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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI P.M. JAGTAP, VICE- & SHRI SIDDHARTHA NAUTIYAL
आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद "यायपीठ आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण अहमदाबाद "यायपीठ अहमदाबाद "यायपीठ ‘A’ अहमदाबाद। अहमदाबाद "यायपीठ अहमदाबाद। अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE SHRI P.M. JAGTAP, VICE-PRESIDENT AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER Assessment Year : 2010-11 Shri Kamlesh Jayantilal Jhaveri, Income Tax Officer, B/201, Siddh Silla Apartment, Vs Ward 10(1), B/h. Ekta Tower, Barrage Road, Ahmedabad Vasna, Ahmedabad PAN : AETPJ 5973 L (Appellant) (Respondent) Assessee by : Shri Aseem Thakkar, AR Revenue by : Shri Vijay Kumar, Jaiswal, CIT-DR सुनवाई क" तार"ख/Date of Hearing : 04/08/2022 घोषणा क" तार"ख /Date of Pronouncement: 07/09/2022 आदेश/O R D E R PER P.M. JAGTAP, VICE-PRESIDENT : This appeal filed by the assessee is directed against the order of learned Commissioner of Income-tax (Appeals), Ahmedabad-5 [“CIT(A) in short]” dated 26.02.2015; and, the solitary issue involved therein relates to the addition made by the Assessing Officer and confirmed by the learned CIT(A) on account of disallowance of assessee’s claim for loss of Rs.12.64 crores.
The assessee, in the present case, is an individual who is engaged in the business of trading in gold bars & ornaments, silver and diamonds under the name of his proprietary concern M/s. Adinath Impex. The return of income for the year under consideration was filed by him on 12.10.2010 declaring a total income of Rs.5,44,720/-. In the said return, Gross Profit (GP) @ 0.04% was declared by the assessee on a turnover of his business of Rs.395.42 crores as against the GP rate of 0.09% declared on the turnover of Rs.75.98 crores in the immediately preceding year. On verification of the copy of relevant accounts, Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 2
value-wise valuation of stock and copies of bills, the Assessing Officer noticed that the assessee during the year under consideration had sold the gold/diamonds at a lower rate to the closely held parties/companies which had adversely effected the gross profit of the year under consideration as compared to the gross profit of the immediately preceding year. He, therefore, required the assessee to show-cause as to why the books of account should not be rejected under Section 145(2) of the Income-tax Act, 1961 (“the Act” in short) and profit should not be estimated as per Section 145 of the Act. In reply, the following submissions in writing were filed by the assessee:-
"1. We are in receipt of your above referred letter wherein it has been stated that for A. Y, 2010-11. We have shown GP ratio at 0.04% where as the auditor had reported the same at 0.00%. It was explained during the course of assessment proceedings that the finance / sharafi business is ancillary to the main business and majority of the funds have been deployed in the finance business. Even otherwise none mentioning of finance business as the main business carried on by the assessee cannot be the reason for not taking cognizance of the finance business pursued by the assessee. In any case it is nobody's case that the assessee has not pursued sharafi / finance business during the year under consideration.
Reference to the accounting standards notified u/s. 145(2) has been made. It has also been stated that if there is no change in accounting policy which has a material fact in the previous year, the same needs to be disclosed. Where the effect of such change is not ascertainable wholly or in part the fact should be indicated. Where the effect of such change is not ascertainable wholly or in part the fact should be indicated. Reference to the concept of materially has been made and it is stated that the financial statements should disclose all material items the knowledge of which might influence the decision of the user of the financial statement. It has also been alleged that since interest income has been shown in the trading account instead of being included in the P & L account and thereby the GP is reduced and the correct and complete picture of financial position of business has not been reflected your Honours have proposed to reject the books of accounts u/s. 145(2) of the Act.
