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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI M. BALAGANESH, AM & SHRI AMARJIT SINGH, JM
O R D E R
PER AMARJIT SINGH, JM:
The assessee has filed the present appeal against the order dated 29.03.2019 passed by the Commissioner of Income Tax (Appeals) -29, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2009- 10.
The assessee has raised the following grounds: - "
I. On the facts and circumstances of the case and in law: Ground No. 1: Re-opening assessment u/s. 147/148
1. The learned CIT(A) erred in confirming the action of re-opening the assessment without substantiating valid "reasons to believe" that income chargeable to tax had escaped assessment. The reasons cannot be non-existent and must be genuine and not a A.Y.2009-10 presence. The reassessment proceedings are bad in law since the reasons to believe are non-existent.
2. The learned CIT(A) failed to take into consideration that information provided by the DGlT (Inv.), Mumbai cannot construe as 'tangible material' to justify the re-opening, since the concerned party has retracted the statement as the same being given under coercion/undue influence.
3. The CIT(A) failed to take into consideration that there is no valid reason to believe since there is no nexus between the said Rajendra Jain's statement and the purchases made by the Appellant and that the entire re-opening was done on the basis of presumption.
4. The CIT(A) failed to take into consideration that reopening of the assessment was purely done on presumptive basis and to make an enquiry or verification.
5. The learned CIT(A) failed to take into consideration the cogent evidence submitted by the appellant in the course of assessment proceedings. Ground No. 2: Addition of Rs. 2,97,023/- being 4% of purchases of 74,25,581/- after giving credit for profit margin already shown by the assessee in the books in respect of the alleged hawala purchases.
1. The learned CIT(A) erred in directing the AO to disallow 4% of the alleged bogus purchases of Rs.74,25,581/- of the alleged hawala purchases made from M/s. Minal Diamonds, although the Appellant provided sufficient information and discharged its onus of proving the genuineness of the transaction, wherein details such as payments made by account payee cheques, bills/vouchers, copy of ledger account, confirmation by M/s. Minal Diamonds, Sales ledger showing consumption of goods purchased from M/s. Minal Diamonds, etc. were duly furnished but A.Y.2009-10
2. The learned CIT(A) have not pointed out any suspicious withdrawals and deposits and has failed to establish the nexus between the impugned Rajendra Jain and M/s. Minal Diamonds. The learned CIT(A) erred in made an addition on presumptive basis without any authentic and concrete evidence, and without affording an opportunity of cross-examination of the vendor, their affidavit, and disregarding he cogent material being given to him like the ledger account and copies of purchase bills of both the above said parties and bank statements of the appellant.
4. The learned CIT(A) erred in not granting the Appellant an opportunity to procure the 'statement taken on oath' by M/s. Minal Diamonds or such other III party which were filed before the DGIT, Mumbai wherein a confession was apparently made that it indulged only in issuing bogus purchase entries to parties that approached them. The said Affidavit formed the basis of the entire addition and the same should have been provided to the Appellant.
5. The learned CIT(A) erred in denying the Appellant an opportunity for cross- examining the above mentioned vendor from whom alleged bogus purchases were said to be made.
6. The learned CIT(A) failed to consider that the goods purchased from M/s. Minal Diamonds were sold to parties who could be identified from the appellant's stock register. The Appellant craves leave to add, alter or amend the Grounds of Appeal at the time of or before the hearing of the appeal."
3. The brief facts of the case are that the assessee filed his return of income on 07-08-2019 declaring a total income to the tune of Rs.1,30,05,150 /-. The return was processed u/s 143(1) of the I.T Act. Thereafter the case of the assessee was reopened u/s 147 of the Act by issuance of notice u/s 148 of the Act dated 09-03-2016.The notice was served upon the assessee. The assessee is engaged in the business of trading and manufacturing of diamonds. The case of the assessee was reopened on A.Y.2009-10 the basis of the information received from the Office of Director General of Income Tax (Inv.), Mumbai wherein it was conveyed that the assessee has taken the bogus purchase entry of Rs.74,25,581/- from the following party: - S. No. Name of the hawala parties Bill amount 1 Minal Diamonds 7425581 Total 12,02,286 After the reply of the notice, the AO restricted the addition to the extent of 5% of the total bogus purchase of Rs.3,71,279/-. The total income of the assessee was assessed to the tune of Rs.1,33,76,430/-. Feeling aggrieved, the assessee filed the present appeal before the CIT(Appeals) who restricted the addition to the extent of 4%. The assessee was not satisfied, therefore, the assessee has filed the present appeal before us.
