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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI M. BALAGANESH, HONBLE
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D”, MUMBAI BEFORE SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI M. BALAGANESH, HON'BLE ACCOUNTANT MEMBER ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., v. Income Tax Officer 5(3)(1) 102, 1st Floor, C-Wing Room No. 526 Shreeji Chamber, Tata Road No.2 Aayakar Bhavan Opera House, Mumbai – 400 004 M.K. Road Mumbai-400 020 PAN: AABCR3078F (Appellant) (Respondent) Assessee by : Shri B.V. Jhaveri Department by : Shri Chaitanya Anjaria
Date of Hearing : 26.07.2019 Date of Pronouncement : 30.09.2019
O R D E R PER C.N. PRASAD (JM) 1. All these appeals are filed by the assessee against common order of the Learned Commissioner of Income Tax (Appeals)–10, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 09.10.2017 for the A.Ys. 2010-11 to 2013-14.
Since the issue is common in all these appeals they are taken up for hearing together and being disposed off by this common order.
2 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., A.Y. 2010-11 3. Assessee has raised following grounds in its appeal: - “1) The Commissioner of Income Tax (Appeals) has erred in law and on facts by dismissing the ground of the appellant that the Assessment order passed u/s.143(3) r.w.s. 147 of the Act dated 03/03/2016 is bad in law and void ab initio on the following amongst other grounds which are without prejudice to one another: a) The Income Tax Officer Ward 5(3)(1) ("the Assessing Officer") failed to produce letter dated 13/03/2014 of DIT (INV)-II Mumbai on the basis of which he had reason to believe that income chargeable to tax has escaped assessment. b) The original assessment order was passed u/s. 143(3) of the Act on 28/02/2013 after calling for all necessary details required for scrutiny assessment and as such there is change of opinion on the part of the Assessing Officer for initiating reassessment proceedings which action of the Assessing Officer is not permitted in law. c) No opportunity has been granted to the assessee to cross examine all the parties whose statements have been recorded by the investigation team during the course of search and seizure action and whose statements are being relied upon for investing jurisdiction u/ s. 148. d) There is no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. 2) The Commissioner of Income Tax (Appeals) has erred in law and on facts by confirming the addition made by the Assessing Officer of Rs.25,55,801/- as gross profit at the rate of 8% on purchase bills of Rs.3,19,47,515/-. 3) The Commissioner of Income Tax has failed to appreciate that no addition can be made on the basis of the facts and circumstances of the case and as such the total addition of Rs.25,55,801/- should be deleted. 4) The Commissioner of Income Tax has failed to appreciate the fact that the Assessing Officer has only on conjectures and surmises arrived at the conclusion that the purchases made by the assessee are for the purpose of reducing the assessee's profits and to siphon off the profit to the extent of difference between actual purchases and bogus purchases.
3 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., 5) The Assessing Officer has erred in law and on facts by charging interest u/s.234B, 234C and 234D of the Act.”
In Ground No.1 of grounds of appeal, assessee has challenged the reopening of assessment and order passed u/s. 143(3) r.w.s. 147 of the Act dated 03.03.2016 as bad in law and void abinitio.
At the outset, Ld. Counsel for the assessee submits that this is a case where the original assessment was made u/s. 143(3) of the Act and subsequently the assessment was reopened beyond four years from the end of the relevant assessment year and the proviso to section 147 of the Act applies. Referring to Page No. 37 of the Paper Book, Ld. Counsel for the assessee submits that in the course of original assessment proceedings the Assessing Officer has called for the details in respect of purchases and sales made by the assessee vide questionnaire dated 18.07.2012 along with various details. Ld. Counsel for the assessee referring to page Nos. 38 to 40 submits that all the details called for by the Assessing Officer in the questionnaire including purchases, details of stocks, export invoices, details of supplies along with copy of purchase invoices exceeding ₹.10 Lakhs, details of purchases with carat and rate at which diamonds were purchased, details of diamonds exported to the Associate Enterprise etc., were filed before the Assessing Officer. Ld. Counsel for the assessee further submits that in the course of the
4 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., assessment proceedings assessee was required to explain and give justifications for the loss offered on the trading activity and the assessee has submitted that due to global recession the diamond industry has been effected substantially and thus the assessee incurred loss. Ld. Counsel for the assessee submits that considering all these submissions of the assessee the assessment was made on 28.02.2013 u/s. 143(3) of the Act accepting the loss returned by the assessee. Therefore, Ld. Counsel for the assessee submits that since the assessee has furnished all the details in respect of opening stock, purchases as well as along with copies of all purchase invoices, details of purchases and sales made with carat and rate in the course of the original assessment proceedings there is no failure on the part of the assessee to disclose material facts necessary for completion of assessment.