It has also been stated that the verification of the copy of the accounts, value wise valuation of stock and copy of the bills indicate that we have purchased gold, diamond at higher rate from closely held parties/companies or sold gold / companies or sold gold / diamonds at lower rate to closely held parties / companies and thereby shown GP loss or at 0% in comparison to GP at 0.9% in the earlier years. On this ground you have proposed to reject the books of accounts u/s. 145(2) and the estimate GP as per the provision of sec. 145 of the Act. Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 3
At the outset it is clarified that the assessee is maintaining complete books of accounts which have duly audited as per the provision of Income Tax Act, 1961. A copy of the audited accounts and tax audit report has also been furnished with your good office. Complete bills, vouchers and other invoices in support of the trading transactions undertaken have been maintained and produced for your verification at the time of assessment proceedings. All the transactions have been undertaken by account payee cheques only and the copy of bank statement have also been furnished during the course of assessment proceedings. The assessee is maintaining complete quantity tally with respect to the goods traded in. The detailed stock, registers and other quantity records have also been furnished at your good office. Your Honour had also called for the complete details with regards the name and addresses of the suppliers and customers of the goods, which had also been issuance of letters u/s. 133(6) of the Act with the suppliers and customers. If there is any discrepancy in those accounts we may kindly be intimated so that the necessary clarification can be made.
4.1 Coming to the issue of this purchases/sales having been made with closely held parties/companies is not correct. In fact, none of these transactions i.e. purchases as well as sales have been made with specified persons covered u/s. 40A(2)(b) of the Act. All these transactions have been undertaken with rank outsiders and 3rd parties. Your Honour has stated that in the earlier years GP was 0.09%. It has also been alleged that during the year interest income has been included and therefore the GP is 0.4%. However, the perusal of audited accounts of the earlier years would reveal that though the GP was 0.09% but the trading account also includes interest income as has been included in the year of assessment. Therefore, the system of disclosing interest income in the trading account is as per the last year. Therefore, the primary allegation that interest income has been included in the trading account only in the year of assessment and not earlier year is not correct. The manner of presentation of accounts is consistent and uniform as per the earlier year. It would not be correct to state that only because of interest income being included in the trading account that the assessee shown a positive GP.
4.2. Therefore, the comparison of the earlier year and the year consideration would show the decline in GP from 0.09% to 0.04%. At this stage attention is invited to the audited accounts for the year under consideration. The turnover has increased from Rs. 75.98 crores to Rs. 395.42 crores. Therefore, there is an increase of about 400% in the total turnover the GP is bound to fall. We have reduced our margin to capture a larger market share. However, as pointed out earlier all the transactions have been undertaken with the parties who has duly been identified and with whom cross verification has also been undertaken.
4.3. The above discussion would clearly go on the reveal that the interest income had been included in the trading account in the earlier year and also the fact that there is a huge increase in turnover which is one of the reasons for a fall in GP. Furthermore, the cross verification of the trading transactions have also been undertaken and there is no specific defect or discrepancy pointed out. Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 4
It would not be correct to presume the GP would be consistent on year basis. In fact, the business is not a machine which can produce identical results on the year to year basis. The demand supply position, market rates, competition, the availability of finance, the governmental policies and regulations etc. are various reasons which affect the GP position. Even at the sake of repetition it is once again pointed out that the books of accounts are duly audited, complete bills and other records have been furnished, complete quantity records and stock registers are being maintained and all items of expenditure are verifiable. There has been no transaction made with persons can be termed as specified u/s. 40A(2)(b) and also the fact that there is no allegation of any collusion or arrangement with these party by which the profit has been manipulated. Merely, decline in GP by itself cannot be the reason for rejecting the books of accounts and estimating the income as was held in following judicial pronouncements.”
