ACIT-18(1), MUMBAI vs. M/S. JEWELLERS NARANDAS & SONS, MUMBAI

Since, the facts raised in the appeal filed by the revenue as well as C.O. filed by the assessee on the revenue appeal are common issue. Therefore, it is heard and disposed off by this consolidated order.

The brief facts of the case are, the assessee filed its return of income on 24.10.2007 declaring total income of Rs. 40,94,154/-. The return was processed u/s 143(1) of the Act and subsequently assessment order u/s 143(3) was passed by AO determining the total income of Rs. 41,22,080/-. Further, the case was reopened u/s 147 of the Act, accordingly notice u/s 148 of the Act were issued and served on the assessee. Vide letter dated 11.04.2014, assessee requested the AO to treat the return filed on 3 I.T.A. No. 1226/Mum/2018 & CO 59/Mum/2019 M/s Jewellers Narandas & Sons 24.10.2007 as return filed u/s 148 of the Act. Further, notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee. In response, AR of the assessee filed the relevant information as called for.

The assessee is engaged in the business of Exporter of Gold ornaments. AO in reference to the search action conducted on Sh. Rajendra Jain Group, Shri Sanjay Choudhary Group and Shri Dharamchand Group of cases by DGIT(lnv.), Mumbai on 03/10/2013 and he noted that Shri Rajendra Jain, Shri Sanjay Choudhary and Dharamchand Jain are some of the entry providers operating in Mumbai, indulging in providing entries in the nature of bogus sales and unsecured loans. AO observed that during the financial year 2006-07 the assessee has entered into transactions to the extent of Rs.4,60,17,324/- with 3 parties i.e. Ms/ Moulimani , M/s Vitrag and M/s Sun Diam and these parties belongs to the above said groups which are indulging in providing accommodation entries. Further AO issued notice to the assessee to provide the details of transactions and submit the copies of ledger accounts. At the same time, notice u/s 133(6)

In response, AR of the assessee provided the copy of ledger accounts, copy of bank statement of the assessee showing the payment for purchases, Quantitative details of diamonds in the stock account of the assessee and confirmations of purchases from the parties mentioned and return of income of the parties and copy of their bank statement of the above said parties. After considering the details submitted before AO, AO observed that the above said concerns with whom assessee has made purchases was operated by Shri. Rajendra Jain group, Shri Sanjay Choudhary Group & Shri Dharamchand Group. Accordingly, AO rejected the contentions /submissions made by the assessee.

AO heavily relied on the investigations made in the above said groups by the Investigation Wing of the Deptt. and came to the conclusion that assessee had made cash purchases of Rs. 4,60,17,324/- and assessee has utilized cash to make payment for such purchases. He observed that considering the possibility of repeated use of cash by sequential transactions of cash purchases

Further, AO observed that assessee has submitted carat- wise quantitative details of diamonds. However, assessee has not submitted the details of how much stock is kept in the form of loose diamonds and how much is kept in the form of diamond jewellery. He observed that it is established that assessee has taken a bogus purchase bill from accommodation entry providers. It is doubtful that the bill would correspond to the actual cost that the assessee incurred in the grey market. It is a known practice that grey market goods are sold at a relatively lower price than in the regular markets. He further observed that it was claimed by the assessee that the material purchased were either sold or were 6 I.T.A. No. 1226/Mum/2018 & CO 59/Mum/2019 M/s Jewellers Narandas & Sons there in closing stock the minimum inflation of the accommodation bills will be equal to gross profit offered by the assessee. In order to fulfill the gap of any revenue leakage and to meet the cause of justice, AO proposed 2.5% of the purchase value as suppressed revenue. Accordingly, he made disallowance of Rs. 11,50,433/-.

Aggrieved with the above order, assessee preferred the appeal before Ld. CIT(A) and before him, made a detailed submission. Ld. CIT(A) after considering the submission of assessee, deleted the addition of Rs. 2,73,26,775/- and estimated the GP @ 3% of the purchases and partly allowed the appeal of the assessee with the following observations:-

All the grounds of appeal are related to the bogus purchase of Rs. 4,60,17,324/- by the appellant. For the sake of convenience, all the grounds of appeal are discussed together.