We have heard the argument advanced by the Ld. Representative of the Department and have gone through the case file carefully. Under this issue the assessee has challenged the restriction of addition to the extent of 4% of the bogus purchase in sum of Rs.74,25,581/-. Before going further, we deemed it necessary to advert the finding of the CIT(A) on record: - “4.2. The Ground two of the appeal is related to addition of Rs.3,71,279/- being 5% of bogus purchases of Rs.74,25,581/-. I have also gone through the basis of disallowance by the A.O. in the Assessment Order. The case laws quoted by the A.R of the appellant as well as other relevant case laws have been perused and considered A.Y.2009-10 4.2.1 It is an admitted fact that DGIT(Inv.) conducted search and seizure operation and established that the group of Bhanwarlal Jain and his family members were engaged in providing accommodation entries without delivery of diamonds. The Appellant is one of the beneficiaries and has received such accommodation entries from one of the hawala operator M/s. Minal Diamonds amounting to Rs.74,25,581/-. The Appellant submitted ledger, bank account statement, purchase invoices during assessment proceedings as well as appellate proceedings. But the AO was not satisfied with the documents submitted by the appellant to justify the claim of purchases made from above mentioned hawala operators.
4.2.2. It is clear from scrutiny of invoices that though the selling invoice included the complete details of items, but the purchase invoices were very silent on the type of item, only polished & cut diamond was mentioned against the description. So purchase invoices are not showing anything about the cut, color, clarity, shape of diamond. In this kind of business, everything depends upon clarity, shape, cut and colour and prices are determined on these factors but the invoices issued by the above said parties did not include these valuable information and only included caret and prices. The 4 c’s of diamond namely, cut grades, colour grade, clarity grade and carat weight all contribute 'ROM price of diamond. For diamonds of a given carat weight, cut grade has the largest influence on price because it is the best single indicator of a diamond's and beauty. The abovementioned purchase invoices are totally silent on the above discussed factors. The main point derived from the above discussion made about purchase invoices A.Y.2009-10 and 4 c's factor of diamond is that no trades were executed between the appellant and the abovementioned parties. If genuine transaction had taken place, the sellers would have been aware of the product being sold to the appellant. But here in the present case, the seller was not even aware of the type, quality, clarity, cut, colour of the diamond and that is the reason they did not mention these price determining factors in the invoices. They simply added carat weight and - prices.
4.2.3. In view of the above, the purchase made by the appellant from the alleged concerns of Bhawarlal Jain cannot be treated as genuine. The A.O. did not doubt the sale component and accepted the sale part of the transaction. On perusal of the sale invoices and consignment bills, it was found that there are no discrepancies in the sale component. It is a fact that there will be purchases corresponding to these sales but these purchases were not made from the above mentioned party. These purchases must have been made from the open market/grey market where trading takes place without issuing bills and by accepting payment in cash. It can be easily concluded that the appellant had made purchases from the open/grey market and accepted the bills from the Bhanwarlal Jain group concerns.
4.2.4. In this regard, it is apt to refer to certain discussions dealing with similar issue. The decision of Hon'ble Gujarat High Court in the case of Bholanath Poly Fab Pvt. Ltd. 355 ITR 290 (Guj.) where the Hon'ble Court was dealing with the finding of Hon'ble ITAT that purchases were made from bogus parties, nevertheless the purchases themselves were not bogus as the entire quantity of A.Y.2009-10 opening stock. purchases and sales were tallying and hence, only the profit margin embedded in such amount be subjected to tax. The Hon'ble Gujarat High Court taking cognizance of the fact and held that whether purchases themselves were bogus or whether the parties from whom such purchases made were bogus, is essentially a question of fact and the Tribunal having examined the evidence on record concluded that the assessee did produce cloth and sell finished goods, the entire amount covered under such purchase would not be subjected to tax and only the profit element embedded therein to be taxed.