The Assessing Officer did not find merit in the submissions made by the assessee. According to him, the same was general in nature and not supported by any evidence. He held that no justification was furnished by the assessee to show how the sale price was lower than the purchase price which was effected with the closely held/related parties and there was no explanation offered by the assessee regarding the compelling circumstances under which he was required to sell gold and diamonds below the purchase price thereby resulting in GP loss. He held that the actual GP was concealed and manipulated by the assessee by selling goods at lower price to the closely held/related parties and keeping in view the repetitive nature of the transactions resulting in gross trading loss again and again was sufficient to doubt the genuineness of the said transactions. To support and substantiate this conclusion, the Assessing Officer pointed out certain instances where the gold and diamonds were sold by the assessee to the closely held/related parties at lower rate than the rate of purchase on the same day resulting into trading loss. As regards the evidence filed by the assessee in the form of complete bills & vouchers, quantitative details, audited accounts and tax audit report to prove the genuineness of the transactions as well as the claim of the assessee of having undertaken all the transactions in dispute by account payee cheques, the Assessing Officer observed that the same per se was not sufficient to prove the genuineness of the relevant transactions. He accordingly treated all the trading transactions resulting into loss of Rs.12.64 crores as not genuine and Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 5
disallowing the said loss, addition of Rs.12.64 crores was made by him to the total income of the assessee in the assessment completed under Section 143(3) of the Act vide an order dated 25.03.2013. 4. Against the order passed by the Assessing Officer under Section 143(3) of the Act, an appeal was preferred by the assessee before the learned CIT(A) and detailed submission was made by the assessee in writing before the learned CIT(A) in support of his case that the disallowance made by the Assessing Officer on account of trading loss of Rs.12.64 crores was not sustainable in the facts and circumstances of the case. The learned CIT(A), however, did not accept the case of the assessee. He found that an identical issue was involved in assessee’s own case for the immediately preceding year, i.e. AY 2009-10; and the similar disallowance made by the Assessing Officer on account of assessee’s claim for trading loss in the sale of gold and diamonds to the closely held/related parties was confirmed by the learned CIT(A). He accordingly followed the order of his learned predecessor passed in assessee’s own case for AY 2009-10 on a similar issue and confirmed the disallowance of Rs.12.64 crores made by the Assessing Officer on account of trading loss claimed by the assessee in the sale of gold and diamonds to the closely held/related parties. Aggrieved by the order of learned CIT(A), the assessee has preferred this appeal before the Tribunal.
The learned Counsel for the assessee, at the outset, pointed out that the loss in question claimed by the assessee on the sale of gold and diamonds to the closely held/related parties was confirmed by the learned CIT(A) vide his impugned order mainly by relying on the order of his learned predecessor passed in assessee’s own case for the immediately preceding year wherein a similar issue was decided against the assessee. He submitted that the order passed by the learned CIT(A) against the assessee on a similar issue for AY 2009-10 was challenged by the assessee in an appeal filed before the Tribunal and the Tribunal, vide its order dated 25.01.2017 passed in ITA No. 1420/Ahd/2013, deleted the Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 6
disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of assessee’s claim for a similar trading loss in sale of gold and diamonds to the closely held/related parties. He has invited our attention to the copy of the said order placed at page Nos. 225 to 249 of the paper-book and submitted that the said order has been followed by the Tribunal subsequently to decide a similar issue involved in assessee’s own case for AY 2011-12 vide its order dated 10.08.2021 passed in ITA No.1254/Ahd/2016. He has also submitted that the Assessing Officer himself in the order dated 13.02.2015 passed under Section 143(3) of the Act for AY 2012-13 has allowed the claim of the assessee for a similar loss. He contended that since the issue involved in the year under consideration as well as all the facts related thereto are similar to that of AYs 2009- 10, 2011-12 and 2012-13, including the nature of transactions as well as parties to the transactions, the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of assessee’s claim for a similar loss is liable to be deleted.
The learned DR, on the other hand, submitted that each assessment year is separate and the principle of res judicata is not applicable in the Income-tax proceedings. He submitted that even if the nature of transactions involved in the year under consideration is similar to that of the other years, it is difficult to accept the claim of the assessee for loss which is continuously incurred year after year. He contended that it appears that this is a case of artificial losses claimed by the assessee just to offset the gain. He contended that if the interest income earned by the assessee is ignored, there was overall loss incurred by the assessee in his business during the year under consideration which is not acceptable.
In the rejoinder, the learned Counsel for the assessee submitted that there was overall profit as declared by the assessee from his business for the year under consideration as well as for the other years and, therefore, the claim of the assessee for loss in certain transactions cannot be treated as artificial loss. He submitted Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 7
that the assessee actually had earned profit in voluminous transactions and after setting off the loss incurred in certain transactions, net profit was offered to tax. He also submitted that the loss suffered by the assessee had resulted in corresponding profits to the closely held/related parties which were duly offered to tax by them. He contended that the facts and circumstances involved in the year under consideration in any case are similar to the facts involved in AYs 2009- 10 and 2011-12 wherein a similar issue has been decided by the Tribunal in favour of the assessee.