The Ld. Counsel for the assessee further submits that assessment of the assessee has been reopened on mere change of opinion in as much as the Assessing Officer in the original assessment proceedings had made complete enquiries about the purchases of diamonds from all the parties including the four parties mentioned in the reasons for reopening. It is submitted that assessee has furnished all details of purchase invoices, as well as the name, address, PAN of the parties from whom assessee had purchased diamonds. Further complete details of back to
5 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., back export of the said diamonds were furnished during the original assessment proceedings. Therefore, it is submitted that assessment was reopened on the basis of change of opinion which is bad in law. Reliance was placed on the decision of the Hon'ble Delhi High Court in the case of CIT v. Multiplex Trading & Industrial Co. Ltd., [378 ITR 351].
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. On examining the facts and the materials available on record, we find that in the course of original assessment proceedings the Assessing Officer by way of questionnaire required the assessee to furnish various details like purchase invoices, export sales, opening stocks, carat and rate for which sales were made etc., and the assessee has furnished all the details as required by the Assessing Officer. Considering the details furnished by the assessee and the explanations given as to why the assessee suffered losses during the year, the Assessing Officer completed the assessment u/s. 143(3) of the Act. Subsequently the assessment was reopened by issue of notice u/s. 148 of the Act dated 11.02.2015 after a period of four years from the end of the relevant Assessment Year i.e. 2010-11. When an assessment u/s.143(3) of the Act was made and such assessment is reopened beyond
6 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., a period of four years from the end of the relevant assessment year the proviso to section 147 of the Act would apply according to which the assessment can be reopened only when there is failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of assessment. In the case on hand for the relevant assessment year the assessee has furnished all the necessary details and materials for completion of assessment and there is no failure on the part of the assessee to furnish the materials for completion of assessment. It is a well settled law that when there is no failure on the part of the assessee in disclosing all material facts necessary for completion of assessment during assessment proceedings and the assessment was completed u/s. 143(3) of the Act, re-assessment is not permissible beyond a period of four years. Thus, since there is no failure on the part of the assessee in disclosing all material facts necessary for completion of assessment we hold that re-assessment made u/s. 143(3) r.w.s. 147 of the Act for the A.Y. 2010-11 is bad in law and void ab-initio. We accordingly quash the re-assessment order passed u/s. 143 r.w.s. 147 of the Act.
7 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., A.Ys. 2011-12 & 2012-13
Coming to the appeals for the A.Ys. 2011-12 & 2012-13 the Ld. Counsel for the assessee submits that the returns were processed only u/s. 143(1) of the Act and there was no scrutiny assessment made u/s.143(3) of the Act. Ld. Counsel for the assessee submits that reopening of assessment without providing information received from the DGIT(Inv.), Mumbai to the assessee and without giving opportunity to cross examine the parties based on whose statement the addition is made by the Assessing Officer is bad in law and without jurisdiction. Reliance was placed on the decision of the Hon'ble Delhi High Court in the case of Pr.CIT v. Menakshi Overseas Pvt. Ltd., [395 ITR 677].
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. So far as the reopening of assessment for A.Ys. 2011-12 and 2012-13 are concerned, we are of the view that the assessments were reopened based on the information received from the DGIT(Inv.) and there are tangible materials came on record after passing intimation u/s.143(1) of the Act. In the case of CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. [291 ITR 500], the Hon’ble Supreme Court held that intimation u/s.143(1)(a) is not an assessment and upheld the validity of
8 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., the notice issued u/s 148 and the reopening of assessment. Their Lordships held as under: - “16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)]; Raymond Woollen Mills Ltd. v. ITO [ 1999 (236) ITR 34 (SC)]. 17. The scope and effect of section 147 as substituted with effect from 1-41989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted
9 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.”
Therefore, as could be seen from the above, at the stage of initiation of proceedings of re-assessment what is required for the Assessing Officer is to form a reasonable belief on tangible materials that the income had escaped assessment.
In the case of Kone Elevator India P. Ltd. v. ITO [340 ITR 454 (Mad)], CIT v. Ideal Garden Complex P. Ltd. [340 ITR 609 (Mad)], it is held that in the case of return of income processed u/s 143(1), the only condition to be satisfied for reopening is taxable income has escaped assessment and the assessee’s plea that no fresh material before the Assessing Officer warranting reopening, is not relevant.
