SAKUN GEMS,MUMBAI vs. ITO 19(3)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “SMC”, MUMBAI BEFORE SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI RAJESH KUMAR, HON'BLE ACCOUNTANT MEMBER ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems v. The Income Tax Officer -19(3)(2) G3, A1 Apartment Matru Mandir, Tardeo Road 270, Walkeshwar Road Mumbai – 400 007 Mumbai – 400 006 PAN: ABEFS1111R (Appellant) (Respondent) Assessee by : Shri Uttam Chand Bothra Department by : Shri Ajay Kumar Ojha

Date of Hearing : 12.07.2019 Date of Pronouncement : 25.09.2019

O R D E R PER C.N. PRASAD (JM) 1. These two appeals are filed by the assessee against different orders of the Learned Commissioner of Income Tax (Appeals) – 52 [hereinafter in short “Ld.CIT(A)”] dated 27.03.2018 and 13.02.2018 for the A.Ys. 2008-09 and 2011-12 respectively.

2 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems “1. THAT the notice issued under section 148 be declared as bad in law and against the provisions of the Income tax Act, 1961. 2. THAT the learned Commissioner of Income tax (Appeals)-52, Mumbai has erred in law as well as under the circumstances of the case in deciding that provision of section 292BB is applicable where no notice is issued u/s. 143(2) of the Income tax Act, 1961. 3. THAT in the absence of notice issued u/s. 143(2), the re-assessment proceedings and consequential assessment order is without jurisdiction and is bad in law. 4. THAT the learned Income tax Officer as well as learned Commissioner of Income tax (Appeals)- 52, Mumbai has erred in law as well as under the circumstances of the case in stating that the purchase to the extent of Rs. 1,73,23,639/- are bogus purchases. 5. THAT the learned Commissioner of Income tax (Appeals)- 52, Mumbai has erred in law as well as under the circumstances of the case in applying G.P. Ratio @ 8% on such alleged bogus purchases. 6. THAT the learned Income tax Officer has erred in law as well as under the circumstances of the case in invoking the provisions of Sec. 145(3) of the Income tax Act, 1961 without issuing any notice to your Appellant and Commissioner of Income tax (Appeals)- 52, Mumbai has erred in law as well as under the circumstance of the case in confirming the same. 7. THAT the learned Commissioner of Income tax (Appeals) has erred in law as well as under the circumstances of the case in not considering the covered matters decided by the jurisdictional Hon'ble Income tax Appellate Tribunal, and cited by your appellant.”

3 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems 5. We have heard the rival submissions, perused the orders of the authorities below. Whether the re-assessment is valid in the absence of issue and service of notice u/s. 143(2) of the Act has been considered and decided by the Coordinate Bench in the case of Shri Ramesah Salecha HUF v. ITO in ITA.No. 3312/Mum/2015 dated 25.10.2017, wherein the Coordinate Bench of the Tribunal held as under: - 3. “Learned Counsel for the assessee at the outset, submits that the Assessment Order passed u/s. 143(3) r.w.s. 147 of the Act is ab-initio void as no notice u/s. 143(2) of the I.T Act was issued and served upon the assessee prior to completion of assessment. Learned Counsel for the assessee submits that there is no direction in the order sheet for issue of notice u/s. 143(2) of the Act. Learned Counsel for the assessee referring to the decision of the Allahabad High Court in the case of ACIT v. Greater Noida Industrial Development Authority [379 ITR 14] submits that it is mandatory requirement for initiation of assessment proceedings to issue notice u/s. 143(2) of the Act and in the absence of issue of notice u/s.143(2) the assessment made u/s. 143(3) r.w.s. 147 is invalid and void ab-initio. He also placed reliance on the decision of the Bombay High Court in the case of ACIT v. Geno Pharmaceuticals Ltd [214 Taxmann 83] and submits that the Hon'ble High Court held that notice u/s. 143(2) is mandatory and in absence of service of such notice Assessing Officer cannot proceed to make an inquiry on return filed in compliance with notice issued u/s. 148 of the Act. 4. Learned Departmental Representative on the other hand submits that assessee has fully cooperated in the Assessment Proceedings. Therefore, it shall be deemed that any notice under any provisions of this Act which is required to be served upon the assessee has been duly served in time in view of the provisions of Section 292BB of the Act which came into operation from 1.4.2008. He strongly supported the orders of the Ld.CIT(A) in holding that the assessee has never objected in the course of Assessment Proceedings raising the contention that notice u/s. 143(2) was not served. Therefore, Ld.DR submits that the defect is curable in view of the provision of Section 292BB of the I.T. Act. 5. We have heard the rival submissions on this preliminary objection i.e. very jurisdiction of the Assessing Officer for initiation of assessment proceedings in the absence of issue and service of notice u/s. 143(2) of the Act. It is the contention of the assessee that no notice u/s. 143(2) has been issued or served on the assessee before completion of the assessment. The assessee has raised this objection for the first time before the Ld.CIT(A) and the Ld.CIT(A) relying on the remand report furnished by the Assessing Officer