We have considered the rival submissions and also perused the relevant material available on record. It is observed that a similar trading loss claimed by the assessee in the transactions of gold and diamonds with the closely held/related parties was disallowed by the Assessing Officer in AY 2009-10 and the disallowance so made was confirmed by the learned CIT(A). The Tribunal, however, deleted the said disallowance vide its order dated 25.01.2017 passed in ITA No.1420/Ahd/2013 vide paragraph Nos.10 to 18 which read as under:-
“10. We have heard the rival contentions and perused the records placed before us and gone through the decisions relied on by the ld. AR. Assessee's appeal revolves round the solitary grievance against the order of ld. CIT(A) confirming addition of Rs.77,95,670/- made by ld. Assessing Officer for not allowing the claim of losses incurred by the assessee in certain sale transactions with Jay Jewellers, ACPL & S. K. Jewellers. We find that during the course of assessment proceedings ld. Assessing Officer selected 15 transactions out of which one each was Jay Jewellers and S. K. Jewellers and 13 transactions with ACPL. All these 15 transactions took place between 3.11.2008 to 28.3.2009 having one common factor that in all these 15 transactions gold bars purchased during the day were sold at a lower rate giving rise to losses. With regard to Jay Jewellers and S. K. Jewellers loss arising on each impugned transaction was Rs.2719/- and Rs.7,05,254/- respectively and the remaining loss of Rs.70,87,697/- was suffered in the impugned remaining 13 transactions entered into with ACPL. Ld. Assessing Officer ignoring the assessee's submissions that the gold prices are very volatile and the impugned transactions were entered in the normal course of business took a view that assessee has been unable to justify that there was actually so much fluctuation in the gold and diamond market in these days due to which sales were made at such lower prices. Ld. Assessing Officer also took a view that these three impugned parties are related/sister concerns of the assessee and losses have been intentionally manipulated by the assessee. Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 8
We further observe that when the issue came up before the first appellate authority, relating to these three parties as to whether the three parties are related to the assessee was adjudicated in detail by ld. CIT(A) who concluded with a view that on the basis of documents presented before him the impugned three parties are not related to the assessee as sister concern nor they are covered in the list of relatives provided in section 40A(2)(b) of the Act. But ld. CIT(A) confirmed the disallowance of losses of Rs.77,95,670/- on the basis of his observation which erupted out of the additional plea taken by the assessee. During the course of assessment proceedings and before the first appellate authority assessee had submitted that primarily all the impugned 15 transactions have been entered into in the normal course of business, no objection has been raised with regard to the purchases made and transactions entered with the other parties during the year and no anomaly has been found in the books of account and assessee has shown a better GP. Assessee took an additional plea by submitting that it has received huge interest free advances from ACPL and if an interest rate of 15% is presumed then also an approximate interest cost of Rs.48,04,106/- would have been borne by the assessee. With this additional plea assessee submitted that there has been no loss of revenue because on one hand there has been loss in the sale transaction and on the other hand interest has not been paid on the advance/credit received from ACPL. This additional plea was taken up by ld. CIT(A) in deciding against the assessee by observing that if the rate of interest is taken at 18% and it is applied on the credit balance lying with the assessee received from ACPL then approximately notional interest will work out to Rs.72 lacs which is more or less matches with the loss suffered by the assessee in the impugned 13 transaction with ACPL and, therefore, these are colourable transactions attempted with sole objective of avoiding of true incident of taxation in the hands of the two parties. However, ld. CIT(A) has not disputed the fact that all the sale and purchases vouchers and invoices are entered in the books of account, receipts and payments have been made through banking channels, no infirmity has been found in the independent enquiries carried out with the impugned three parties. Therefore, there remains no force in the view taken by ld. CIT(A) of taking notional interest as a base to confirm the addition. The only reason for which both the lower authorities have denied the admissibility of the losses was that these transactions do not justify the bench mark of commercial expediency as there was no specific reason due to which appellant suffered losses again and again.
