MR.ANIL M. KADAKIA,MUMBAI vs. ACIT CIRCLE-17(1), MUMBAI

Briefly stated the facts are that, the assessee is an individual and engaged in the business of trading in cut and polish diamonds filed return (A.Y: 2013-14) Shri Anil M. Kadakia of income on 01.08.2013 for the A.Y.2013-14 declaring income of ₹.28,81,375/- and the return was processed u/s. 143(1) of the Act. The Assessing Officer received information from the DGIT(Inv.), Mumbai about the accommodation entries provided by various dealers and assessee was also one of the beneficiary from those dealers. The assessee was required to prove the genuineness of the purchases made from various parties which were referred to in the Assessment Order. The assessee produced copies of bills, bank statements, copies of VAT challans, ledger copies and submitted that the purchases made are genuine. Not convinced with the submissions of the assessee the Assessing Officer treated the purchases as non-genuine and he was of the opinion that assessee had obtained only accommodation entries without there being any transportation of materials and the assessee might have made purchases in the gray market. It is the finding of the Assessing Officer since the purchases made by the assessee and claimed as expenses in his Profit and Loss Account are not genuine, the purchases to that extent remained unverifiable. He also observed that the dealers from whom the assessee made purchases stated that they have issued only accommodation bills. Therefore, he treated purchases of ₹.9,98,106/- as non-genuine and added to the income of the assessee. On appeal the Ld.CIT(A) sustained the addition made by the Assessing Officer.

Ld. DR vehemently supported the orders of the authorities below.

We have heard the rival submissions, perused the orders of the authorities below. We find that identical issue has been decided by this Coordinate Bench in the case of ACIT v. M/s. Choron Diamond (I) Pvt. Ltd in ITA.Nos. 4449, 6798 & 6800/MUM/2016 dated 30.10.2017 wherein the Coordinate Bench taking note of the CBDT Circular, report of the task group submitted to Department of Commerce etc., held as under: - 8. “We have heard the rival submissions, perused the orders of the authorities below. In this case the assessments were reopened based on the information from the DGIT(Investigations), Mumbai that assessee is a beneficiary from the entities operated by Shri Rajendra Jain, Shri Surendra Jain, Shri Bhanwarlal Jain and Shri Dharmichand Jain wherein the search took place and it was found that Shri Rajendra Jain, Shri Surendra Jain, Shri Bhanwarlal Jain and Shri Dharmichand Jain were providing only accommodation entries and there were no actual sale transactions and the assessee could not prove the movement of goods from the suppliers to the assessee. In the absence of delivery challans, proper stock records and based on the depositions of the suppliers that they have provided only accommodation bills, the Assessing Officer has rightly concluded that the assessee has obtained only bogus bills and assessee might have purchased goods in gray market. The Assessing Officer estimated the Gross Profit Margin on such purchases at 12.5% by reducing Gross Profit rate already shown by the assessee for the Assessment Years 2008-09, 2010-11, 2011-12 and 2013-14 and for the Assessment Year 2007-08 the entire purchases were treated as non-genuine. The Ld.CIT(A) taking note of the submissions of the assessee as well as the averments of the Assessing Officer, the CBDT Instructions and various case laws estimated the profit element from these purchases at 4% for the Assessment Year 2007- 08 and 3% for the Assessment Years 2008-09, 2010-11, 2011-12 and 2013-14. The Ld.CIT(A) for the Assessment Year 2007-08 observed as under: - (A.Y: 2013-14) Shri Anil M. Kadakia “5.2 I have carefully considered the facts of the case and submissions of the ld.AR. I have also gone through the decisions relied on by the Ld.AR. As seen from the