M/S. DELUX DIAMONDS,,SURAT vs. THE INCOME TAX OFFICER, WARD-1(3)(1),, SURAT

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 1 of 15

INCOM TAX APPELLATE TRIBUNAL SURAT-BENCH-SURAT BEFORE SHRI C .M. GARG, JUDICIAL MEMBER AND SHRI O. P. MEENA, ACCOUNTANT MEMBER I.T.A. No.1396/Ahd/2017: Assessment Year:2007-08 M/s. Deluxe Diamonds, Vs. Income Tax Officer, U-49, Pooja Abhishek, Opp. Lal Ward 1(3)(1) Surat Bungalow Athwalines Surat 395007 PAN: AABFD 8354M Appellant Respondent

Assessee by Shri Mayur Kisnadwala CA Shri Vinay Sinha Advocate Revenue by Shri D. D. Yadav, Sr. D.R. Date of hearing 13.02.2018 Date of pronouncement 11.04.2018

ORDER PER O. P. MEENA, AM 1. This appeal by the Assessee is directed against the order of learned of Commissioner of Income tax (Appeals)-2, Surat (in short “the CIT (A)”) dated 06.04.2017 pertaining to Assessment Year 2007-08, which in turn has arisen from the order dated 27.03.2015 passed by the ITO 1(3) (1) Surat (in short “the AO” ) under section 143 (3) r.w.s.147 of Income Tax Act,1961 ( in short ‘the Act’). 2. The grounds of appeal raised by the assessee as under: (1) That on facts in law, the learned CIT(A) has grievously erred in confirming the addition on account of unverifiable purchases, which is made in violation of principle of natural justice by not

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 2 of 15

supplying the copies of report / materials relied on, nor granting opportunity to cross –examine the concerned persons whose statements are relied on by the AO to make the addition, inspite of the specific prayer made by the appellant. (2) That on facts in law, the learned CIT(A) has grievously erred in confirming the addition of Rs. 1,41,28,605/- made on account of alleged bogus purchases. (3) That on facts, evidence on record and in law, the learned CIT (A) ought to have deleted the entire addition, as prayed for. (4) That on facts in law, the learned CIT (A) has grievously erred in confirming the levy of interest u/s. 234B and 234C of the Act.

1,41,28,605 made on account of bogus purchases, hence, these are being

considered together.

are that the assessee is a partnership firm and had filed return of income

on 30.10.2007 declaring total income of Rs. 4,68,690. Subsequent to this,

there was a search and seizure operation carried out on 03.10.2013 in the

case of Shri Rajendra Jain Group, Sanjay Choudhary Group and Dharam

Chand Jain Group of Mumbai, which revealed that the said Group had

provided accommodation entries to various parties in respect of bogus

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 3 of 15

unsecured loan and bogus purchases through 16 benami web concerns. It

was noticed from the report of Director of Income-tax (Inv)-Mumbai dated

14.03.2014 that the assessee-firm has received accommodation entries of

Rs. 1,41,28,605 from Shri Sanjay Chaudhary, Proprietor of Mayank Impex

(HUF) during assessment year 2007-08. Accordingly, the case of the

assessee was reopened and a notice under section 148 of the Act was

issued on 27.03.2014 and served upon the assessee on 30.03.2014. The

statutory notice were issued and scrutiny assessment was made. In the

statement recorded on oath under section 132(4), Shri Sanjay Chaudhary

Proprietor of Mayank Impex(HUF) has admitted the fact that all the

concerns controlled and managed by him are not doing any real trading in

diamonds but indulged in paper transaction only without any physical

stock for goods in the name of numerous concerns. The AO citing decision

in the case of Kamalchand Nathamalal Lunia of ITAT Ahmedabad 514

Taxpundit 33 [2014] 40 CCH 199 (Ahd) treated the amount of Rs.

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 4 of 15

1,41,28,605 as bogus purchases made from Sanjay Chaudhary HUF

Proprietor of M/s. Mayank Impex.