On further examination of facts we observe from the ledger account for F.Y. 2008-09 of ACPL placed on pages 15 to 19 of the paper book, from December, 2008 to March, 2009 regular transactions of purchase, sales and movements of funds have taken place and revenue has not disputed the transactions other than the 13 transactions and found them to be genuine. These transactions other than 13 transactions also includes those in which assessee has gained profits. Further ld. AR took us through the purchases made from Harshad Jewellers placed at pages 22 to 25 of the paper book out of which on 17.3.2009 purchases of gold bars have been made at Rs.1305 per gm. and when we look at the impugned transactions entered on 17.3.2009 gold bar has been sold to ACPL at Rs.1306 per gm and on the very Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 9
same day there has been purchases from Deep Impex @ Rs.1580 per gm. Ld. Assessing Officer has alleged that assessee had purchased gold bars on 17.3.209 from Deep Impex at Rs.1580 per gm and has sold to ACPL at Rs.1306 per gm. giving rise to loss of Rs.11,06,960/- and has termed these transactions as colourable but on the very same day assessee made some purchases @ Rs.1305 per gm which is evidenced by the bill. Both these purchases from Deep Impex and Harsh Jewellers have not been held to be ingenuine which proves the contention of assessee that there was a high volatility. Ld. Assessing Officer has questioned the genuineness of sale @ Rs.1306 per gm., but has not raised any objection with regard to purchases made at Rs.1305 per gm. on the very same day. Similarly on 20.3.2009 the alleged sale transaction to ACPL of gold bar is at Rs.1306 per gm. and on the very same day there is a purchase of Rs.1305 per gm from Harshad Jewellers vide its bill No.205 dated 20.3.2009. These facts in itself proves the volatility of gold/silver market and also shows the genuineness of the business transaction entered by the assessee which remains disproved even by the Revenue. At this juncture we would like to go through the judicial precedence adjudicating such type of issues. 13. We observe that Hon. Jurisdictional High Court in the case of Marghabhai Kishabhai Patel & Co. vs. CIT (supra) while adjudicating the issue relating to purchase of tobacco from its partners at higher price than average price paid to outside parties and held that the Tribunal was not justified in disallowing a part of actual price of tobacco paid by assessee -firm when it was not shown that the transaction was not bona fide or one or to be sham one or price paid was not what was shown in the books of account. It was further held that it was not open to the taxing authorities to disregard the figures of he transactions shown in the books of account of the assessee firm. Relevant portion of the Judgment of Hon. High Court is reproduced below :- It may be pointed out that the decision of the Madras High Court in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax [1955] 28 10^95,2 (Mad) was approved and followed by the Supreme Court in Commissioner of Income-tax v. Calcutta Discount Company Ltd. [ 1973] 9_1 ITRJj. (SC) and there the Supreme Court held:
"Where a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction. An assessee can so arrange his affairs as to minimise his tax burden." Hegde J., after noting the decision of the Madras High Court in Sri Ramalinga Choodambikai Mills Lid. v. Commissioner of Income-tax (1955) 28 ITR 952 (Mad) and the earlier decision of the Supreme Court in Commissioner of Income-tax v. A. Raman & Company ' TR 11 (SC) observed at page 13 of [1973] 91 ITR 8 (SC): "But the law does not oblige a trader to make the maximum pro fit that he can out of his trading transactions. Income which accrues to a trader Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 10
taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment a case commencing a proceeding for reassessment under section 147(6) may be made out, Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act, Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. It is a well accepted principle of law that an assessee can so arrange his affairs as to minimise his tax burden. Hence, if the assessee in this case has arranged its affairs in such a manner as to reduce its tax liability by starting a subsidiary company and transferring ks shares to that subsidiary company and thus forgoing pan of its own profits and at the same time enabling its subsidiary to earn some profits, such a course is not impermissible under law."
In view of this legal position and particularly in view of the decision of this High Court in Commissioner- of Income-tax v. Keshavlai Ckandulal [1966] 5^_ITR_12() (Guj), unless it has been shown that the transaction in question was a sham one or unless the value shown was not the value in the books of accounts or unless it was not a bona fide transaction, it is not open to the taxing authorities to disregard the figures of the transactions shown in the books of account of the firm. The case before the Madras High Court in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income- tax [1955] 28 ITR 952 (Mad) and before this High Court in Commissioner of Income-tax v. Keshavlai Chandulal [1966] 59_ITR^12P (Guj.) was directly converse of the case before us. In Keshavlai Chandulal's case [1966] 5J^JT]^J12() (Guj) the allegation was that the firm's profit was shown less by reason of the fact of sale to the partners at an under- value. In the instant case before us it is alleged that the firm's profit has been shown to be less by reason of the fact that the purchases from the partners are shown to be at an inflated price. The Supreme Court has pointed out in Calcutta Discount Company's case [1973] 9.1 ITR 8 , 13 (SC), quoting from Commissioner of Income-tax v. A. Raman & Company [19681 67 ITR 11 (SC):
"Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon Considerations of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented." Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 11
In the instant case, it is nobody's case that the transactions of sale from the partners and Chaturbhai Kishabhai Patel to the assessee-firm were not bona fide transactions nor is it the case of the department that they were sham transactions or that the price paid in respect of each of these transactions by the assessee-firm was other than the one set out in the books of account of the firm. Under these circumstances it appears to us that the taxing authorities had no right to substitute either the market price or the average price in place of the price or value agreed to between the parties to the transaction, since the transaction has not been shown to be a sham one nor has it been shown that the value was not the value in the books of account.
