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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJIT SINGH
The assessee has raised various grounds on legal issues as well as on merits, which are common in all the appeals, challenging the order of learned CIT(A), however, at the time of hearing, assessee has argued the appeal on merits only.
The only issue on merit involved in these appeals is against the order of learned CIT(A) partly sustaining by directing the Assessing Officer to apply 10%
The facts in brief are that assessee is engaged in the business of polishing of rough diamonds and providing labour/job work to various parties. The assessee filed its return of income on 24.06.2010 declaring an income of Rs.3,46,050/-. Thereafter, a survey action under Section 133A of the Act was conducted on the assessee on 18.11.2015. The said survey was conducted consequent upon a search action under Section 132 of the Act in the case of Sur Gems group, an exporter, manufacturer and supplier of polished diamonds on 18.11.2015. Shri Saket Sudhir Mehta, Shri Sudhir Rasiklal Mehta and Shri Manoj Rasiklal Mehta are the key persons of the group. The residential premises of Smt. Kaushika Mehta was also covered under the search. She being close relative of Shri Saket Sudhir Mehta and Shri Sudhir Rasiklal Mehta holding 75% share in the assessee firm. Shri Sanjay S. Kothari holds 25% in the assessee firm. The assessee is a partnership firm and is operating from Sun Ville building, Paper Mill Compound, Opp. Greens Restaurant, Lamington Road, Grant Road, Mumbai 400 004. It was also noted by the Assessing Officer that assessee was providing services of polishing of rough diamonds, however, the business operations was discontinued over the last many years. During the course of survey on the assessee, it was found that assessee has shown profit of Rs.2.2 lacs on sales of Rs.2.40 crores in A.Y 2012-13 and the survey team came to the conclusion that the assessee had suppressed the profits. It was also found that assessee was providing services mainly to Sur Gems by way of polishing diamonds and charging labour charges. During the course of search on Sur Gems group, prototype unsigned labour charges bills of Riash Exports, the assessee, were found in Lenovo desktop besides the rubber stamp of the 3 to 1832/Mum/2019 Riash Exports assessee. On being asked about why the prototype bills and rubber stamps of Riash Exports were found at the premises of Sur Gems, Ms. Falguni Malkan, CFO of Sur Gems stated that the rubber stamp of Riash Exports were used by Sur Gems when the bills for labour charges were prepared at the direction of Riash Exports. It was submitted before the Assessing Officer that the persons employed by Riash Exports were skilled but not educated enough, therefore, the bills used to be prepared at the premises of Sur Gems only. The Assessing Officer was not convinced with the contentions of the assessee and recorded a finding that prototype bills and rubber stamp were found at the business premises of Sur Gems. The Assessing Officer also noted that cash withdrawals were being made by the assessee soon after the labour charges were received from Sur Gems and this proved that the books of account maintained by Riash Exports are not reliable. The Assessing Officer rejected the same under Section 145(3) of the Act and made addition of Rs.25,68,676/- by applying rate of 15% of gross sales.
In the appellate proceedings, the learned CIT(A) partly allowed the appeal of the assessee by holding and observing as under :-
“5.2 In course of the appellate proceedings, it was submitted that the action of the AO of drawing an adverse inference on the basis of the rubber stamp and prototype bills of the assessee being found from the premises of Assessee Group is not justified since M/s Sur Gems as well as the assessee belong to the same Sur Gems Group. It was further submitted that the rate of 15% applied by the AO after relying upon CBDT Circular No. 2 of 2008 dated 22.02.2008 is erroneous since as per the said Circular, profit margin of 6% is reasonable for the business of diamond manufacturing or diamond trading, however, the assessee is in the business of doing job work/labour on contract basis. It was further submitted that if it is the conclusion of the AO that M/s Sur Gems has claimed bogus expenditure on account of job work/labour charges, then the corresponding receipts cannot be asked in the hands of our
4 to 1832/Mum/2019 Riash Exports assessee. It was further submitted that the adverse inference drawn by the AO on the basis of cash withdrawals made by the assessee is not correct since the said cash withdrawals were made predominantly for making payments to its labourers. It was further submitted that the said payments made to the assessee by M/s Sur Gems have been subjected to TDS. Moreover, it was submitted that the action of the AO of rejecting its books is not correct since the same have been subjected to Tax Audit. 5.3 The contentions of the assessee have been duly considered. It is noted that prototype bills and rubber stamps of a number of job work/labour parties were found from the premises of Assessee Group for which there was no plausible explanation. This fact clearly demonstrated that the possibility of inflation of expenses by M/s Sur Gems cannot be ruled out. On the other hand, the assessee had shown nominal income of only Rs.3,46,054/- on aggregate receipts/sales of Rs.1,71,24,509/- which included job work/labour receipts of Rs.55,84,865/- from M/s Sur Gems. Therefore, the action of the AO of rejecting the books of accounts of the assessee cannot be faulted. However, there is merit in the contention of the assessee that Circular No. 2 of 2018 of CBDT dated 22.02.2018 cannot be applied since it is in the business of job work/labour on contract basis and not of manufacturing/trading in diamonds. As per the provisions of Section 44AD, in respect of small contractors, profit margin of 8% is considered to be reasonable. However, considering the adverse findings of the search action related to job work/labour charges, payments made by M/s. Sur Gems, it will meet the ends of justice, if profit margin of 10% is applied on the aggregate gross receipts/sales for computing the taxable profits of the assessee. By applying the profit margin of 10% on sales/receipts of Rs.1,71,24,509/-, the taxable profits of the assessee for the relevant year are estimated at Rs.17,12,451/- as against Rs.25,68,676/- determined by the AO. Accordingly, Ground Nos. 1, 2 & 6 of the appeal are partly allowed.”
5. We have heard the rival submissions and perused the material on record. We find that in this case Riash Exports has been rendering contract services to Sur Gems by way of polishing of rough diamonds. A survey was conducted under Section 133A of the Act on the assessee after a search and seizure action in the case of Sur Gems during which prototype bills and rubber stamp of the assessee were found which were explained by staff of Sur Gems to be used at the time of preparation of labour bills on behalf of 5 to 1832/Mum/2019 Riash Exports Riash Exports as their labour were skilled but not educated. We note that the labour bills of the assessee were prepared by Sur Gems which was subjected to TDS and the books of account of Sur Gems were also duly audited. The addition was made on the ground that its rubber stamps and prototype bills were found during the course of search in the premises of Sur Gems, which appears to be not a convincing reason to make the addition as there cannot be any suppression of income by just finding prototype bills and rubber stamps of the assessee at the premises of Sur Gems. The Assessing Officer has made the addition @ 15% towards suppression of profits which was reduced by learned CIT(A) to 10%. In our view, the addition made by the authorities below is purely on surmises and conjectures and there is no concrete evidences on record as the income received by the assessee by way of labour charges has been subjected to TDS and only the net payment is received by the assessee. It is pertinent to note that in case of Sur Gems similar addition has been made by the Assessing Officer and partly sustained by the learned CIT(A) which the coordinate bench has duly deleted in ITA No.2078/M/2019 Assessment Years: 2010-11 & Others as being based on surmises and conjectures and without any basis. Considering all the facts and circumstances of the case, we are inclined to set aside the order of learned CIT(A) as there is no correct basis for making this addition and the authorities below have failed to bring on record any concrete and substantive evidences. Accordingly, the appeal of assessee are allowed.
In the result, appeals of the assessee are allowed.
Order pronounced in the open court on 21st January, 2021.