MEENA JEWELLERS PRIVATE LIMITED,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD

Brief facts of the case are that the assessee company, engaged in the business of trading in bullion, gold and diamond ornaments and diamonds etc., filed its return of income for the A.Y 2013-14 on 29.9.2012 admitting a taxable income of Rs.1,30,43,040. During the assessment proceedings u/s 143(3) of the Act, the AO called for various information which was filed by the assessee. AO verified the same and observed that the information was received by his office from the Office of the DGIT (Inv.), Mumbai stating that a search and seizure operation was conducted u/s 132 of the I.T. Act in the case of Rajendra Jain Group which is a leading entry provider of Mumbai on 3.10.2013, and several incriminating documentary evidence was found and seized which conclusively proved that the associated companies/persons of the above group, through a web of concerns run and operated by them, are engaged in providing accommodation entries in the nature of bogus unsecured loans and bogus sales and that this information also contained the list of beneficiaries who made purchases from the above group. He verified the details and found that during the financial year 2012- 13 relevant to the A.Y 2013-14, the assessee company had made purchases from two companies i.e. Karnavat Impex Pvt. Ltd for an amount of Rs.13,56,150 and Sun Diam for an amount of Rs.11,35,000. He observed that these two companies are operated and managed by Rajendra Jain Group and that the statement recorded from the key persons of the said group also confirmed that the above companies were controlled and managed by them and that they are not doing any real trading in Diamonds but only indulged in paper transactions. The AO afforded an opportunity of cross examination to the assessee before us. Summons u/s 131 was also issued by the AO to the Director of the company. One of the Director of the company, in response to the said notice, appeared and stated that the transactions are all genuine and recorded in the books and stock register and that all the payments are made by RTGS. He thus denied the allegation of the AO that the purchases are bogus. However, the AO was not convinced with the reply of the Director and held that the purchases are bogus and disallowed the same and brought it to tax. Aggrieved, the assessee preferred an appeal before the CIT (A), who confirmed the order of the AO and the assessee is in second appeal before us by raising the following grounds of appeal: “1. The order of the Ld. CIT (A) is bad both in law and on facts to the extent it is prejudicial to the interest of the assessee.

The learned Counsel for the assessee while reiterating the submissions made by it before the authorities below submitted that the assessee has not only recorded the purchases in its books of account but also recorded the same in the stock register and has offered the net profit to tax after sale, which has been accepted by the Department. He submitted that the Department cannot disallow the purchase and also bring to tax the profit on sale. He has drawn our attention to the purchase invoices from Karnavat Impex Private Ltd and also from Sun Diam which are placed at pages 77 to 80 of the paper book and also the bank statement reflecting the payments made to these companies by RTGS. He has also drawn our attention to the sales invoices regarding these goods. He submitted that all these details were submitted both before the AO as well as the CIT (A), who failed to verify these documents but have made the additions and confirmed the addition merely on suspicion and surmises. In support of his contention that such disallowances cannot be made, he placed reliance upon the following decisions: i) Hon'ble High Court of Gujarat in the case of CIT vs. Bholanath Poly Fab (P) Ltd reported in 40 Taxmann.com 494 ii) Hon'ble High Court of Bombay in the case of CIT vs. Nikung Eximp Enterprises (P) Ltd reported in 35 Taxmann.com 384 iii) ITAT Mumbai in the case of M/s Steel Line India vs. Asstt. CIT in ITA No.880/Mum/2016.

The learned DR, on the other hand, supported the orders of the authorities below and submitted that from the statement of Rajendra Jain Group, it was clear that these two companies are only issuing accommodating entries without there being actual sale and therefore, the AO was justified in disallowing the bogus purchases.

Having regard to the rival contentions and the material on record, we find that the assessee has made the payments to the parties through banking channels and therefore, the party was rightly identified. Further, the assessee has made the sales of these items and offered the income therefrom to tax. Once the Department accepts the sale, it cannot disallow the corresponding purchases. When all the documents were on the file of the AO, he ought to have verified the genuineness of the sale instead of depending solely on the statement of the Rajendra Jain Group. In view of the same, we deem it fit and proper to remit the issue to the file of the AO for verification of the documents filed by the assessee and if it is found that the payment has been made by the assessee through banking channels and the purchases and sales have also been recorded in the books and the net profit has been offered to tax, then there cannot be any disallowance of the purchases.

In the result, appeal of the assessee is treated as allowed for statistical purposes.