4 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems which stated that notice u/s. 143(2) and u/s. 142(1) were issued to the assessee and it was served through speed post as per the records maintained in the office of the Assessing Officer and taking note of the decision of the ITAT, Delhi Bench in the case of ITO v. M/s.Industrial Syndicate in ITA.No. 2589/Del/2011 for the Assessment Year 2007-08 concluded that as the assessee has not raised any objection as to the service of notice u/s. 143(2) during the Assessment Proceedings provisions of Section 292BB will be applicable and in which case it will be deemed that any notice under any provisions of this Act is served on the assessee, the preliminary objection is dismissed by the Ld.CIT(A). 6. Before us the Revenue could not prove with evidences that the notice u/s. 143(2) was neither issued nor served on the assessee. Now the question as whether the notice u/s. 143(2) can be said to have been served on the assessee and whether the assessee shall be precluded from taking any objection in any proceeding or enquiry under this Act and whether issue of notice u/s. 143(2) is mandatory is the subject matter to be decided. Whether in the absence of issue of notice the assessment is valid or not has been considered by the Allahabad High Court in the case of ACIT v. Greater Noida Industrial Development Authority (supra) and it has been held that the jurisdiction of the Assessing Officer to make an assessment u/s. 143(3)(ii) of the Act is based on the issuance of the notice u/s. 143(2)(ii) of the Act. It was held that the proviso to Clause (ii) of Sub-section (2) of the Section 143 clearly stipulates that the notice must be served on the assessee. It has been held that since the Assessing Officer failed to issue notice within the specified period u/s. 143(2) of the Act, the Assessing Officer had no jurisdiction u/s. 143(2) of the Act to make an assessment. It was further held that this defect could not be cured by recourse to the deeming fiction provided u/s. 292BB of the Act, while holding so the Hon'ble Allahabad High Court held as under: - “18. Section 292 BB of the Act was inserted by the Finance Act, 2008 with effect from 1 April 2008. Section 292 BB of the Act provides a deeming fiction. The deeming fiction is to the effect that once the assessee has appeared in any proceeding or cooperated in any enquiry relating to an assessment or reassessment, it shall be deemed that any notice under the provisions of the Act, which is required to be served on the assessee, has been duly served upon him in time in accordance with the provisions of the Act. The assessee is precluded from taking any objection in any proceeding or enquiry that the notice was (i) not served upon him; or (ii) not served upon him in time; or (iii) served upon him in an improper manner. In other words, once the deeming fiction comes into operation, the assessee is precluded from raising a challenge about the service of a notice, service within time or service in an improper manner. The proviso to Section 292 BB of the Act, however, carves out an exception to the effect that the Section shall not apply where the assessee has raised an objection before the completion of the assessment or reassessment. Section 292 BB of the Act cannot obviate the requirement of complying with a jurisdictional condition. For the Assessing Officer to make an order of assessment under Section 143 (3) of the Act, it is necessary to issue a notice under Section 143 (2) of the Act and in the absence of a notice

