with no transaction in between, sums of Rs. 3000 and four installments of Rs.49,000 each were deposited in cash in her bank account on 24.1.2005 creating the necessary fund for giving the loan of Rs.2 lakhs the very next day i.e. 25.1.2005. 6.1 The aforesaid facts clearly show that the availability of funds in the hands of the depositors were manipulated by depositing cash in their bank accounts except for Shri Hasmukh R. Mehta. Even though four of the depositors may have appeared before the Assessing Officer and confirmed the loans, even then the loans did not stand satisfactory explained, especially in relation to the creditworthiness of the alleged depositors. The identities of four depositors were established only by their personal appearance. However, the returns of income cannot be treated as a conclusive evidence of genuine identity or even the bank accounts, especially when it is considered that a large number of bogus returns and bank accounts are opened for providing such entries, the practice of which in Surat is almost an industry, apart from the textile and diamond industries. On the face of it the transactions were made look absolutely genuine as the loans were taken by account-payee cheques, the depositors had filed their returns of income, had prepared their accounts, had their own bank accounts and four of them had even appeared before the Assessing Officer. Unfortunately, a deep scrutiny into the pile of documents furnished by the AR and the assessee, both in asst. proceedings and in appellate proceedings clearly reveal that the manipulations, the manner in which cash was deposited in the bank accounts of seven of the alleged depositors immediately prior to issuing the cheques to the assessee. It may be alright to contend by relying on Court decisions that the Assessing Officer was not competent to enquire into the source of source of the loans yet, the Courts have also held that the creditworthiness of the depositors/lenders have to be necessarily established. Though this is clearly a contradictory and dichotomous situation yet, the necessity of enquiries regarding the creditworthiness of the alleged depositors cannot simply be wished away. In the case of the assessee, such enquiries have clearly revealed that, apart from Shri Hasmukh R. Mehta, the remaining seven alleged depositors simply did not have the funds available to give the loans to the assessee. The funds were available by surreptitious means which was not explainable. Given such facts and circumstances of the case, I hold that of the unexplained loans of Rs. 13 lakhs, only the loans of Rs. 3 lakhs in the name of Shri Hasmukh R. Mehta,

13 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

stood satisfactorily explained. The remaining loans of Rs. 10 lacs represented absolutely bogus accommodation entries. The addition to the extent of Rs. 10 lakhs under the provisions of sec. 68 of the IT Act is sustained."

6.1 Counsel further submitted that assessee had not only established the identity of the depositors, had received the amount through cheque. Genuineness of the transaction therefore, could not have been doubted. The creditworthiness of the depositors also was sufficiently established. Assessee thereafter, could not have been asked to establish the source of the income of such creditors. 7. With respect to the legal contention that the Revenue cannot insist on assessee supplying the source of source is impeccable. However, the facts of the present case are vastly different. It is of-course true that some of the observations made by the Tribunal may suggest that the Tribunal did concern itself with the source of the source. However, such observations cannot be picked in isolation as to treat that as the conclusion of the Tribunal. When one reads the order of the Assessing Officer, that of the Commissioner(Appeals) and also of the Tribunal, inescapable conclusion one arrives at is that the Revenue authorities as well as the Tribunal found the entire transaction not genuine. There was sufficient evidence on record to suggest that in case of all the depositors, their bank accounts contained meager balance shortly before sizable amount of Rs. 1 lakh and upward were given to the assessee through

14 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

such account. In such bank accounts, cash amounts were credited and immediately entire amounts were withdrawn through issuance of such cheques in favour of the assessee. It was noticed that such creditors did not maintain any books of account. Nowhere their capacity to raise such amount for drawing cheque of sizable amounts was established. In short therefore, the V very genuineness of the transaction was not established. This therefore, is not a case where the Revenue makes addition on the assessee failing to establish source of the source. All issues are essentially based on facts and appreciation of evidence on record. No question of law arises. Tax Appeal is dismissed.”

Thus the Hon’ble High Court after considering the peculiar facts of the case has

refused to accept the contention of the assessee that the revenue cannot insist on

assessee supplying source of source. Similar view has been taken by the Hon’ble

Punjab & Haryana High Court in the case of Dayal Singh & Sons vs. CIT (supra)

when the creditworthiness and genuineness of the transaction to be considered and

it was found that the payments were made from the deposits in cash on the same

day when the cheques were issued. Accordingly, in view of the facts and

circumstances of the case, when the assessee has failed to discharge its onus of

proving the genuineness of the transaction and even failed to produce the

confirmation and PAN of the loan creditor, the addition made by the authorities

below is justified as the record produced by the assessee also goes against the claim

of the assessee. The assessee has raised an issue of additional evidence in ground

no. 2(a). However, since this evidence was duly considered by the ld. CIT (A) while

deleting the addition made by the AO in respect of capital introduced by the partner

of the assessee firm, therefore, no argument has been advanced by the assessee on

this issue as the issue has become infructuous. Ground No. 2 of the assessee’s

appeal is dismissed.

15 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.

Ground No. 3 is regarding disallowances of expenses.

press this ground and the same be dismissed as not pressed. The ld. D/R has no

objection if the ground of the assessee is not pressed. Accordingly, ground no. 3 of

the assessee is dismissed as not pressed.

Order is pronounced in the open court on 08/03/2018.

Sd/- Sd/- ( HkkxpUn ) (fot; iky jkWo ½ ( BHAGCHAND ) (VIJAY PAL RAO) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member

Jaipur Dated:- 08/03/2018. Das/

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

16 ITA No. 378/JP/2014 M/s. Gemorium, Jaipur.