During the course of appellate proceedings, the assessee was directed to

provide current address of the seller for verification. In response to

which, the appellant has provided two addresses of the seller, however,

the enquiry done through Inspector revealed that the party is not

traceable on given address. In view of these facts and circumstances,

after relying on some of case laws, the CIT (A) upheld the action of the

AO in treating the purchases as bogus.

The learned counsel for the assessee submitted the copies of statement

recorded from seller were not provided to the assessee. Nor any cross

examination was allowed as demanded (PB-13). The ld. A.R. relied in the

case of CIT v. Ashish International of Hon`ble Bombay High Court [Tax

Appeal No. 4299 of 2009 dated 22.02.2011] wherein opportunity of cross

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 5 of 15

examination was not allowed hence, the addition on account of bogus

purchases was deleted by the Tribunal was held to be proper. The

learned counsel for the assessee relying on the decision of Hon`ble

Gujarat High Court in the case of CIT v. M K Brothers [1987] 30 Taxman

547 (Guj) /[1987] 163 ITR 249 (Guj) submitted that it was held that there

was no evidence anywhere that those concerns give bogus vouchers to the

assessee and further there was nothing to indicate that any part of fund

given by the assessee to those parties came back to the assessee in any

form. In such circumstances, it was held that the evidence was not

adequate to conclude that purchases were bogus and therefore, the

addition deleted by the Tribunal was upheld. In the case of the assessee

also, there is no evidence to show that the assessee has given any fund to

seller, which has came back to the assessee in any form. Without

prejudice to above, the learned counsel for the assessee further

submitted that admittedly the assessee has provided all books of

accounts, cash book, bank statement sales except no cash sales and

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 6 of 15

payment were made by account payee cheques. No case of the AO that

cash received by the assessee. The assessee filed confirmation PB-64-65.

The assessee has also furnished PAN number of supplier and his

confirmation. The learned counsel for the assessee relied on the decision

in the case of Sejal Export (India) v. DCIT I.T.A. No. 3859/M/2017 dtd.

27.09.2017 in which bogus purchase restricted to 2% by CIT (A) was

upheld. The ld. A.R. also placed reliance on the decisions in the case of

ACIT v. M/s. Choron Diamonds (I) Pvt. Ltd. I.T.A. No. 4449/MUM/2016

dtd. 30.10.2017 wherein considering the diamond manufacturing rate of

1.5% to 4.5% and trading rate of the range of 1% to 3% , rate of 2% of

bogus purchases was directed to be adopted. The learned counsel for the

assessee further submitted that the AO has failed to allow cross-

examination as demanded by the assessee as mentioned in written

submissions. Therefore, relying on the decision of Hon`ble Supreme Court

in the case of Kishanchand Chelaram v. CIT 125 ITR 713 (SC) and

Prakashchand Nahta v. UOI [2001] 247 ITR 274(SC) submitted that no

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 7 of 15

addition can be made without giving an opportunity of cross examination

of the parties whose statement was relied upon by the AO. The ld. AR

further submitted that the assessee has filed day-to-day quantity details

of polished diamonds purchased from above parties and their

corresponding sales from that quantity. It was therefore, claimed that

where the relevant quantity of sales of diamonds, the quantity of said

diamonds were actually purchased. It was submitted that when the

purchases are supported by bills and there is payment by account payee

cheques, no addition is called for as held by the Hon’ble Gujarat High

Court in the case of CIT v. M. K. Brothers [1987] 163 ITR 249 (Guj). It was

also contended that when sales are not doubted then purchases could not

be doubted. It was submitted that in the case of the assessee payments

were made by account payee cheques and no material was brought on

record that monies are returned to the assessee and therefore, rate

adopted in Vijay Proteins 55 TTJ 76 (Ahd-Trib) ought not to be adopted in

this case. The ld. AR further submitted that total sales are tars 4.29

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 8 of 15

crores including 90% is from exports on which ground profit rate disclosed

by the assessee comes to 8.55% which is as per the market rate of similar

diamond traders and also similar to as disclosed by the assessee in earlier

years. In view of these facts and circumstances, it was urged that the

addition be deleted in full.

