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Income Tax Appellate Tribunal, “G” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM)
O R D E R Per Shamim Yahya, A. M.:
These cross appeals by the Revenue and the Assessee are directed against the order of the learned Commissioner of Income Tax (Appeals)-30, Mumbai (‘ld.CIT(A) for short) dated 08.08.2018 and pertain to the assessment year (A.Y.) 2010-11.
2. The grounds of appeal raised by the revenue read as under: 1. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in computing the profit for the purpose of section 28 of the I T Act 1961 taking in to consideration the bogus bills against which no goods have been received?"
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2. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in restricting the addition on account of bogus purchases @3% of the total purchases of Rs.17,44,48,759/-, as the profit element embedded in these purchases overlooking that the alleged suppliers were admittedly engaged only in giving accommodation entries to several parties including the assessee?"
"Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in presuming that purchases have been made from unknown parties whereas bills have been received from accommodation entry provider.?" 4. "Whether on the facts and in the circumstances of the case and in law, if the Ld. CIT(A) has made a presumption that purchases have been made from unknown parties, the Ld. CIT(A) has not clarified how the payment was made and whether section 69 of the IT Act, 1961 will be applicable?"
5. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not considering the order of Hon'ble Supreme court in the case of N K Protein Ltd. dated 16.01.2017, which is on similar issue of bogus purchases and when the apex court order was already the law of the land when the Ld. CIT(A) has pronounced its order on 16.08.2018?"
6. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO be restored. 3. The grounds of appeal
raised by the assessee read as under:
1. The CIT(Appeals) has erred by treating 3% of the alleged bogus purchases amounting to Rs.17,44,48,759/- and disallowing the same and adding it to the taxable income of your appellant.
2. The Appellant craves leave to add, amend, delete or alter any grounds of appeal on or before the hearing of this appeal & drop the penalty proceeding.
4. Brief facts of the case are that the assessee is engaged in the business of manufacturing and purchase of cut and polished diamonds. The return of income for the year under appeal was filed on 13.09.2010 declaring total income of Rs. 96,99,741/-. The case was reopened u/s 147, by issuing notice u/s 148 of the Act on 30.03.2017. The reasons for reopening of the assessment is based on the information that Search & Seizure operations were conducted on 03.10.2013 by the Investigation wing, Mumbai, in the group cases of Shri Rajendra Jain and during the course of the operations, it was found that several name lending dummy directors, partners/
3 S.Sagar Enterprises proprietors of various concerns belongs to the native place of Rajendra Jain & family through which accommodation entries are provided for bogus sales and bogus unsecured loans. It is also noticed that the concerns were literally controlled, operated and managed by Shri Rajendra Jain and his family. The persons in charge of the concerns admitted this, in their sworn statements recorded during the course of search operation and they have also admitted that they were made to the position by Bhanwarlal Jain. Post search investigation reveals that the assessee has taken accommodation entries of purchases from M/s. Avi, Kalash, Karnawat, Kriya Sparsh and Sun amounting to Rs. 1 7,44,48, 759/-. Assessment u/s 143(3) r.w.s. 147 of the I.T. Act, 1961 was completed by the Ld. AO on 30.12.2017 determining the total income at Rs. 18,41,48,500/- by estimating profit margin @ 100% on such purchases..
In making the addition, Ld. A.O. relied on the sworn statements given at the time of search and survey operations on the group concerns of Shri Rajendra Jain, recorded from the in-charge persons of the dummy concerns and the post search investigation outcome of the investigation wing. It was noticed by the Ld. AO that all the said persons/ concerns from whom appellant had allegedly made purchases had testified before the Investigation authorities that they are merely employees of Shri Rajendra Jain family and are shown as directors, partners and proprietors and the management of the concern lies in the hands of Rajendra & his family members. Post search investigation revealed that the appellant taken accommodation entries from these parties. Ld. AO held that in absence of the supply of goods, even though the documentation aspect of the transaction was not being denied, it would lead to the only human probability that the goods mentioned in the paper transaction were purchased by the appellant from undisclosed entities from the grey market. Hence, Ld. AO assumed that since the sales made by the appellant were confirmed, purchases had definitely taken place though not from the aforementioned suppliers. Therefore, the AO came to the conclusion that there was a definite probability that purchases were made from undisclosed entities from the grey market and got benefited by the 4 S.Sagar Enterprises additional GP margin earned by purchasing from the grey market which was estimated @100% of such total purchases made from those concerns and added to the total income. In estimating the profit margin at 100% of such purchases, the AO solely relied on the decision of apex court in the case of M/s N.K. Proteins Ltd.
