STAR GEMS & JEWELLERY,DELHI vs. PR.CIT- 16, NEW DELHI

Brief facts of the case are that the assessee filed the return of income for the Assessment year 2010-11 on 28/9/2010 declaring an income of Rs. 25,23,730/- and the same was processed on section 143(1) of the Act. There was a search and seizure action in the case of Mr Rajendra Jain, Sanjay Chaudhary and Dharmichand Jain on 3/10/2013 by the DGIT (Inv.), Mumbai. learned Assessing Officer says that the said persons are entry providers operating in Mumbai, indulging in providing accommodation entries in the nature of bogus sales and unsecured loans. In his statement recorded under section 132 (4) on 5/10/2013 and 5/12/2013, Mr Rajendra Jain admitted to have been engaged in the business of bills shopping to all the concerns and were merely lending names of their various concerns to the real importers of diamonds who takes the actual delivery of diamonds. Such a statement of Rajendra Jain was corroborated by Mr Anup Jain also.

Consequently, notice under section 148 of the Act, was issued. By way of letter dated 6/12/2017 the assessee stated that the return filed showing the income of Rs. 30,81,760/- on 6/12/2017 may be treated as the return in response to the notice under section 148 of the Act. Notices under section 143 (2) and 142 (1) of the Act were issued. Having considered the submissions made by the assessee, learned Assessing Officer recorded that, the assessee offered to treat the transaction with the above persons, in terms of the decision of the Income Tax Appellate Tribunal in the case of Vishal diamonds dated 24/9/2015.

On examination of the case of the assessee, learned Assessing Officer recorded that the assessee failed to furnish evidence establishing receipt of goods purported to have been purchased from the above persons and since the assessee failed to discharge the onus to prove that the supplier are genuine persons and have really supplied the material to the assessee, merely because the payment was made to the banking channels, transaction cannot be believed and the bills obtained by the assessee are held to be the part of the transaction of obtaining accommodation entries.

Thereafter, the learned Assessing Officer recorded that where on one hand, the genuineness of the purchase parties is doubted, but the genuineness of purchases on a whole cannot be doubted, the courts have taken the view that only the profit margin embedded in such a transaction has to be taxed. According to the learned Assessing Officer, the assessee has inflated the purchase by taking accommodation entry to reduce the profit element and in such situation, the learned Assessing Officer considered the question as to whether the entire amount of purchase should be added back to the income of the assessee, or only the profit element embedded therein. For this purpose, the learned Assessing Officer considered the question as to whether the purchasers themselves were completely bogus and a non-existent, or that the purchasers were actually made but not from the parties from whom those were claimed to have been made and instead may have been purchased from grey market without proper billing or documentation.

By placing reliance on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Bholanath Ply Fab P. Ltd. (2013) 355 ITR 290 and also CIT VS. Simit P. Sheth learned Assessing Officer reached a conclusion that the profit embedded in the purchase to the tune of Rs. 69,75,369/- at 14.35%, as a against 8% offered by the assessee, which works out to Rs. 10,00,966/- has to be added to the income of the assessee.

Subsequently, on the proposal for review of this case for the assessment year 2010-11 received from the learned Assessing Officer through the JCIT, learned PCIT perused the assessment order and assessment records and after hearing the assessee observed that the question involved in this matter is whether only GP addition is to be made on purchases or the entire purchases are to be disallowed and added back in terms of the decision of the Hon’ble Gujarat High Court in the case of NK Proteins Ltd VS.DCIT, in appeal number 240 of 2003 vide order dated 20/6/2016. According to the ld. PCIT, the learned Assessing Officer made a pure presumption without any evidence that the purchases would have been actually made from grey/cash market without realising the fact that in that case also, the entire cash investment in such purchases remain unexplained and thus needs to be added fully under section 68 and 69C of the Act.

According to the PCIT, in the absence of any evidence to show that such purchases were actually made from some other source, the entire purchases have to be disallowed. He, therefore, recorded that not considering the latest decision on the aspect in the case of NK Proteins Ltd(supra) by the Hon’ble Gujarat High Court and the dismissal of SLP against the judgement by the on Hon’ble Supreme Court renders the assessment order erroneous and levying only 14.35% of the bogus purchases instead of disallowing the entire expenditure in that respect, makes it prejudicial to the interest of revenue. He, therefore, set aside the assessment order under section 263 of the Act and directed the learned Assessing Officer to pass assessment order de novo by calling relevant details, applying the relevant law in an objective manner without being influenced by the order under section 263 of the Act.