assessee that no information was supplied but the assessment was

reopen on the basis of information received from DGIT(Inv), hence, the

contention is not acceptable. The AO has examined the matter as

discussed in the assessment order. The ld. Sr. DR relied on the decision of

Co-ordinate Bench in the case of Vijay Proteins 55 TTJ 76 (Ahd-Trib) and

submitted it is fact that seller party is not traceable, hence, purchases

needs to be held as bogus and entire addition be upheld as sustained by

the CIT (A).

material on record. We find that the assessee has made purchases of Rs.

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 9 of 15

1,41,28,605 from M/s. Mayank Impex proprietor concern of Shri Sanjay

Chaudhary, HUF. The assessee has failed to produce the said party for

verification to prove the genuineness of purchases. Shri Sanjay Chaudhary

has admitted in his statement recorded under section 132(4) of the Act

during the course of search and seizure operation conducted in their case

that they used to provide bogus accommodation bills. However, the

copies of his statement was not made available to the assessee during the

course of assessment proceedings nor any cross-examination was allowed.

Therefore, the violation of not allowing cross examination to the assessee

as held in the case of CIT v. M/s. Ashish International Tax Appeal No.

4299 of 2009 dated 22.02.2011, which supports the case of the assessee.

The ld. A.R. submitted the AO has relied on the decision in the case of

Karamchand Nathmal Lunia [2014] 40CCH 199 (AHD-TRIB) wherein it was

held that the companies of Mukesh Choksi are entry provider and

therefore, the transaction with these companies as facts. Accordingly,

the whole amount of Rs. 1,41,28,605 was added as bogus purchases. The

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 10 of 15

assessee has duly produced the copies of bills, invoices and payments is

made by account payee cheques. This shows that purchases have been

made, but may be not from the party from whom purchases bills have

been obtained. The only possibility is therefore, is that the assessee

might have inflated the purchases, as sale has not been doubted by the

AO. In view of this matter, it is not just or reasonable to treat entire

purchases when corresponding sales has not been doubted by the AO.

There cannot be any sales without making purchases. We are, therefore,

of the view that it is a simple logic that when the AO has not questioned

the sales /stock then there is no logic to disallow the 100% bogus

purchases. It is obvious that there cannot be any sales without purchases.

The Co-ordinate Bench of the Tribunals in subsequent decisions have

restricted the disallowance to 12.5% instead of 25% as adopted in the

case of Vijaya Proteins Ltd. (supra). We find that in the case of Vijay

Proteins 55 TTJ 76 (Ahd-Trib) number of adverse facts were brought on

record namely blank bill book and signed cheque book of number of

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 11 of 15

person were found, payment were made by crossed cheque and not by

account payee cheques and it was established that cheques were

encashed by party itself and accordingly money had come back to the

assessee. The Co-ordinate Bench of Ahmedabad Tribunal in the case of

M/s. Suryanarayan Silk Mills (P) v. ACIT [I.T.A. No. 2088/Ahd/2007 dtd.

22.08.2017] has considered the decision of N. K Proteins Ltd. v. DCIT [Tax

Appeal No.242/2003 dated 20.06.2016 as upheld in SLP (C ) CC

No.963/2017 dtd. 16.01.2017-Gujarat High Court] and had distinguished

the said case on the ground that a search has been conducted in said

case leading to seizure/ recovery of blank signed cheques , vouchers of

number of concerns along with endorsements , blank purchase bills ,

books letter heads from searched persons. There are no such facts in the

instant case. In view of these facts, the said case was distinguishable.

The tribunal therefore, restricted the disallowance to 12.5%. No such

adverse facts are present in the present case. In view of above facts, we

are of the view that facts N. K Proteins Ltd. v. DCIT [Tax Appeal

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 12 of 15

No.242/2003 dated 20.06.2016 as upheld in SLP (C ) CC No.963/2017 dtd.

16.01.2017 Guj. High Court] are not applicable to present facts of the

case. The book results of the assessee are in line with book results of

earlier years. The books of accounts are audited under section 44AB of

the Act and no adverse comments pointed out by the auditors. Quantity

records are maintained. There is no evidence that cash received back

except statement of Shri Sanjay Chaudhary, which is general in nature

and same was also not made available to the assessee. The case laws of

Karamchand Nathmal Lunia (supra) relied by the AO is not applicable to

the assessee case as that case was of LTCG transaction made out of Stock

Exchange and payments were made in cash. However, there is no

corroborating evidences that bills from the impugned party were as per

market value and purchase cost represent fair market value.

case of Mayank Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003]

dated 17.11.2014 wherein the Hon`ble High Court has observed as under:

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 13 of 15

“5. We have heard learned advocates for both sides and perused the orders passed by the CIT as well as the Tribunal. As a result of hearing and perusal of records, it is borne out of that the average profit which has been considered for this industry is around 3 to 7%. The Tribunal in the instant case has directed addition at the rate 12.5%, which is in our opinion, is on higher side. Learned advocate for the appellant has fairly conceded that excess 7% is on higher side and that at the most 3% may be applied. In that view of the matter, going by the peculiar facts of the present case, we are of the view that ends of justice will be met by taking mean of maxim and minimum of the profit rate which comes to 5%. Therefore, we think it fit to direct the Assessing Officer to apply 5% G.P. rate as the rate of 12.5% is drastically higher and 1.03% is drastically lower. Gross profit rate of 5% is the average rate of the industry and we think it fit to make addition on account of 5% gross profit rate. The addition be made accordingly. We therefore, answer the question raised in the negative i.e. against the revenue and in favour of the assessee.” 10. We further observe that gross profit rate disclosed by the assessee

is at 8.55% which is as per the market rate of similar diamond traders and

also similar to as disclosed by the assessee in earlier years. However, it is

also a fact that the assessee has failed to substantiate the purchases by

not producing the parties in question and admission of the party that they

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 14 of 15

have indulged in providing bogus accommodation entries. We may also

note the ld. CIT (A)-3, Surat in Gangani Impex (supra) has also considered

5 % net profit rate in case of such bogus purchases whereas the other CIT

(A) `s of Mumbai income-tax charges as reproduced by the ld. CIT (A) -3

in his order in the case of Gangani Impex (supra) have adopted 3% net

profit rate of such bogus purchases made through Bhanwarlal Jain Group.

Some cases cited by the Tribunal of Mumbai Tribunal has adopted 2% net

profit rate. Therefore, in the light of above facts and circumstances and

considering the net profit of 5% as the average rate of the industry as

observed by the Hon`ble Jurisdictional High Court and following the

judicial pronouncements by the Co-ordinate Bench of Tribunals and the

decision of Hon`ble Jurisdictional High Court in the case of Mayank

Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003] dated

17.11.2014; we deem it fit to restrict the addition to 5% of total bogus

purchases of Rs. 1,41,28,605. We order accordingly. The AO will worked

Deluxe Diamond v. ITO Ward 1(3)(1)/I.T.A. No.1396/Ahd/2017/A.Y.07-08 Page 15 of 15

out the addition accordingly. Thus, ground No. 1 to 3 of appeal of the

assessee are partly allowed.

234B and 234C is concerned, we are of the view that charging of interest

is mandatory as held by the Hon`ble Supreme Court in the case of Anjum

M. H. Ghaswala 252 ITR 1 (SC), Therefore, it is upheld. However, the

assessee is entitled to consequential relief if any as arise out on giving

effect to this order.

Sd/- Sd/- (C.M. GARG) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat: Dated: 11th April, 2018/opm Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / /

Assistant Registrar, Surat