Upon assessee’s appeal Ld.CIT(A) noted that AO has not made any independent enquiry himself. But, he found that surrounding evidences are sufficiently there for the purchase to be bogus. However, he noted that AO has not doubted the sales. He proceeded to hold 3% disallowances by concluding as under:-
6.12 As narrated earlier, the Ld. A.O. in this case has himself held that the purchases were not bogus though the party from whom the purchases were made by the appellant was found to be bogus and that is the reason for which AO considered the addition on the basis of the profit element embedded on such purchases which is estimated @ 100% of the total purchases. The motive behind obtaining bogus bills thus, appears to be inflation of purchase price so as to suppress true profits. Considering the facts of the case as well as the various case laws cited (supra) especially in the case of CIT vs. Simit P. Sheth (supra), I agree with the action of the AO estimating the addition on the profit element embedded on such bogus purchases.
6.13 However, AO estimated the profit margin @ 100% solely relied on the decision of apex court in the case of M/s N. K. Proteins Ltd. In similar cases Assessing Officers have estimates Profit margin at 3% of the purchases. Though I am in agreement with the reasoning of the AO for estimating of the profit percentage, I feel that the AO has not given the correct reasoning for estimation of the profit percentage @ 100% in this nature of trade. Further the appellant has stated that the facts of the N.K. Proteins Ltd. case are completely different. The chart furnished by appellant during the appellate proceedings to distinguish the facts is reproduced as under: M/sN. K. Proteins Ltd. Case Sr. Appellant’s case No. 2 The search had not taken place at your appellant's premises. The search had taken place at assessee premises. T No documents relating to such All documents re/at/n to such alleged bogus purchases were produced before your goods self. purchases were discovered at the time of search 3 The invoice were taken from billing There is no such case. All the invoices are genuine and agencies. produced from both the sides (i.e buyer and seller )
5 S.Sagar Enterprises 4 The fact of bogus purchase came to The alleged bogus purchases were added on the basis of search taken place at the premises of Mr Rajendra Jain / the knowledge of the department only because of the search taken place at Bhanwarlal Jain Group and not at your appellant's premises. the premises of M/s N. K. Proteins However, your appellant had purchased diamonds from them Ltd. Place v' and same were accepted by the seller of the diamonds
6.14 Thus it is seen that the facts of the instant case are completely different and distinct then the facts of the case relied upon by the AO to estimate the profit margin at 100% of such purchases. While deciding the profit element embedded in the bogus purchase cases, Gujarat High Court adopted the profit @ 12.5% by taking the benefit derived out of the saving of taxes, considering the profit margin in that line of trade. In the light of the above, one has to see in the present case, who are in the manufacturing and trading of diamonds, the profit element embedded estimation @ 100% is correct or not. Coming to the profit margin in the trade, the taskforce group for diamond industry constituted by the Government of India, Ministry of Commerce and Industry, after considering the BAP scheme, recommended presumptive tax for net profit calculated @2% of trading activity and @3% for manufacturing activity or @ 2.5% across the board. It is also ascertained that the operating profit in case of diamond trading for computation of ALP by the TP wing is consistently in the region of around 1.75% to 3%, It is also brought to my notice that the AOs are a/so adopting 3% on the purchases made from Rajendra group concerns, as the profit element embedded, in the subsequent assessments finalized on the similar set of facts. In view of the same and also since the profit margin is lesser in this sector, adopting 100% by the AO, is not based on correct footing. Considering the lesser profit margin in this sector i.e. around 2 to 3 percent and the taxes saved is around 1% and also on purchases made from places like Surat, there is no levy of tax, I am of the considered opinion that if the addition is sustained to the extent of 3% of the purchases made as the profit element embedded in such purchases from the three parties belonging to the Rajendra Jain Group concerns, the same will meet the ends of justice. Accordingly I direct the AO to restrict the addition @3%, on the total purchases of Rs. 17,44,48,759/- as the profit element embedded in such purchases. Ground No. 1 raised on this issue are treated as 'Partly Allowed'.