In the case on hand the Assessing Officer recorded reasons that the assessee had availed accommodation entries on bogus bills from M/s.Nice Diamonds and M/s. Nice Diamonds is belongs to group of Shri Bhanwarlal Jain where they have admitted in the course of the search that M/s. Nice Diamonds is managed by them and they are bogus hawala dealers. Therefore, in our view the Assessing Officer has reason to
10 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., believe that income had escaped assessment based on the above information and formed an opinion by himself and there is no borrowed satisfaction. Thus respectfully following the above judgement of the Hon'ble Supreme Court in the case of CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd., (supra) we uphold the reopening made by the Assessing Officer u/s. 147 of the Act for the A.Ys. 2011-12 and 2012-13. The case laws relied on by the Ld. Counsel for the assessee was considered by us and find that the ratio of the judgment has no application to the facts of the assessee’s case.
In view of the above position of law, the Ld. CIT(A) has rightly confirmed the reopening done by the Assessing Officer by issuing notice u/s 148 of the Act. In the circumstances, we hold that since the assessment was reopened based on tangible materials and information coming into the possession of the Assessing Officer at a later stage, we hold that the reopening of assessment u/s 147 of the Act is valid, hence the ground raised by the Assessee against reopening of assessment is dismissed.
Coming to the merits of the appeals, the Assessing Officer required the assessee to prove the genuineness of the purchases made by various parties as mentioned in the Assessment Orders. Assessee filed copies of
11 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., bank statements, copy of account of the details in its Books of Accounts, copies of sales invoices, shipping bills, Airway bills etc., assessee also filed acknowledgement of filing returns by the parties and submitted that assessee company made genuine purchases of diamonds hence no disallowance should be made treating them as non-genuine. Ld. Counsel for the assessee submits that Books of Accounts of the assessee are not rejected sales were accepted and hence purchases cannot be doubted. Ld. Counsel for the assessee submits that correlation between the purchases of diamonds under consideration and export of the same which are recorded in the Books of Accounts prove the genuineness and the veracity of the purchase transactions. Reliance was placed on the following decisions: - (i) CIT v. Nikunj Eximp Enterprises Pvt. Ltd., [372 ITR 619] (ii) ITO v. Karsan Nandu [77 taxmann.com 275 (Mum)] (iii) M/s. Vama International v. ITO in ITA.No. 7315, 7316 & 7317/Mum/2016 dated 15.02.2018. (iv) M/s. Sejal Exports (India) v. DCIT in ITA.No. 3854 to 3859 & 3864/Mum/2017 dated 04.07.2018. (v) M/s. Simoni Gems v. DCIT in ITA.No. 747 to 752/Mum/2018 dated 13.03.2019. (vi) Indo Unique Trading Pvt. Ltd., v. DCIT in ITA.No. 6341 & 6721/Mum/25016 dated 16.08.2017.
In the alternative and without prejudice the Ld. Counsel for the assessee submits that when the sales are accepted as genuine the whole of the purchases cannot be disallowed and the addition may be restricted to the extent of 2%. Reliance was placed in the case of Asst. CIT v.