Before parting with this case it may be pointed out that we fail to understand how the Income-tax Officer arrived at the figures of addition back for each of these assessment years without comparing the prevailing market price of the tobacco of the particular quality purchased from the partners and Chaturbhai Kishabhai Patel on the dates of purchase with the purchase price actually paid to the partners and Chaturbhai Kishabhai Patel. The qualities of tobacco differ very widely and also there may be fluctuations in the market from time to time and striking an average of the price of all tobacco purchased during the entire season irrespective of qualities and irrespective of the fluctuations in the market rates, was a very unscientific method followed by the department in arriving at its conclusion but in any event he had no right to depart from the prices shown in the books of account unless he found the transaction not to be a bona fide one or to be a sham one or unless he found that the prices paid were not what was shown in the books of account and since none of these three conclusions had been reached by him. he had no right to depart from the books of account of the assessee-firm.
In view of these conclusions we hold that the Tribunal was not justified in disallowing a part of the actual price of tobacco paid to the partners and question No. (1) must, therefore, be answered in the negative, that is, in favour of the assessee and against the revenue. In view of our conclusion it is really not necessary to answer question No. (2) but in any event it appears that the conclusion reached by the Tribunal that the partners and their relatives were paid higher price was erroneous in law as the Tribunal has not compared comparables. We, therefore, answer question No. (2) in the affirmative, that is, in favour of the assessee and against the revenue. The Commissioner will pay the costs of this reference to the assessee.
We further observe that Hon. Supreme Court in the case of CIT vs. Shivakami Co. P. Ltd. (supra) adjudicating the issue wherein assessee with a view to sequestering the shares held by assessee in the company from clutches of Government, it sold them at a price much lower than their market value and in fact incurred a loss but Revenue could not prove that consideration was understated. Hon. Court decided the issue in favour of assessee by observing as follows:- Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 12
In the instant case, on behalf of the revenue, it was contended that it was accepted both by the Tribunal and the High Court that the transactions in question were done in order to defeat the claim of the revenue. The facts found were that there was a sale. The High Court has stated that the Tribunal had found that the consideration was not understated [Emphasis supplied]. The counsel-for the revenue contended that this was not correct. On the other hand, an inference could be drawn that the consideration was understated. The High Court also noted that the explanation given by the assessee for effecting the sate was not acceptable.
As it appears from the decision of this Court in K.P. Varghese's case (supra), the onus was on the revenue to prove that there was understatement in the document not that the goods were sold at undervalue. Understatement of a value is a misstatement of value. Selling: goods at an undervalue to defeat revenue is different from understating the value in the document of sale. The counsel for the revenue Contended that in the back ground of the facts of this case, the evil design of the assessee was clear and he said that it was difficult to know the mind of man. Therefore, an inference could be drawn in the facts of this case as noted by the Tribunal that there was understatement of value in the document. Though the legislation in question is to remedy the social evil and should be read broadly and should be so read that the object is fulfilled, yet the onus of establishing a condition of taxability must be fulfilled by the revenue. There is no evidence direct or inferential that the consideration actually received by the assessee was more than what was disclosed or declared by him. The relationship between the parties has been established. The desire to defeat the claims of the revenue has also been established but that fact that for this the assessee had stated a false fact in the document is not established. What appears from the Tribunal's order was that the real and main object was to safeguard these shares from being taken over by the Government in settlement of tax dues, and also that the buyer and seller were indirectly connected with each other.
The first proviso to section 12B(2) provides 'full value of the consideration for which the sale, exchange, relinquishment or transfer is made1 to be taken as the basis for the computation of the capital gains. Therefore, unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for computation of capital gains. The onus is on the revenue - the inferences might be drawn in certain cases but to come to a conclusion that a particular higher amount was in feet received must be based on such material from which such an irresistible conclusion follows. In the instant case, no such attempt was made.