Against the above order, assessee and revenue cross appeals before us. We have heard both the parties and perused the record.
Ld. Departmental Representative relied upon the order of AO.
Per contra Ld. Counsel of assessee placed reliance upon the following case laws:- 1. ITO vs. M/s. Dinal Diamonds
ACIT vs. M/s. M.Shailesh & CO. ITA Nos. 3451 & 3484/ Mum/2017 3. Report of the Task Group for Diamond sector issued by the Govt.of India in February, 2013
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Upon careful consideration, we note that facts of revenue’s grounds are identical to the one dealt by this ITAT in the case of M/s. Dinal Diamonds (supra). The ITAT has concluded as under:-
10. Upon careful consideration we find that the assessee has provided the documentary evidence for the purchase. Adverse inference has been drawn by the A.O. on the investigation wing action on Gautam Jain group. No independent enquiry has been conducted by the A.O. himself. We find that in this case the sales have not been doubted. It is settled law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from the Hon'ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises (in writ petition no 2860, order dt. 18.6.2014). In this case, the Hon'ble High Court has upheld 100% allowance for the purchases said to be bogus when sales are not doubted. However, in that case all the supplies were to the government agency. In the present case, the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non- payment of tax and others at the expense of the exchequer. In such situation, in our considered opinion, on the facts and circumstances of the case, 3% disallowance out of the bogus purchases meets the end of justice, as reasoned by the ld. CIT(A) above. The case law quoted by the Revenue in the grounds of appeal is a dismissal of SLP simplicitor by the Hon'ble Apex Court. It does not meagre the order of the Hon'ble Apex Court with that.
Similarly, ITAT in the case of Shailesh & Co (supra) has concluded as under:- 10. We have heard both the counsel and perused the records. The ld. Counsel of the assessee relied upon the following case laws:
1. 1. M/s. Choron Diamond (I) Pvt. Ltd. (in and others vide order dated 30.10.2017) for the proposition of 2% disallowance of bogus purchase.
2. Pr. CIT vs. Tejua Rohitkumar Kapadia (in Special Leave Petition (Civil) Diary No(s). 12670/2018) for the proposition that when there is no defect in documentation, no disallowance for bogus purchase is required.
11. Upon careful consideration, we note that this is a case of disallowance on account of bogus purchase in case of a diamond trader. Sales have not been doubted. No defect in purchase documentation has been noted. In identical case, in the case of M/s. Choron Diamond (I) Pvt. Ltd. (supra) the co-ordinate Bench of the ITAT has held as under: 10. As could be seen from the above that the Coordinate Bench while sustaining the order of the Ld.CIT(A) also considered the report of Task Group for Diamond Sector submitted to Department of Commerce, wherein it was submitted that net profit in diamond manufacturing is in the range of 1.5% to 4.5% and in trading it is in the range of 1% to 3%. The ITA.No.4449, 6798 and 6800/MUM/2016 ITA.No.4379, 5868 to 5871/MUM/2016 M/s. Choron Diamond (I) Pvt. Ltd. assessee before us submitted that he is into 100% exports of trading of cut and polish diamonds. The Task Group for Diamond Sector submitted to Department of Commerce also suggests that the profit margin in trading of goods is in the range of 1% to 3%. In the circumstance we direct the Assessing
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Officer to estimate the profit element from the purchases treated as non-genuine at the rate of 2% uniformly for all the Assessment Years 2007-08, 2008-09, 2010-11, 2011-12 and 2013-14. 12. We further note in the present case the ld. CIT(A) on similar reasoning has directed 3% disallowance. The A.O. himself has made similar disallowance in the subsequent years. In our considered opinion, there is no infirmity in the same. Accordingly, we uphold the same.
Accordingly, we find that the issue is duly covered by ITAT decision as above. Following the same, we uphold the order of Ld.CIT(A).
In the result, both appeals stand dismissed.
Order pronounced in the open court on 30 .08.2021