Aggrieved with the above order, the revenue and assessee preferred the appeal and CO before us raising the following grounds:-

On the facts and in the circumstances of the case, the CIT(A) has erred in law as well as on fact in not sustaining addition u/s 69C of Rs. 2,73,26,7757- on account of Peak Credit of transaction of bogus purchases, after having accepted the finding in principle that the purchases were made from undisclosed/ unverifiable/ unidentifiable parties in the grey market by investing in cash and the purchases

On the facts and in the circumstances of the case, the CIT(A) has erred in law as well as on fact in not sustaining addition u/s 69C of Rs. 11,50,433/-being 2.5% of the alleged bogus purchases of Rs. 4,60,17,324/- on account of inflation of bogus bill, after having accepted the finding in principle that the purchases were made from undisclosed/ unverifiable/ unidentifiable parties in the grey market by investing in cash and the purchases shown were only accommodation entries and not actual purchases.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deviating from the findings made by the AO and applying the G.P. rate and limiting the disallowance of purchases made from tainted suppliers to 3% of the alleged bogus purchases of Rs. 4,60,17,324/-, and ignoring the fact that the assessee had failed to substantiate his claim before the AO during the course of the assessment proceedings regarding genuineness of Purchase made from the 3 concerns namely, Shri Rajendra Jain, Shri Sanjay Choudhary Group & Shri Dharamchand.

On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts in 14 I.T.A. No. 1226/Mum/2018 & CO 59/Mum/2019 M/s Jewellers Narandas & Sons ignoring the fact that a search action under section 132 of the Act was conducted in the case of Shri Rajendra Jain, Shri Sanjay Choudhary Group & Shri Dharamchand who are declared to be an entry operator without any genuine business activity.

For the above mentioned reason and any other reasons that may be urged at the time of hearing, it is requested that the order of the CIT(A) be quashed and that of the A.O. be restored.

The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.

The learned CIT(A) failed to appreciate that reopening of assessment is bad in law as sanction for reopening is obtained in contravention of the provisions of section 151 as same is obtained from Additional CIT instead of Commissioner / Chief Commissioner of Income Tax.

The learned CIT(A) erred in restricting addition to Rs. 13,80,520/- i.e. 3% of Rs. 4,60,17,324/- being purchase made from M/s. Moulimani, M/s. Vitrag & M/s. Sun Diam without appreciating that entire purchases were genuine as payment were made through Banking Channels, Suspicious suppliers were produced before

The respondent craves leave to add, amend, alter or vary the grounds of appeal at the time of or before the date of the hearing.

Before us, Ld DR brought to our notice that Ld. CIT(A) applied 3% on bogus purchase and deleted the addition made u/s 69C of the Act on account of peak credit of the transaction of bogus purchases. Even though, he accepted the finding of AO in part that the purchases were made from undisclosed, unverifiable parties in the grey market by investing in cash and the purchase shown were accommodation entries and not actual genuine purchase. Ld. DR objected that Ld. CIT(A) has applied 3% GP in place of 2.5% applied by the AO by deleting the Peak Credit of cash transaction.

On the other hand, Ld. AR submitted that assessee has filed CO raising jurisdiction issue in this case that for reopening of the assessment, AO has taken sanction from ACIT instead of Commissioner or Joint Commissioner of Income Tax as per the 16 I.T.A. No. 1226/Mum/2018 & CO 59/Mum/2019 M/s Jewellers Narandas & Sons provision of section 151 of the Act. He brought to our notice page 2 of CIT(A)‟s order, wherein assessee has raised this ground in the grounds of appeal and page 5 of the said order, assessee has made the detailed submission in this regard. He further brought to our notice page 9 of the order of Ld. CIT(A) in which Ld. CIT(A) has discussed his findings and nowhere in his findings has discussed about the jurisdiction issue. He further brought to our notice page 209 of the paper book which is letter written by AO to Ld. CIT(A)-29 on the subject “Reminder to non-submission of report in the case of assessee for Assessment Year 2007-08” and in that letter, AO replied that the same was sent vide letter dated 17.10.16. Ld. AR further brought to our notice page 210 of the paper book in which AO has confirmed that the permission for reopening was sought from the then ACIT Rg 14(1), Mumbai and Ld. AR submitted that it is clear that the permission was granted by the then ACIT only. He submitted that as per section 151 of the Act in order to reopen the assessment after the expiry of 4 years from the end of relevant assessment year, the sanction has to be from the PCIT or Commissioner. For this proposition, he relied on the decision in 17 I.T.A. No. 1226/Mum/2018 & CO 59/Mum/2019 M/s Jewellers Narandas & Sons the case of Dhadda Exports vrs. ITO (2015) 377 ITR 347 (Raj – HC) and Ghanshyam K. Khabrani vrs. ACIT (2012) 346 ITR 443 (Bom HC). He further submitted that even though Ld. CIT(A) has verified this issue as well, but not adjudicated on the issue of jurisdiction.

In rejoinder, Ld. DR agreed that this issue was not adjudicated by Ld. CIT(A) and he prayed that it may be remitted back to the file of Ld. CIT(A) to decide the issue on jurisdiction. However, he brought to our notice page 35 of the paper book which is notice issued u/s 148 of the Act to the assessee in which at point no. 3, it is mentioned that this notice is being issued after obtaining the necessary satisfaction of the Commissioner of Income Tax.

Considered the rival submissions and material placed on record. We notice from the record that Ld. CIT(A) has appreciated the whole facts in this case and given clear cut findings. It is finding on record by the AO that the purchases made by the assessee are unverified and falls under the category of bogus purchases and AO proceeded to make disallowance on 18 I.T.A. No. 1226/Mum/2018 & CO 59/Mum/2019 M/s Jewellers Narandas & Sons the basis of presumed cash transaction and applied the peak credit in the case of purchase transaction. We notice that Ld. CIT(A) has correctly came to the conclusion that the correct way of dealing with bogus purchase issue is to estimate the profit margin on such purchases and not adding the entire amount of such purchases when the AO came to the conclusion that it is bogus purchases and by considering the decision of the various courts, AO can only disallow the estimated margin which assessee would have enjoyed in such practices of taking accommodation entries. Therefore, we are in agreement with Ld. CIT(A) that AO cannot proceed to disallow the whole purchases or applied peak credit in cash transaction. However, we notice that Ld. CIT(A) appreciated to estimate the disallowance @ 3% instead of 2.5% proposed by AO and we observe that the revenue is in appeal objecting the findings of Ld. CIT(A). Therefore, we dismissed the Ground No. 1 raised by the revenue that AO cannot apply any other method other than estimating the disallowance on alleged purchases.

With regard to Ground no. 2 to 6, Ld. CIT(A) has disallowed @ 3% whereas AO has disallowed @ 2.5% alonwith

Now coming to CO filed by the assessee, we notice that assessee has raised the jurisdiction issue at the time of filing of appeal before first appellate authority, however Ld. CIT(A) has sought report from AO and AO has also submitted a letter confirming that reopening the assessment was beyond 4 years, AO has taken sanction only from the then Addl. Commissioner instead of taking permission from Commissioner as per the provision of section 151(1) of the Act. Even though, the above said discrepancies pointed out to the Ld. CIT(A) and still Ld. CIT(A) has not adjudicated the issue on jurisdiction.

In our considered view, the violation of section 151(1) of the Act is apparent on record and there is no necessity for this issue to go back to Ld. CIT(A) as submitted by Ld. DR. Respectfully following the decision in the case of Dhadda Exports vrs. ITO (2015) 377 ITR 347 (Raj – HC) and 20 I.T.A. No. 1226/Mum/2018 & CO 59/Mum/2019 M/s Jewellers Narandas & Sons Ghanshyam K. Khabrani vrs. ACIT (2012) 346 ITR 443 (Bom HC), the AO has no jurisdiction to reopen the assessment, when there is violation to the statutory direction contained in section 151 of the Act. Accordingly, we allow ground no. 1 raised by the assessee in CO. Therefore, we are inclined to set aside the assessment order, we notice that Ground no. 2 raised by the assessee is only on merit, thus the same is dismissed.

In the net result, the appeal filed by the revenue is dismissed and CO filed by the assessee is partly allowed.