facts of the case the AO has reopened the assessment based on the information received from the DIT(lnv.), Mumbai on the basis of search and seizure action conducted by the investigation wing during the course of which Rajendra Jain have given categorical statements clearly stating the modus operandi followed by them in providing the accommodation bills. They have also admitted unequivocally before the investigation wing that they were not involved in any real trading of diamonds except giving bogus bills to those who need them for certain commission. Having observed that those parties in question are non-existant sellers and they have not made any sales except the bogus invoices issued in their name, the AO has brought to-lax the entire bogus purchases standing in the names of the so-called sellers u/s 69C of the Act as the explanation given by the appellant was not satisfactory. The argument of the appellant was that unless the AO proves positively that the material was not delivered to the assessee and the payment made through the Bank channels have been bogus or the amounts paid in the names of the suppliers have come back to the purchaser-assessee, the AO cannot make any addition u/s.69C. Further, as the AO has not doubted the sales disclosed by the appellant he has to allow the purchases since there cannot be any sales without the purchase of the material. The only possibility is that the appellant might have inflated its purchases by incorporating the invoices in the names of the bogus suppliers. The presumption is that the material might have been purchased from grey market at a lower rate and made good the entries with bogus bills to reduce the profits. Under similar circumstances the Hon’ble High Court of Gujrat in the case of Simit P Seth, 2013 (356 ITR 451) had an occasion to deliver its judgment by confirming the decision of the ITAT which has estimated the disallowance at 12.5% of the disputed bogus purchases to meet the ends of justice. The head-note of the decision is reproduced as under- "Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of Profits [Bogus purchases] - Assessment year 2006-07 - Assessee was engaged in business of trading in steel on wholesale basis - Assessing Officer having found that some of alleged suppliers of steel to assessee had not supplied steel to assessee but had only provided sale bills, held that purchases made from said parties were bogus - He, accordingly, added entire amount of purchases to gross profit of assessee - Commissioner (Appeals) having found that assessee had indeed made purchases, though not from named parties but other parties from grey market, sustained addition to extent of 30 per cent of (A.Y: 2013-14) Shri Anil M. Kadakia purchase cost as probable profit of assessee - Tribunal however, sustained addition to extent of 12.5 per cent - Whether since purchases were not bogus but were made from parties other than those mentioned in books of account, only profit element embedded in such purchases could be added to assessee's income - Held, yes - Whether hence, order of Tribunal needed no interference - Held, yes [Paras 6, 7 & 9] [In favour of assessee]". (emphasis supplied). 5.2.1. With regard to the information received from DIT(lnv.), 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 Jain 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 accommodation entries in the trading community is not unheard of. Further, the disturbing facts revealed by Rajendra Jain 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 particular case before them. I am of the opinion that the theory laid down by the Hon'ble Gujrat 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 from 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 the Board's Instruction No-2/2008 dated February 22, 2008 wherein it has laid down a guideline in the form of benign assessment procedure for assessee's engaged in diamond manufacturing and/or trading, wherein it has stated that:

