M/S KUMUDCHAND D MEHTA,MUMBAI vs. ACIT CIRCLE-19(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “H” BENCH, MUMBAI BEFORE SHRI M. BALAGANESH, AM AND SHRI AMARJIT SINGH, JM आयकर अपील सं/ I.T.A. No.4491/Mum/2019 (निर्धारण वर्ा / Assessment Year: 2009-10) M/s. Kumudchandra D. Mehta बिधम/ ACIT, Circle-19(2) 2nd 14, Hanvant Bhavan, 80E, 207, Floor, Matru Vs. Nepean Sea Road, Mumbai- Mandir, Tardeo Road, 400006. Mumbai-400007. स्थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAAFK6824G (अपीलाथी /Appellant) (प्रत्यथी / Respondent) .. Assessee by: None Revenue by: Shri Gurbinder Singh (DR) सुनवाई की तारीख / Date of Hearing: 01/02/2021 घोषणा की तारीख /Date of Pronouncement: 07/04/2021 आदेश / 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. 2. 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

ITA No. 4491/M/2019 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

ITA No. 4491/M/2019 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

ITA No. 4491/M/2019 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.

“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

ITA No. 4491/M/2019 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

ITA No. 4491/M/2019 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

ITA No. 4491/M/2019 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:

ITA No. 4491/M/2019 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.

ITA No. 4491/M/2019 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,

ITA No. 4491/M/2019 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".

ITA No. 4491/M/2019 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

ITA No. 4491/M/2019 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

ITA No. 4491/M/2019 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".

4.2.7 on further appeal by the department as well as by the appellant, the Hon'ble examined the issue and also considered the decision of Coordinate Bench in the of M/s.Amy Diam Vega Jewellery P. Ltd. v. DCIT in ITA No.5700 to ,01/Mum/2016 and the Coordinate Bench by order dated 28.09.2017 and finally held as under:

"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 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 circumstances, we direct the Assessing 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. The grounds raised by the Revenue for the Assessment Years

ITA No. 4491/M/2019 A.Y.2009-10 2007-08. 2008-09 and 2011-12 and the grounds raised by the assessee for the Assessment Years 2008-09, 2010-11. 2011-12 and 2013-14 on this issue are dismissed and ground raised by the assessee on this issue for the Assessment Year 2007-08 is partly allowed."

4.2.8 All the above decisions by the Hon'ble Tribunals including the jurisdictional Tribunal i.e ITAT, Mumbai 'H Bench have dealt with absolutely an identical issue where the issue of accommodation entry for purchase of diamonds from Mr. Bhavarlal Jain, Mr. Rajendra Jain and Mr. Surendra Jain have been the subject matter of appeal. In those cases, the A.O. has treated the diamond trading equivalent to other trading business and had disallowed 12.5% of the suspicious purchases. The CIT(A) and Hon'ble ITAT has considered the very fact that in all other cases where accommodation entries for purchases are taken, the percentage of VAT is as high as 12.5%. On the basis interpretation by various judgements, 12.5% of VAT rate has been treated as benefit being derived by such beneficial assessee who have used accommodation entries for purchases. However, in the case of diamond, various Learned Cs.IT as well as the Tribunals have held that VAT in the case of diamond is either 1% or totally exempt.

Thus, the percentage of normal business cannot be applied.

4.2.10. Under identical situation, the decision of Honble, Tribunal including the jurisdictional Hon'ble Tribunal have to be considered. Though, there are catena of cases including some of them delivered by the jurisdictional ITAT which has decided on this issue, but all of them are not uniform as the cases have been

ITA No. 4491/M/2019 A.Y.2009-10 decided as per facts and circumstances of that particular case before them. In the case of diamond business, the VA charges are 1% and the custom duty on import is above 2%. Keeping in view the above tax rates, the intention of the appellant to save tax from the transaction should be viewed only to the extent of benefit derived by the appellant from indulging in unethical practice of taking accommodation entries. Also, keeping in view the Board's Instruction No.2/2008 dated 22.02.2008 wherein it has laid down guidelines in the form of benign assessment procedure for assessees engaged in diamond manufacturing and/or trading and report of Task Force for diamond sector submitted to the 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 diamond trading, it is in the range of 1% to 3%, it will be fair to estimate the gross profit out of purchases from the dealers which have provided only accommodation entries. Though the Hon'ble Tribunals including jurisdictional Tribunals have held 2 to 3% as the profit reasonable in diamond trading particularly on purchases for which the accommodation entries have been taken from Bhanwarlal Jain & Others, however, I find it reasonable if 4% of the amount of so called bogus purchases are brought to tax. I accordingly direct the A.O. to disallow 4% of the purchases under reference i.e. Rs.74,25,581/- over and above the income returned in place of total purchases.”

ITA No. 4491/M/2019 A.Y.2009-10 very high. Under the peculiar facts and circumstances of the present case and considering this fact that the profit margin in the business of the assessee is not more than 1% to 2% of the gross profit, therefore, we restrict the addition to the extent of 2% of the total bogus purchase. Accordingly, we decide this issue in favour of the assessee against the revenue. 6. In the result, the appeal filed by the assessee is hereby partly allowed. Order pronounced in the open court on 07/04/2021 Sd/- Sd/- (M. BALAGANESH) (AMARJIT SINGH) लेखध सदस्य / ACCOUNTANT MEMBER न्यधनिक सदस्य/JUDICIAL MEMBER मुंबई Mumbai; ददनांक Dated : 07/04/2021 Vijay Pal Singh (Sr. PS)

ITA No. 4491/M/2019 A.Y.2009-10 आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant प्रत्यथी / The Respondent. 2. 3. आयकर आयुक्त(अपील) / The CIT(A)- 4. आयकर आयुक्त / CIT 5. दवभागीय प्रदतदनदध, आयकर अपीलीय अदधकरण, मुंबई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. आदेशधिुसधर/ BY ORDER, सत्यादपत प्रदत //True Copy// उि/सहधिक िंजीकधर /(Dy./Asstt. Registrar) आिकर अिीलीि अनर्करण, मुंबई / ITAT, Mumbai