12 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., M/s.Choron Diamond (I) Pvt. Ltd., in ITA.No. 4449, 6798, 6800 and 5868 to 5871/Mum/2016 dated 30.10.2017.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. The Ld. CIT(A) considering the submissions, evidences furnished by the assessee, the averments of the Assessing Officer and the instructions of CBDT held that only the profit element embedded in such purchases shown to have been made from the non-existing parties are to be brought to tax. Accordingly, Ld.CIT(A) sustained the estimation of profit element at 8% adopted by the Assessing Officer observing as under: - “7.3.25 It is well known that if purchases are made from open market without insisting from the genuine bills, the suppliers may be willing to sell those products at a much lower rate as compared to the rate at which they may charge in case the dealer has to give a genuine sale invoice in respect of that sale and supply the goods. There may be various factors due to which there is bound to be a substantial difference between the purchase price of unaccounted material and rate of purchase of accounted for goods. There may be a saving on account of sales-tax and other taxes and duties which may be leviable in respect of manufacture of sale of goods in question. The suppliers or the manufacturers make a substantial saving in the income-tax also in respect of income from sale of unaccounted goods produced and sold by them. This may also be one of the factors due to which the seller may be willing to charge lower rates for unaccounted goods as compared to accounted for goods. Thus the motive behind obtaining bogus bills is inflation of purchase price so as to suppress the profits. Therefore, the profit element embedded in such bogus purchase which the assessee could have made, has to be assessed as undisclosed income of the
13 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., appellant. This being the position, it needs to be determined what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The estimation varies with the nature of business and no uniform yardstick can be adopted. Further, the addition will differ from case to case depending upon the facts of the case. The CBDT's Instruction No.-2/2008 dated February 22, 2008 lays down guideline in the form of benign assessment procedure for assessee's engaged in diamond manufacturing and/or trading under- ...the 'Benign Assessment Procedure', in the case of assessees engaged in diamond business as announced by Hon'ble Finance Minister in his Budget Speech on 28.2.2007 shall be as under:— A. The procedure will apply to assessees engaged in the business of manufacturing and/or trading of diamonds (referred to below as such business). B. If an assesses has shown a sum equal to or higher than 6% of his total turnover from such business as his income under the head 'profits and gains of business or profession' for a particular assessment year, the Assessing Officer shall accept his trading results. ….. ….. D. The procedure shall not apply to an assessee for an assessment year – ….. (vi) where there is information regarding escapement of income. E. The rate of profit as a percentage of turnover would be reviewed annually on the basis of revenue generation and results of scrutiny assessments, searches and surveys made during the year. 2. The above instruction is issued under section 119(1) of the Income-tax Act, 1961 and would be applicable for assessments made during Financial Year 2008-09. 7.3.26 However, in the aforesaid instruction it has been stated that the above instruction would be applicable for assessments made during Financial Year 2008-09 and that the acceptance of profit at
14 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., 6% or above as for a particular assessment year will not be a precedent for that assessee or for any other assessee. Further, it would not be applicable where there is information regarding escapement of income. However, the persuasive value of the aforesaid instruction cannot be ignored. It is also observed that recently the Hon'ble ITAT, Mumbai in a recent decision dated 19.05.2017 in the case of M/s Dhadda Gems Ltd. vs. ITO 5(1 )(3), Mumbai in ITA No. 7310 to 7314 has sustained an addition @ 8% of the purchases shown from the impugned bogus parties, hence the profit embedded in accommodation entries of purchase can be taken as an equivalent @ 8% of the purchase amount, which results from the saving on account of sales-tax and other taxes and duties which may be leviable in respect of manufacture of and sale of goods in question, which is transferred to the purchaser, when purchases are made without genuine bills . As it is an estimate of the profit embedded in purchase, it cannot be allowed to be adjusted against any subsequent profit arising from the sale of the materials. Hence all the additions made on accoutn of profit embdded in the accommodation entries of bogus purchases estimated @8% on such purchases are upheld.”
We agree with the Ld. CIT(A) and the Assessing Officer that only the profit element should be assessed in the purchases which were made by the assessee in the gray market as there was no dispute on quantitative details of the stock and the sales/exports made by the assessee. However, it is the fact that in the report of Task Group constituted by the Department of Commerce that the margin in Diamond Industry has to be accepted in the range between 1 to 4.5%. It is also the contention of the assessee that even according to the CBDT Circular which was relied on by the Ld.CIT(A) if assessee has shown the sum equal to or higher than 6% of his total turnover from diamond business as his income under the heading “profit and gain of business or profession” for that particular assessment year the Assessing Officer shall accept the trading results.
15 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., 21. We 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, 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 these Assessment years i.e. A.Y.2011-12 & 2012-13. 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 all these Assessment years.
In the result, appeals of the assessee for the A.Y. 2011-12 & 2012-13 are partly allowed.
16 ITA NOs. 1575, 1576, 1577 & 1578/MUM/2018 (A.Ys: 2010-11, 2011-12, 2012-13 & 2013-14) M/s Ralf Jems Pvt. Ltd., A.Y. 2013-14
Coming to the appeal for the A.Y. 2013-14 facts on merits being similar and identical to A.Ys. 2011-12 and 2012-13 the decision taken for the A.Y. 2011-12 & 2012-13 applies mutatis mutandis to the issue in appeal for the A.Y.2013-14. We order accordingly.
In the result, Appeal of the assessee for the A.Y. 2010-11 is allowed and appeals for the A.Ys. 2011-12, 2012-13 & 2013-14 are partly allowed as indicated above.
Order pronounced in the open court on the 30th September, 2019
Sd/- Sd/- (M. BALAGANESH) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai / Dated 30/09/2019 Giridhar, Sr.PS
Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum