MAXELL DIAMOND P. LTD,MUMBAI vs. ITO 5(2)(3), ITO 5(2)(3)

The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in restricting the profit element embedded in respect of alleged bogus purchases at 3% as against 9% made by the ld. AO in the facts and circumstances of the instant case.

We have heard rival submissions and perused the materials available on record. We find that assessee is a company engaged in the business of trading in diamonds. The return of income for the A.Y.2012-13 has been filed on 29/09/2012 declaring total income of Rs.6,97,570/-. We find that the ld AO had observed that assessee had made purchases from Mahalaxmi Gems Pvt. Ltd., to the tune of Rs.2,34,83,754/- and from Lucky Exports to the tune of Rs.2,59,51,893/- totalling to Rs.4,94,35,647/-, whose names appear to be hawala dealers and belonging to Bhanwarlal Jain Group. We find that the ld. AO had stated that during the course of search proceedings in Bhanwarlal Jain group, a statement was recorded u/s.132(4) of the Act wherein it was submitted that the group had indeed given accommodation entries in the form of bogus invoices, among others, to various parties. The ld. AO sought to verify the genuineness of the purchases of the aforesaid two parties by issuing notice u/s.133(6) of the Act. The ld AO observed that both the parties did not respond to the notice issued u/s 133(6) of the Act. We find that the ld. AO had not doubted the sales made by the assessee company out of the aforesaid purchases. We find that assessee also furnished the quantity details of stock which was tallying with the stock register, the details of purchases made from the aforesaid two parties and corresponding sales made thereon were duly reflected in the stock register. The ld. AO however, having agreed to the corresponding sales made out of the aforesaid purchases, proceeded to estimate the profit element embedded thereon at the rate of 9% of value of Rs.4,94,35,647/- and made an addition of Rs.44,29,209/- as unexplained expenditure u/s. 69C of the Act. We find that the ld. AO primarily relied on the modus operandi adopted by the Bhanwarlal Jain Group to justify this addition. We find that the ld. AO had also observed that the gross profit rate disclosed by the assessee is only 0.01%. In the backdrop of these observations, the ld AO proceeded to estimate the profit element embedded in the alleged bogus purchase transaction at 9% and made addition thereon.

M/s. Maxell Diamond Pvt. Ltd., 3.1. We find that before the ld. CIT(A), the assessee brought evidences on record to prove that one party had indeed responded to the notice issued u/s.133(6) of the Act before the ld. AO. It was also pointed out that the Bhanwarlal Jain Group had not mentioned the name of the assessee to be a beneficiary of accommodation entry in its statements recorded u/s.132(4) of the Act. It was also pointed out that the statement of key person given in Bhanwarlal Jain Group u/s.132(4) of the Act had been subsequently retracted by him. It was also pointed out that the statement recorded from Bhanwarlal Jain Group which was heavily relied upon by the ld. AO for making the addition was never supplied to the assessee for its rebuttal. We find that the ld. CIT(A) by placing reliance on the decision of the Hon’ble Gujarat High Court in the case of Simit P. Sheth reported in 356 ITR 451, had held that in respect of these type of ingenuine purchases, the assessee would have maximum saved only the VAT portion. Accordingly, the ld. CIT(A) restricted the addition to 3% as against 9% made by the ld. AO.

Aggrieved by this action, we find that only assessee is in appeal before us and Revenue has not preferred any appeal before us.

We find that this Tribunal going by the gross profit ratio of the assessee in earlier years had decided in assessee’s own case in 137 of 2019 dated 23/02/2021 in similar facts and circumstances by adopting the profit element at 1% of value of ingenuine purchases. Respectfully following the said decision, we hold that 1% profit element on the value of ingenuine purchases would meet the ends of justice.

The last issue to be decided in this appeal is as to whether the ld. CITA was justified in confirming the disallowance made on an estimated basis at 10% on conveyance, telephone and travelling expenses in the facts and circumstances of the instant case.

The ground No.4 raised by the assessee is general in nature and does not require any specific adjudication.

In the result, appeal of the assessee is partly allowed.