5 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems under Section 143(2) of the Act, the assumption of jurisdiction itself would be invalid. 19. In view of the aforesaid, we are of the opinion that Section 292BB, which was inserted with effect from 01.04.3008 is not applicable to the proceedings for the assessment year 2006-07, 2007-08, 2008-09. We are also of the opinion that Section 292BB of the Act is not applicable also for the assessment years 2009-10, 2010-11 and 2011-12. The deeming fiction that once an assessee has appeared in any proceeding or participated in any query relating to assessment or reassessment, it shall be deemed that the notice under the provisions of the Act, which is required to be served has been duly served upon him in accordance with the provisions of the Act and, therefore, is precluded from contending that the notice was not served upon him or was not served upon him in time or was not served upon him in a proper manner, in our view, is not applicable for the following reason. 20. There is a clear distinction between "issue of notice" and "service of notice". In R.K.Upadhyaya Vs. Shanabhai P. Patel, 166 ITR 163, the controversy was that a notice under Section 148 was issued on 31.03.1970 i.e. the last date of limitation, which notice was served on the assessee on 03.04.1970, after the expiry of limitation. The High Court held that since the notice was served after the expiry of the period, the assessment order was invalid and had accordingly quashed the notice for reassessment issued under Section 147 of the Income Tax Act,1961. The Supreme Court held that the scheme of 1961 Act in so far as the notice for re-assessment was concerned was quite different than that contained under Section 34 of the Income Tax Act, 1922. The Supreme Court held that a clear distinction has been made between "issue of notice" and "service of notice" under the Act. The Supreme Court held that once a notice is issued within the period of limitation, the Income Tax Officer gets the jurisdiction to proceed to reassess and make the assessment order. The mandate of Section 148(1) of the Act is, that reassessment shall not be made until there has been a service of notice which is a condition precedent to making an order of assessment. The Supreme Court further held that the requirement of issue of notice is satisfied when a notice is actually issued and that service under the Act, 1961 is not a condition precedent to conferment of jurisdiction on the Income Tax Officer to deal with the matter but it is only a condition precedent to the making of the order of assessment. The Supreme Court held: "Section 34, conferred jurisdiction on the Income-tax Officer to reopen an assessment subject to service of notice within the prescribed period. Therefore, service of notice within limitation was the foundation of jurisdiction. The same view has been taken by this Court in Janni v. Indu Prasad Bhat, 72 ITR 595 as also in C.I.T. v. Robert, 48 ITR 177. The High Court in our opinion went wrong in relying upon the ratio of 53 ITR 100 in disposing of the case in hand. The scheme of the 1961 Act so far as notice for reassessment is concerned is quite different. What used to be contained in section 34 of the 1922 Act has been spread out into three sections, being sections 147, 148 and 149 in the 45 1961 Act. A clear distinction has

6 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems been made out between 'issue of notice' and 'service of notice' under the 1961 Act. Section 149 prescribe the period of limitation. It categorically prescribes that no notice under section 149 shall be issued after the prescribed limitation has lapsed. Section 148(1) provides for service of notice as a condition precedent to making the order of assessment. Once a notice is issued within the period of limitation, jurisdiction becomes vested in the Income-tax Officer to proceed to reassess. The mandate of section 148(1) is that reassessment shall not be made until there has been service. The requirement of issue of notice is satisfied when a notice is actually issued. In this case, admittedly, the notice was issued within the prescribed period of limitation as March 31, 1970, was the last day of that period. Service under the new Act is not a condition precedent to conferment of jurisdiction in the Income-tax Officer to deal with the matter but it is a condition precedent to making of the order of assessment. The High Court in our opinion lost sight of the distinction and under a wrong basis felt bound by the judgment in 53 ITR 100. As the Income-tax Officer had issued notice within limitation, the appeal is allowed and the order of the High Court is vacated. The Income-tax Officer shall now proceed to complete the assessment after complying with the requirements of law. Since there has been no appearance on behalf of the respondents, we make no orders for costs." 21. From the aforesaid, it is clear that the essential requirement is "issuance of notice" under Section 143(2) of the Act. The deeming fiction under Section 292BB of the Act is with regard to "service of notice". Since the initial requirement of issuance of notice was not made by the Assessing Officer, the deeming fiction of service of notice under Section 292BB of the Act, consequently, does not arise and is not applicable. 22. In the light of the aforesaid, since the Assessing Officer failed to issue notice within the specified period under Section 143(2) of the Act, the Assessing Officer had no jurisdiction to assume jurisdiction under Section 143(2) of the Act and this defect cannot be cured by taking recourse to the deeming fiction provided under Section 292BB of the Act. Consequently, the Tribunal was justified in setting aside the order of the Assessing Officer as well as the order of the Appellate Authority. 23. The contention that adequate opportunity was not given to the appellant before the Tribunal now becomes redundant in view of the specific finding given by us on the issuance of the notice under Section 143(2) of the Act. However, we must observe that the appellant was not fair to the Court in alleging that no proper opportunity was given or that the Tribunal gave no directions to the Department to produce the original records. We are constrained to observe that there is no affidavit of the departmental representative who had appeared before the Tribunal to state on oath that the observations made by the Tribunal with regard to the production of the original records at the stage of hearing of the stay application and thereafter was perverse. In the absence of any affidavit being filed, it was not open for the Department to allege that no proper opportunity was given. Further, we find that the assertion made in paragraph 16 of the Supplementary