Aggrieved by such an order passed under section 263 of the Act assessee preferred this appeal. Argument of the learned AR is that the action taken by the Ld. PCIT is not sustainable in law for the reason that such an action was taken by the Ld. PCIT on the borrowed satisfaction of the Ld. JCIT; that the Ld. PCIT erred in holding that the assessment order passed by the learned Assessing Officer was erroneous as the ld. Assessing Officer had failed to follow the latest decision of the Hon’ble Gujarat High Court in the case of NK Proteins (supra); that such a decision of the Hon’ble Gujarat High Court is not applicable to the facts of the case inasmuch as the purchases in such case were treated as bogus purchases whereas in the present case the learned Assessing Officer found that it is a case of assessee inflating the purchases are taking accommodation entry and therefore, the learned Assessing Officer was right in bringing to tax only the profit element involved in the purchases; that the facts of this case are similar to the case of Bholanath Ply Fab Pvt. Ltd; that in this case, the sales have not been doubted by the learned Assessing Officer and, therefore, where the books of accounts of the assessee are audited and details of closing stock were duly furnished, entire purchase could not have been disallowed by the assessing officer; that where after considering the material, the learned Assessing Officer had come to a definite conclusion, the mere fact that a different view could be taken should not be a basis for an action under section 263 of the Act; and that the jurisdiction under section 263 cannot be assumed in respect of a debatable issue and in view of the decision of the Hon’ble Supreme Court in the case of CIT VS. visible products Ltd (1973) 88 ITR 192 (SC) where there is possibly of two different or conflicting views, the view in favour of the assessee should be preferred. Lastly Ld. AR brought to our notice the CBD instruction No. 2 of 2008 dated 22/2/2008, prescribing the assessment procedure for the assessees engaged in the diamond manufacturing and/or trading, wherein it is stated that if an assessee has shown a sum equal to higher than 6% of the total turnover from such business as his income under the head “Profit and Gains of Business or Profession” for a particular assessment year, the learned Assessing Officer shall accept the trading result.

Per contra, Ld. DR placed reliance on the Explanation that has been inserted in section 263 of the Act by Finance Act, 2015 with effect from 1/6/2015 and also the decisions of the Hon’ble Supreme Court in the case of Daniel Merchant Private Limited VS.ITO dated 29/11/2017, Raj Mondir Private Limited VS.PCIT (2017) Taxman.com 285 (SC), Manjunatheswara Packing Products and Camphor Works VS.CIT (1998) to 31 ITR 53 (SC) and other High Court in support of his contention that where the learned Assessing Officer did not make any proper enquiry while making the assessment and accepted the explanation of the assessee, the direction given to the learned Assessing Officer under section 263 of the Act to carry out the detailed enquiry is sustainable.

He also placed reliance on the decision of the Hon’ble Gujarat High Court in the case of NK Proteins Ltd (supra) and submitted that when the entire transaction was found to be bogus and where the purchases made by the assessee were treated as bogus by the learned Assessing Officer, the addition on the basis of undisclosed income cannot be restricted to certain percentage. He submitted that though the learned Assessing Officer posed a question to himself as to whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to be added, and also posed the question as to whether the purchases themselves were completely bogus and non-existent or that the purchases were actually made not from the parties from whom it was claimed to have been made and instead might have been purchased from grey market without proper billing or documentation - learned Assessing Officer did not discuss the issue with reference to the books of accounts of the assessee to reach a conclusion that the assessee has inflated the purchases by taking accommodation entry to reduce the profit element or that the entire purchases were not bogus.

According to the Ld. DR though the assessee claims that the learned Assessing Officer had considered such an aspect in the light of the audited books of accounts of the assessee and the details of closing stock et cetera and it was only thereafter the learned Assessing Officer accepted the sales, such the fact is not reflected in the assessment order and the learned PCIT, therefore, justified in setting aside the assessment order which is nonspeaking on this aspect and directing the learned Assessing Officer to pass the assessment order de novo by calling relevant details, applying the relevant law in an objective manner without being influenced by the discussion held in the order passed on section 263 of the Act after providing an opportunity to the assessee of being heard.