4.2.5. In the case of diamond trade, generally the rate of VAT is stated to be charged @ 1% on the purchases made from Mumbai and on the purchases made under Form 'H', no VAT is levied due to export commitment and on purchases made from Surat also.
4.2.6. Coming to the profit element involved in these trades, the Task Force constituted by the Ministry of Commerce and Industry has, after considering BAP (Benign Assessment Procedure) Scheme, recommended a profit margin of 1 to 3% in diamond trading business. Reliance is also placed on the following decisions:
1. Hon'ble ITAT, Mumbai in the case of ITO-25(3)(4) vs. M/s. Shah Diam (ITA 4013/Mum/2017) had decided the identical issue wherein the assessee firm, a Diamond trader had taken similar accommodation entry. The A.O. had allowed the entire purchase. The CIT(A) that only profit element has to be taxed and sustained disallowance of 3% of purchase. The revenue filed appeal before the ITAT. It was held as under: A.Y.2009-10 "5. I heard the parties and perused the record. There is no dispute with regard to the fact that come to the conclusion that the profit element embedded in the purchases could be assessed. Since purchases have been made from a group, which had taken a different stand, the Ld. Cl T(A) took the view that there is possibility of inflation of purchases price, from which the assessee could have made profit. The said profit was estimated at 3% on the basis of Benign Assessment Procedure guidelines and the Transfer Pricing adjustments generally made.
From the foregoing discussions, I am of the view that the decision so reached by Ld. C/T(A) can not be found fault with, in the facts and circumstances of the case. It is also pertinent to note that the assessing officer has proceeded to assess the amount of Rs. 34,75,1431- on the impression that the assessee has received the above said amount from M/s Daksh Diamonds. Before Ld. CIT(A), the assessee has shown that it has purchased diamonds from M/s Daksh Diamonds and has also exported the same. This fact shows that the AO, after re-opening of assessment, has misguided himself during assessment proceedings. The Ld CIT(A) has correctly appreciated the facts and has rendered his decision. Accordingly, uphold the order passed by Ld. CIT(A) on the issue.
2. Hon'ble ITAT, Mumbai in the case of M/s.Naitik Gems vs. ITO- Ward 32(2)(4)(ITA No.4760/Mum/2017) had decided the identical issue wherein accommodation entry from Jain group for diamond purchase was an issue. The Hon'ble ITAT confirmed the finding of the CIT(A), the relevant portion of which is held as under: There is merit in the arguments of the A.O. as given above and following A.Y.2009-10 such arguments it is held that the A. 0. was right in estimating additional profit on unproved/non-genuine purchases. The A. 0. has fairly conceded in para 9.1. of his order that the appellant had incurred expenditure on such purchases, but expenditures remain unexplained. Thus, some disallowance out of the Led purchases will have to be made, but the question remains whether disallowance at the rate of 6% of the unproved purchases is fair or not. The main lesson for adopting six percent as fair additional profit was because the AO thought that instruction no.2 of 2008 dated 22.02.2008 will be applicable to this case. However, from a plain reading of instruction no.2 of 2008 it is seen that this instruction was meant to be applicable for the assessments made during F.Y.2008-09. Clearly, the assessment of the appellant has not been made during F. Y 2008-09. Further, the clause E of the said instruction states "the rate of profit the board in all the cases of assesses engaged in diamond business. In diamond trade the rate of VAT is stated to be fully exempt. The task force 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 stated that the operative profit ill 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 in similar cases of diamond business, some CIT(A) 's have taken a view a view that 3% of the disputed purchases should be considered as fair additional profit. In view of the above and also since the profit margin is lesser in this sector, A.Y.2009-10 adopting 6% as the additional profit by the A.0 is not based on correct or footing. Considering the fact that the profit margin in this sector is around 2 to 3% and the taxes saved is also around 1%. I am of the considered opinion that if the addition is sustained to the extent of 3% of the disputed purchases, the same will meet the ends of justice. Thus, after considering the totality of facts the addition made by the A.O. is restricted to 3% of the disputed purchases. Thus 3% of Rs. 6,92,82,349/- which is Rs.20,78,470/- is taker) as profit for the appellant on purchases that are not fully and properly explained. Addition of Rs.20,78,470/- is accordingly confirmed out of an addition of Rs.41,56,941/- and the balance is deleted. Grounds of appeal NO.1 is therefore partly allowed".