As this Court has explained in K.P. Varghese's case (supra) that the second ingredient that is to say that the word 'declared' in sub-section (2) of section 52 is very eloquent and revealing. It clearly indicated that the focus of sub-section (2) was on the consideration declared or disclosed by the assessee as distinguished from the consideration actually received by him and it contemplated a case where the consideration received by the assessee in respect of the transaction was not truly declared or disclosed by him but was shown at a different figure. Capital gains was intended to tax the gains of an assessee, not what an assessee might have gained. Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 13
What is not gained cannot be computed as gained. All laws, fiscal or otherwise, must be both reasonably and justly interpreted whenever possible. Capital gains tax is not a tax on what might have been received or could have taxed, In this case, the revenue has made no attempt to establish that there was any under statement though it might be that shares were sold at an undervalue.
In view of the ratio of K.P. Varghese's case (supra) the proviso to section 12B(1) can be invoked only where the consideration for the transfer of capital asset has been understated by the assessee. There is no evidence as discussed above that the full consideration received by the assessee in the transfer of the assets involved in these cases has been understated. The proviso helps or enables the department by providing a way to determine the market value. But the proviso is applicable only where the full value for the consideration has not been stated. There is no evidence, direct or inferential, in these cases that the full consideration had not been stated in the document.
In that view of the matter, in our opinion, the appeals must fail, though on different grounds than taken by the High Court. The appeals are accordingly dismissed.
Further we also observe that Hon. Supreme Court in the case of CIT vs. Calcutta Discount Co. Ltd. (supra) on a similar issue has held as under :-
It is a well accepted principle of law that an assessee can so arrange his affairs as to minimise his tax burden. Hence, if the assessee in this case had arranged its affairs in such a manner as to reduce its tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus forgoing part of its own profits and at the same time enabling its subsidiary to earn some profits, such a course was not impermissible under law.
We also observe that Hon. Jurisdictional High Court in the case of CIT vs. Amitbhai Gunvantbhai (supra) has held as under :-
The Tribunal had overlooked one important fact, namely, that the entries in the books of account of 'G ', (HUF) were not challenged by the department as a device or as a cloak to evade the tax. Nowhere on the record the department challenged that the entries did not reflect the real transaction between the parties. In the absence of any such challenge, according to the assessee, it was not open to the Tribunal to come to the conclusion that the money was not received by 'G' in his capacity of HUF but was received by him in his capacity as the guardian of the assessee.
The basic principle is the same in the law relating to income-tax as well as in civil law, namely, that if there is no challenge to the transaction represented by the entries or to the genuineness of the entries, then it is not open to the other side-in the instant case the revenue--to contend that what is shown by the entries is not the real state of affairs. No attempt was made by the department to show that, in fact, Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 14
though the entries were made in the books of account of the HUF, the moneys were received or passed on to Amitbhai or that the moneys were received by G in his capacity as the guardian of the assessee. Under these circumstances, the department not having challenged the genuineness of the entries in the books of account of G, (HUF) and there being no other material on the record on which it could be said that the moneys were received by G in his capacity as guardian of minor, there was no evidence before the Tribunal to come to the conclusion as it did at the end of its order by way of inference that the amount in question did reach the representative assessee in his capacity as guardian of assessee. The entries which were the only evidence on record showed that the amount was received by G in his capacity as karta of the HUF but beyond that there was no other evidence. The Tribunal without any evidence on the record had drawn the inference that the amount in question did reach the representative assessee in his capacity as guardian of the assessee. To say that G was representative assessee or that the amount did reach the representative assessee in his capacity as guardian of the assessee, was not correct so far as the record of the instant was concerned. The inference drawn by the Tribunal that the amount having come to G's hands must be considered to have reached his hands in his capacity as guardian of assessee was not warranted by the evidence on record and was contrary to whatever evidence that had been led on behalf of the assessee and this evidence had not been challenged on behalf of the revenue.