We have perused the record in the light of the submissions made on either side. The impugned order reads that on receiving a proposal for review of the case of the assessee for the assessment year 2010-11 through the JCIT, Ld. PCIT perused the assessment order and assessment records and found that the assessment order dated 21/12/2017, passed by the learned Assessing Officer under section 147/143(3) of the Act was erroneous insofar as prejudicial to the interest of the revenue. The impugned order does not show that the review of the assessment order dated, 21/12/2017 by the JCIT is the sole basis for exercise of jurisdiction under section 263 of the Act by the ld. PCIT. Forward of the case by the JCIT is only triggered the process of the ld. PCIT perusing the assessment order and assessment records to reach a conclusion that the order passed under section 147/143(3) of the Act was erroneous, insofar as it is prejudicial to the interest of the revenue. It is, therefore, clear that the learned PCIT reached an independent conclusion as to the nature of the assessment order after perusal of the assessment order and assessment record, and consequently cannot it be said that the action was taken by the learned PCIT was on the borrowed satisfaction. We therefore reject the first contention of the Ld. AR.

Now adverting to the next contention of the assessee that during the original assessment proceedings she had produced the relevant material, including confirmation from the suppliers along with the bank statement and had also offered explanation; whereas in the case of NK Proteins search was conducted at the premises of the company during which various incriminating material was found and seized his concerned, the question whether the searches conducted in the premises of the assessee or that during such search, any incriminating material relating to our pertaining to the assessee were found is irrelevant. It is only because the statement given by Mr Rajendra Jain corroborated by Mr Anup Jain, learned Assessing Officer had to verify the genuineness of the purchases made by the assessee. Learned Assessing Officer after issuing requisite notices under law, and after hearing the assessee proceeded to assess the income of the assessee. It is pertinent to note that during the assessment proceedings, the assessee offered to tax 8% of the disputed purchases stating that it was so to purchase peace and in terms of the decision of the Income Tax Appellate Tribunal in Vishal diamonds case.

Now the limited question for our consideration is whether the learned PCIT is justified in setting aside the assessment order and directing the learned Assessing Officer to pass the assessment order de novo by calling relevant details, applying the relevant law in an objective manner without being influenced by the discussion made by him in the order passed under section 263 of the Act. Insofar as the contention of the learned PCIT that the learned Assessing Officer failed to consider the decision of the Hon’ble Gujarat High Court in the case of NK Proteins is concerned, the assessment order is conspicuous on this aspect. Though the learned Assessing Officer referred to the decisions of the Hon’ble Gujarat High Court in the cases of Bholanath Ply Fab. Ltd, Simit P. Seith et cetera there is no reference to the case of NK Proteins (supra).

It is no doubt true that the learned Assessing Officer raised the question as to whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded in such purchases was to be added and for such purpose thought it fit to consider the question whether the purchases themselves were completely bogus and non-existent or that the purchases were actually made but not from the parties from whom it was a claim to have been made and instead may have been purchased from the grey market without proper billing or documentation. Having posed such a question, the learned Assessing Officer failed to refer to the books of accounts of the assessee to say that the entire transaction of purchases was not bogus, but the assessee actually made purchases, though not from the parties from whom such purchases were claimed to have been made, but purchased from grey market without proper billing or documentation so that only the profit element involved in such purchase transaction has to be brought to tax. Without making any further enquiry, as could be established from the record, learned Assessing Officer, even before posing such a question as to the quantum of the addition, recorded that the assessee has inflated the purchases by taking accommodation entry to reduce the profit element.

As a matter of fact, when the learned Assessing Officer reached a conclusion that the assessee took accommodation entries in respect of purchases, it is incumbent upon the learned Assessing Officer to refer to the audited accounts of the assessee and also the closing stock register to say that the entire transaction is not a bogus one, but only the bills work purchased from grey market, whereas the purchase was a genuine one. It is only when the learned Assessing Officer records the fact with reference to the accounts of the assessee that in fact the purchases took place corresponding to the sales and only the bills were the result of obtaining the accommodation entries, it could be said that the ld. Assessing Officer took a plausible view. The assessment order does not show that it is only after examining the audited accounts of the assessee, the learned Assessing Officer satisfied that in view of the sales recorded in the books, the purchases cannot be doubted, but in the absence of any proof that the goods were purchased from the parties from, whom those of claimed to have been purchased, it had to be inferred that have been purchased the goods from grey market, the assessee obtained the purchase bills by way of accommodation entries so as to inflate the purchase price.