3. The Hon'ble ITAT Mumbai 'H' Bench in the case of M/s. Choron Diamond (I) Pvt. Ltd. vide (A.Y.2007-08), ITA No.6798/Mum/2016 (A.Y.2008-09) and ITA No.6800/Mum/2016 (A.Y.2011-12) had occasion to deal with an identical issue wherein on the basis of information received from the Investigation Wing of the department that the appellant company has utilized accommodation entry for purchase of diamonds by entities operated and managed by Mr. Bhawarlal Jain and Mr. Rajendra Jain and Mr. Surendra Jain u/s. The Jain Brother have admitted in the statement of oath taken u/s.132(4) that they have provided accommodation entries for purchase of diamonds. The AO. has reopened the assessment and mined the entire facts for A.Yrs.2008-09, 2010-11. 2011-12 & 2013-14. According to him, the purchases were not made from the parties managed and operated by Jain Brothers but actually had been procured from open/grey market. After discussing various case A.Y.2009-10 laws that only benefits derived out of such accommodation entries needs to be taxed, he disallowed 12.5% of the purchases treating the same as non-genuine purchases. Upon appeal, the CIT(A) discussed CBDT Instruction for diamond trade as well as task force report and held as under:
With regard to the information received from DIT(Inv.), Mumbai the summary of the communication was already passed on to the appellant while communicating reasons for reopening and subsequent periods during assessment proceedings. Even though Rajendra Group has not mentioned the name of the appellant in their statements they have given the names of the concerns in whose names the invoices were given to the appellant and those bogus names are indeed appearing in the books of the appellant. Therefore, the link is established. Even though the AG could not prove substantively that the amounts given to the sellers in cheque form have come back to the appellant, the activities of the accommodation entries in the trading community is not unheard of Further, the disturbing facts revealed by Rajendra Group itself during the course of search and seizure proceedings conducted by the investigation wing of the income tax department giving detailed modus operandi and confessions, cannot be lost sight of The subsequent retraction is of no relevance as the threat, duress and coercion under which the statements were alleged to have been recorded was not established by them. Even though there are catena of cases relied on by the appellant, including some of them delivered by the jurisdictional ITAT, which have decided the issue in favour of the assessee, they are not uniform in all the cases as they were decided as per the facts and circumstances of that A.Y.2009-10 particular case before them. I am of the opinion that the theory laid down by the Hon'ble Gujarat High Court in the case of Simit P. Seth (supra) should be applied in the instant case. The decision rendered by Gujarat High Court in the above case is on the basis of VAT benefit the appellant might have saved by taking accommodation entries. However, in the diamond trade the benefit of VAT saving is not that high. In the case of diamond business, the VAT charges are only 1% and the customs duty on import is about 2%. Keeping in view the above tax rates the intention of the assessee to save the transaction should be viewed only to the extent of saving from the above taxes by indulging in unethical practice of taking accommodation entries. It is also pertinent to mention here the relevance of Board's Instruction No.212008 dated February 22, 2008 wherein it has laid down a guideline in the form of benign assessment procedure for assesses engaged in diamond manufacturing and/or trading, wherein it has stated that A……… B. If an assessee has shown a sum equal to or higher than 6% of its total /nover from such business as his income under the head profits and gains of - business or profession for a particular assessment year, the assessing officer shall except he's the trading results.
C........
Keeping in view the above instruction of the Board, on the one hand and the formia laid down in the case of Simit Seth by Gujarat High Court and the profits disclosed in this line of business, to A.Y.2009-10 meet the ends of justice, I find it reasonable if 4% of the amount of so-called bogus purchases are brought to tax. I accordingly direct the AO to charge 4% of the bogus purchases reported over and above the income returned in place of disallowance made under section 69C of the Act. This addition is clear of the profits disclosed by the appellant the year. In view of this, the ground is partly allowed".