From going through the series of judgments of Hon. Supreme Court and Hon. Jurisdictional High Court discussed in preceding paras, we find that the ratios laid down in these judgments contemplate that if there is no challenge to the transactions entered in the books or to the genuineness of the entries, then it is not open on the side of Revenue to contend that what is shown in the transactions/entries is not the real state of affairs. In the instant case also we find that Revenue has miserably failed to make any attempt or to prove that entries made in the books are not genuine nor any other adverse material has been placed on record to show that the impugned loss was false and assessee has received more consideration than the actual transaction of sale. Further even in the independent enquiries conducted on the alleged three parties it ended up without giving any iota of evidence against the assessee as the same have nowhere been highlighted in the assessment order.
We are, therefore, of the view that the action of ld. Assessing Officer was erroneous as he has selected only few transactions on which only loss has incurred without giving cognizance to the fact that assessee has gained in other transactions with the impugned parties which are very well evidenced with the independent itemwise transaction details forming part of the books of account of assessee placed at pages 35 to 45 of the paper book. Ld. Assessing Officer also failed to point out any mistake in the alleged transactions except mentioning that the loss has been incurred. Ld. Assessing Officer completely failed to appreciate that every assessee has his own style of doing business and more specifically in the kind of business assessee is entered into it is well established that there is regular fluctuations in the prices of gold/silver/diamonds and jewellery due to which profit/loss are incurred. Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 15
In the present case when the assessee is maintaining regular books of account which are audited and all transactions are fully supported by bills and vouchers, impugned transactions have taken place through banking channels, confirmations have been received from the alleged parties no adversity has been found in the statements recorded by the Revenue of the alleged parties, quantitative records are regularly maintained, similar transactions have not been disputed even in the subsequent assessment u/s 143(3) of the Act as supported by the copy of the order u/s 143(3) of the Act for Asst. Year 2012-13 framed on 13.2.2015. We, therefore, hold that the impugned 15 transactions giving rise to loss of Rs.77,95,670/- are genuine and cannot be termed as colourable with the intention of evasion of tax and ld. Assessing Officer erred in disallowing the same. We accordingly, set aside the order of ld. CIT(A) and allow the appeal of the assessee.”
The Tribunal thus passed a well-considered and a well-discussed order and decided the similar issue involved in AY 2009-10 in favour of the assessee after taking into consideration all the facts of the case as well as the arguments raised by both the sides. As submitted by the learned Counsel for the assessee, the said order passed in AY 2009-10 has been subsequently followed by the Tribunal to decide a similar issue in favour of the assessee for AY 2011-22 vide its order dated 10.08.2021 passed in ITA No.1254/Ahd/2016 and even the Assessing Officer in the order dated 13.02.2015 passed under Section 143(3) of the Act for AY 2012-13 has allowed the similar claim of the assessee for loss in the sale of gold and diamonds to the closely held/related parties. At the time of hearing before us, even though the learned DR has contended that every assessment year is separate and the similar loss incurred by the assessee in the similar transaction year after year cannot be accepted being artificial one, he has not been able to point out any distinction in the facts involved in the year under consideration vis-à-vis the facts involved in AYs 2009-10 and 2011-12 wherein a similar issue is decided by the Tribunal in favour of the assessee. He has also not been able to support and substantiate his contention that the loss in question claimed by the assessee and supported by the relevant documentary evidence in the form of bills/vouchers, complete quantitative details, audited books of account etc… is an artificial loss. We, therefore, find no justifiable reason to take a different view on this issue in the year under consideration than the view taken by the Tribunal in AYs 2009-10 and 2011-12 by passing a well discussed and well reasoned order. Respectfully Shri Kamlesh Jayantilal Jhaveri Vs. ITO AY : 2010-11 16
following the said orders of the Co-ordinate Bench of this Tribunal, we delete the disallowance of Rs.12.64 cores made by the Assessing Officer and confirmed by the learned CIT(A) on account of assessee’s claim for loss incurred in the sale of gold and diamonds to the closely held/related parties and allow this appeal of the assessee.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 7th September, 2022 at Ahmedabad. (SIDDHARTHA NAUTIYAL) VICE-PRESIDENT Ahmedabad, Dated 07/09/2022 *Bt आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant 2. ""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त ( अपील ) / The CIT(A)- 5. "वभागीय ""त"न"ध आयकर अपील"य अ"धकरण/DR,ITAT, Ahmedabad, , 6. गाड" फाईल /Guard file.
आदेशानुसार/ BY ORDER,सहायक पंजीकार (Asstt.