Further, learned PCIT in his order observed that the assessee was required to prove that such purchases were actually made from some other source, but assessee failed to discharge such onus; that in case of cash purchases, the assessee was required to further prove source of such cash purportedly used to make such cash purchases and if it was unexplained, entire amount was required to be added; and that in the present case, the assessee has paid only Rs. 14 lakhs during the year and balance amount of Rs. 55,75,369/- was outstanding and, therefore, it cannot be said that cash of Rs. 69,75,369/- came out of such purchase, payment against which was only Rs. 14 lakhs. Learned PCIT, therefore, on examination of these facts and on the basis of test based onus, reached the conclusion that the assessee failed to make a case for addition of only certain percentage of bogus purchases and instead the amount covered by the entire bogus purchases had to be added.

It is, therefore, the clear observation of the learned PCIT that out of the total purchases of Rs. 69,75,369/-, the assessee paid only Rs. 14 lakhs during the year and balance amount of Rs. 55,75,369/- was outstanding and therefore it would be difficult to believe that by paying cash the assessee purchased the goods and obtained the purchase bills by way of accommodation entries. No explanation is forthcoming from the assessee on this vital aspect. It cannot, therefore, be said that there is proper enquiry on the part of the learned Assessing Officer to conclude that the assessee in fact made purchases, but not from those persons from whom she said to have purchased, but from someone else at obtained the purchase bills by way of accommodation entries only to inflate the purchases by way of such accommodation entries, and therefore, only the profit element involved in such process has to be brought to tax. For these reasons, we are unable to accept that having considered the audited accounts of the assessee the learned Assessing Officer returned any finding as to the acceptability of the purchases or the genuineness of the purchase as a whole and in the absence of any reasons recorded by the ld. Assessing Officer, it is difficult for us to believe that the purchases are genuine, but only the purchase bills were obtained by way of accommodation entries, so that not the entire amount covered by the purchases, but only the element of profit involved therein, is liable to be taxed.

Learned PCIT recorded that it is not a case of two possible views as it was admitted by both the learned Assessing Officer and the assessee that the purchases were bogus, as the parties from whom the bills were taken, were accommodation entry providers and in such case, in the absence of any proof that the purchases were actually made from some other source, but the assessee obtain the bills from someone else, the entire purchase transaction is bogus and therefore the decision of the Hon’ble Gujarat High Court in the case of NK Proteins (supra) is applicable to the facts of the case. According to him, non- consideration of the said judgement and not disallowing the entire purchase amount renders the assessment order as erroneous insofar as it is prejudicial to the interest of revenue.

In the preceding paragraphs we expressed our opinion that the assessment order does not indicate that the learned Assessing Officer had examined the genuineness of the purchase transaction in the light of the audited accounts of the assessee. More particularly the fact that out of the alleged purchasers of Rs. 69,75,369/- , there was payment to the suppliers only to the extent of Rs. 14 lakhs and the balance amount of rupees. 55,75,369/- was shown to have been outstanding goes unverified and the assessment order is silent on this aspect. Mention of this fact in the order passed under section 263 of the Act clearly shows that the learned PCIT had examined the record and reached a reasonable conclusion that this non-examination of the genuineness of the purchases to apply the law laid down by the Hon’ble Gujarat High Court in the case of NK Proteins (supra) renders the impugned assessment order as erroneous insofar as it is prejudicial to the interest of revenue. It cannot, therefore, be said that the learned PCIT did not conduct any independent enquiry to reach a conclusion that the assessment order is also prejudicial to the interest of the revenue. Learned PCIT is right in his observation that the examination of the genuineness of the purchases is necessary in this case.

For all these reasons, were of the considered opinion that the learned PCIT rightly assumed jurisdiction and it is only after perusal of the assessment order and assessment record, he rejected the contentions of the assessee that the view taken by the learned Assessing Officer is also one of the plausible views. Decisions relied upon by the assessee have no application to the facts of the case.

Now coming to the instruction bearing number 2 of 2008 dated 22/2/2008, it is submitted by the assessee that this instruction prescribes the procedure for assessment in the case of the persons engaged in the diamond manufacturing and/or trading, and this instruction says that if such an assessee had shown a sum equal to or higher than 6% of his total turnover from such business, as is income under the header “Profit and Gains of Business or Profession” for a particular assessment year, the learned Assessing Officer shall accept his trading result. Assessee is free to rise such a contention before the learned Assessing Officer at the time of hearing.

In the circumstances, while declining to quash the impugned order’ section 263 of the Act, we direct the learned Assessing Officer to examine the books of accounts of the assessee in the light of the observations made by the learned PCIT, and also to consider the CBDT instruction bearing number 2 of 2008 dated 22/2/2008 and to take a plausible view to pass the fresh assessment order.

In the result, appeal of the assessee is allowed in part.