As could be seen from the above the Ld.CIT(A) also taken note of the CBDT Instructions which the Ld.DR relied on and estimated the profit element in the purchases at 4% and 3%. We also find that more or less similar issue came up before the Coordinate Bench in the case of M/s. Amy Diam Vega Jewellery P. Ltd. v. DCIT in ITA.No. 5799 to 5801/Mum/2016 and the Coordinate Bench by order dated 28.09.2017 held as under: - “9. We have heard the rival submissions, perused the orders of the authorities below. In this case the assessments were reopened based on the information from the DGIT(Investigations), Mumbai that assessee is a beneficiary from the entities operated by Shri Bhanwarlal Jain/Shri Praveen Kumar Jain wherein the search took place and it was found that Shri Bhanwarlal Jain/Shri Praveen Kumar Jain were providing only accommodation entries and there were no actual sale transactions and the assessee could not prove the movement of goods from the suppliers to the assessee. In the absence of delivery challans, proper stock records and based on the depositions of the suppliers that they have provided only accommodation bills, the Assessing Officer has rightly concluded that the assessee has obtained only bogus bills and assessee might have purchased goods in gray market. The Assessing Officer estimated the Gross Profit Margin on such purchases at 8% which the Ld.CIT(A) reduced to 4% taking note of the report of the Task Group for Diamond Sector submitted to the Department of Commerce observing as under: - (A.Y: 2013-14) Shri Anil M. Kadakia “4.2. The A.O called upon the appellant to establish the genuineness of the purchases. The AO noted that the concerns from whom purchases were shown did not have documents to prove the delivery of goods of the appellant. The concerns from whom purchases were claimed to be made were operating from premises which were in the name of Bhanwarlal Jain & Family. The suppliers/ bogus parties could not be produced before the A.O for examination. The A.O therefore concluded that the appellant had merely received bills but not the material/goods from these parties. Though the appellant had shown corresponding sales against the purchases claimed, purchases were most likely made from grey market. Without bill and to adjust these transactions, bogus bills were obtained from Bhanwarlal Jain Group. The A.O concluded that the diamonds purchased from the grey market are cheaper than the diamonds sourced from genuine dealers. Subsequently there is an element of discount in the case of cash purchased in the grey market. The A.O. therefore computed the additional G.P earned by the appellant has 8% of the purchase cost. Accordingly, disallowance/ addition of ₹.63,90,742/- was made to the returned income 4.3. In the appellate proceedings the Ld.AR submitted that the appellant was engaged in the business of trading in polished diamonds and manufacturing of jewellery. The appellant had requested the A.O. to furnish the copies of documents relied upon by him for treating the purchases as bogus and to also allow cross examination of the alleged parties. Neither of the request were granted by the A.O. The appellant had furnished detailed chart showing name of parties, date of purchase, quantity in carats, amount in rupees and details of exports made against each purchases. Stock book reflecting the purchases were also produced. Ledger accounts in respect of the purchases and copy of invoices for the purchase and corresponding sales were also furnished. It was contended that the initial burden on the appellant to prove the genuineness of the purchases was fulfilled. The A.O has not conducted any enquiry as regards the alleged bogus transactions of the appellant. No defects have been found in the books. The copies of the material based on which the A.O. concluded that the purchases are not (A.Y: 2013-14) Shri Anil M. Kadakia genuine was not provided to the appellant. Once the sales (primarily exports) are not doubted, no addition can be made by doubting the purchases. As regards the absence of delivery challan, it was submitted that the A.O completely ignored confirmation on the purchase bills by the appellant by signing on the face of the bill as is the practice in diamond trade. The allegation that the purchase is from grey market is based on presumptions and surmises. It was also contended that the estimation of gross profits @8% was quite high Reference was made to its own transfer pricing study report and the report of task group submitted in February 2013 presented to the Commerce and Industry Ministry. It was also submitted that all the impugned purchases are exported. Polished diamonds are purchased locally and exported. Further, that where H form is submitted, there is no levy of VAT and in the cases where VAT is levied, the same is refunded subsequently after export of diamonds. The appellant relied on the decision of the Hon'ble ITAT in the case of Say India Jewellers in stating that no addition should be made. 4.4. I have considered the submissions of the appellant carefully. In the face of categorical denial by the alleged suppliers of diamonds of any real supply of goods, and the appellant's inability to establish the facts to be otherwise, the disallowance of purchases is clearly in order. The action of the assessing officer of disallowing a percentage of impugned purchases is in line with the view expressed in the decisions such as in the case of CIT vs. Bholanath PolyFab Pvt. Ltd. (2013) 355 ITR 290 and thereafter in the case of CIT vs. Simit P. Sheth (2013) 219 Taxman 85 (Gu]. 4.5. It is noted that there is nothing distinguishable to identify the sales as corresponding to the purchases. However, the submission that the margin on trading in polished diamonds is low is supported by the report of the Task Group for Diamond Sector submitted to Department of Commerce in which it was reported that net profit in diamond manufacturing is in the range of 1.5 to 4.5% and in trading in the range of 1 to 3%. The appellants business is of trading in polished diamonds in respect of the impugned purchases. Thus, a margin of 4% is considered to be appropriate.

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 circumstance 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 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.

We further find that what advantage the assessee could have got on purchasing the diamonds in gray market was only 1% being the VAT, as the assessee made purchases in the grey market without paying VAT, but obtained only the accommodation entries. Further as per the report of the task group constituted by the Department of Commerce the margin in trading in the diamond industry was only 1 to 3%. Therefore, taking the average of the industry average i.e. 2% and the advantage which the assessee got from purchases from the gray market i.e. 1% towards VAT, in our view at best the disallowance can be made only at 3%. Therefore, (A.Y: 2013-14) Shri Anil M. Kadakia taking the totality of the facts and circumstances into consideration, we are of the view that the profit element margin embedded in these purchase transactions should be taken @3% for the Assessment year under consideration i.e. 2013-14. Accordingly, we direct the Assessing Officer to estimate the profit element @3% of the purchases treated as non-genuine and re-compute the income of the assessee for the A.Y.2013-14.

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