DINESH BABULAL JAIN,MUMBAI vs. ITO 19 (1)(4), MUMBAI

This appeal has been filed by the assessee against the order dated 25.07.2018 passed by the Commissioner of Income Tax (Appeals)-30 (for short ‘the CIT(A), Mumbai, for the assessment year 2009-10, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) r.w.s. 147 of the Income Tax Act, 1961 (for short the ‘Act’).

Brief facts of the case are that the assessee engaged in the business of trading in Diamonds, filed its return of income for the assessment year consideration declaring total income at Rs. 2,62,740/-. The return was processed u/s 143 (1) of the Act. Accordingly, the assessment was completed u/s 143 (3) of the Act determining the total income at Rs. 3,10,040/-. A search and seizure action was conducted on Shri Bhanwarlal Jain & and his Group concern on 03.10.2013 by the DGIT (Inv.). During the course of search Assessment Year: 2009-10 proceedings, it transpired that several name lending dummy Directors, partners/proprietors of various concerns through which accommodation entries were provided for bogus sales and bogus unsecured loans. It was further noticed that these concerns were being operated and managed by Shri Bhanwarlal Jain and his family. The assessment was accordingly reopened u/s 147 of the Act after issuing notice u/s 148 of the Act. In response to the AO issued notice u/s 142 (1) and 143 (2) of the Act, the authorized representative of the assessee attended the proceedings from time to time and furnished the details called for. Since it was noticed that the assessee had taken accommodation entries from bogus entities Proficient Infraction Pvt. Amounting to Rs. 3,75,365/-, Mauli Gems amounting to Rs. 50,20,958/- and Naman Exports amounting to Rs. 2,90,63,494/-, the AO issued show cause notice to the assessee as to why these transactions should not be treated as bogus. The assessee pleaded that it had made genuine purchases. The assessee also furnished certain details in support of its contention. However, the AO based his findings on the investigation made by the department and estimated the profit of 8% on the questioned purchases and made addition of Rs. 27,56,785/- to the income of the assessee. In the first appeal, the Ld. CIT(A) restricted the addition to 3% of the total amount of bogus purchases determined during the reassessment proceedings. Still aggrieved, the assessee is in appeal before the Tribunal. 3. The assessee has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- “1 On the facts and circumstances of the case and law, the ld. CIT (A) erred in confirming proceeding u/s 148 of income tax Act. 2. On the facts and circumstances of the case and law, the ld. CIT (A) erred in confirming disallowance of Rs. 10,33,795/- being 3% of suspicious purchases of Rs. 3,44,59,817/- assumed by the Ld. AO.

Before us, the Ld. counsel for the assessee submitted that the Ld. CIT (A) has wrongly sustained the addition to 3% amounting to Rs. 10,33,795/- as the Assessment Year: 2009-10 assessee has furnished the chart showing the particulars of purchases from the concerned parties with copies of retail invoices. The assessee has further placed on record the copies of bank statements and other documents to prove that the payments were made through banking channels. The assessee has also filed the copies of return of income, balance sheet, ledger confirmation of the concerned parties. The Ld. counsel further contended that the sales are fully vouched and the AO has not rejected the sales. Moreover, the assessee has also furnished the copies of export invoices and supporting documents to prove that the goods purchased were exported. The Ld. counsel further pointed out that the AO has not conducted any enquiry in order to ascertain the genuineness of the information received by him rather based his findings on the report of investigation conducted by the Investigation Wing of the department. The Ld. counsel further submitted that no incriminating material was recovered from the possession of the assessee. The copies of statement relied upon by the AO were not supplied to the assessee and the assessee was not given opportunity to cross-examine the witnesses. In view of the aforesaid facts the Ld. counsel submitted that the order passed by the Ld. CIT(A) may be set aside and the addition sustained may be deleted.

On the other hand, the Ld. Departmental Representative (DR) supporting the order passed by the Ld. CIT(A) submitted that during the course of search, the dummy directors/partners/proprietors of various concerns admitted that they were made directors/partners and proprietors as per the directions of Banwarlal Jain and family which were controlled and managed by Banwarlal. During the course of search, blank cheque books signed by dummy directors, partners and proprietors were found from the workplace of these entities and as per the statement of the employees these directors/partners and proprietors used to sign blank cheques as per the directions of Banwarlal Jain. The Bank accounts of all the concerns were being managed and controlled by Banwarlal Jain and the books of accounts were also maintained as per the directions of Banwarlal Jain. Mr. Banwarlal Jain has admitted in his statement recorded u/s 132 (4) of the Act that he used to manage and control the business affairs Assessment Year: 2009-10 of all the concerns in which the persons, who were his employees are shown as directors/partners and proprietors. Since, the assessee has failed to establish the genuineness of transaction; the Ld. CIT (A) has rightly sustained the addition to a reasonable percentage. 6. We have heard the rival submissions of the parties and perused the material on record including the cases relied upon by the authorities below in the light of the rival contentions. The Ld. CIT (A) has upheld reopening of the assessment u/s 147 r.w.s. 148 of the Act holding that the AO had reason to believe that income of the assessee has escaped assessment. As pointed out by the Ld CIT(A), the expression reason to believe cannot be read to mean that the AO should have finally ascertained the fact. The only requirement is that the AO should have tangible material before him for forming a belief that the income of assessee has escaped assessment. In our considered view, the material available before the AO i.e., the report of in investigation wing of the department, was sufficient for issuing notice u/s 148 of the Act. Hence, we do not find any infirmity in the findings of the Ld. CIT (A). We therefore, uphold the findings of the Ld. CIT(A). 7. So far as the addition is concerned, the Ld. CIT (A) has restricted the addition to 3% of the total amount of the questioned purchases after coming to the conclusion that the assessee has failed to establish the genuineness of the transaction to the satisfaction of the AO. The Ld. CIT (A) restricted the addition to 3% keeping in view the rate of VAT applicable and the recommendation of the taskforce group for diamond industry constituted by the Govt. of India, Ministry of Commerce and Industry. The operative part of the order of the Ld. CIT (A) reads as under:- “7.12 As narrated earlier, the Ld. AO, in this case has himself held that the purchases were not bogus though the party from whom the purchases were made by the appellant was found to be bogus and that is the reason for which AO considered the addition on the basis of the profit element embedded on such purchases which is estimated @ 8% of the total purchases. The motive behind obtaining bogus bills thus, appears to be inflation of purchases price so as to suppress true Assessment Year: 2009-10 profits. Considering the facts of the case as well as the various case laws cited (supra) especially in the case of CIT vs. Simit P. Sheth (supra), I agree with the action of the AO estimating the addition on the profit element embedded on such bogus purchases. 7.13 However, AO estimated the profit margin @ 8% and the reasons given are that, most of the traders in the market actually operate at this level of margin in the open market, this fact was identified by the GOI introducing the Benign Assessment Procedure (BAP) for the assessee who are into manufacturing and / or trading of diamonds. BAP was to be applicable for those diamond merchants, who were showing a profit margin of 8% of their turnover. Although, this BAP talks about the net profit margin (NP), for a petty dealer, operating without any establishment, the GP would be almost similar to NP. Hence, it was assumed that the margin that is now being adopted for purchases made in cash from the grey market and for which the bills are procured from the Bhanwarlal Jain group concerns. Though I am in agreement with the reasoning of the AO for estimating the profit percentage, I feel that the AO has not given the correct reasoning for estimation of the profit percentage @ 8% in this nature of trade. While deciding the profit element embedded in the bogus purchase cases, Gujarat High Court adopted the profit @ 12.5% by taking the benefit derived out of the saving of taxes, considering the profit margin in that line of trade. In the light of the above, one has to see in the present case, who are in the manufacturing and trading of diamonds, the profit element embedded estimation @ 8% is correct or not. In diamond trade the rate of VAT is stated to be 1% and in some place like Surat the same is fully exempt. Coming to the profit margin in the trade, the taskforce 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 ascertained that the operating profit in case of diamond trading for computation of ALP by the TP wing is consistently in the region of around 1.75% to 3%. 7.14 Hence, the task on hand is to ascertain the additional GP, which the appellant must have earned by purchasing the Assessment Year: 2009-10 diamonds from the grey market, than from the regular dealer. This would be the margin which the petty trader in the grey market offers over the genuine trader.