7 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems Affidavit that a notice was issued is patently erroneous and, an attempt was made by the Department to deceive the Court. The notice asserted in para 16 of the Supplementary Affidavit is not a notice under Section 143(2) of the Act but is only a notice issued under Section 142(1) of the Act. Such tactics adopted by the Department is totally deplorable.” 7. Similar view has been taken by the Hon'ble Delhi High Court in the case of Principal Commissioner of Income Tax v. Silver Line in ITA.No.578 to 581,585, 587 and 588/2015 dated 04.11.2015. The Hon'ble Delhi High Court upheld the decision of the ITAT in holding that the re-assessment order cannot be passed without complying with the mandatory requirement of notice being issued by the Assessing Officer to the assessee u/s. 143(2) of the Act and therefore the re-assessment order was legally unsustainable. While holding so the Hon'ble Delhi High Court considered various decisions on the issue and observed as under:- “10. Mr. N.P. Sahni, learned Senior Standing counsel for the Revenue, first submitted that the ITAT erred in permitting the Assessee to raise a ground regarding non-issuance of notice under Section 143(2) of the Act, when no such ground has been raised during the reassessment proceedings before the AO. He accordingly submitted that in terms of the proviso to Section 292BB of the Act, it was not open to the Assessee to raise such a plea and that too for the first time before the ITAT. Secondly, it was submitted that the Assessee had failed to file any return pursuant to the notice issued under Section 148 of the Act. The return initially filed had been processed under Section 143 (1) for three of the AYs. There was no occasion for the AO, in the absence of any return having been filed by the Assessee pursuant to the notice issued under Section 148 of the Act, to issue a notice under Section 143 (2) of the Act. It was for the above reason that the AO thought it appropriate to issue the notice under Section 142 (1) of the Act. Relying on the decision in Alpine Electronics Asia Pte. Ltd. v. Director General of Income Tax (2012) 341 ITR 247, Mr. Sahni submitted that in the facts and circumstances of the present case, the failure of the AO to issue a notice under Section 143(2) of the Act was not fatal to the reassessment proceedings. 11. Dr. Rakesh Gupta, learned counsel for the Assessee, pointed out that the requirement of issuance of notice under Section 143(2) of the Act prior to finalisation of the reassessment order was a jurisdictional one and the compliance of such requirement could not be dispensed with by resorting to the proviso to Section 292BB of the Act. Referring to the decisions of the Allahabad High Court in Commissioner of Income Tax v. Parikalpana Estate Development (P.) Ltd. (2012) 79 DTR 246 (All.) and Manish Prakash Gupta v. Commissioner of Income Tax (2012) 259 CTR 57 (All.), he submitted that Section 292BB of the Act was only a rule of evidence for dealing with service of notice and has nothing to do with the mandatory requirement of issuance of notice under Section 143 (2) of the Act which is a notice giving jurisdiction to AO. Reference was also made to the decision of this Court in Pr. CIT v. Shri Jai Shiv Shankar Traders Pvt. Ltd. (decision dated 14th October 2015 in ITA No. 519 of 2015). Dr. Gupta further pointed out that for three of the AYs in question i.e. 2005-06, 2006-07 and 2007- 08, Section 292 BB of the Act could not be invoked since that ITA No. 578

8 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems of 2015 & connected matters provision was introduced in the statute book with effect from 1st April 2008. Referring to the decision in Commissioner of Income Tax v. Mohammad Khaleeq (2015) 229 Taxman 566 (All.) and the decision of this Court dated 6th October 2010 in ITA No. 1159/2010 (CIT v. Kuber Tobacco Producers P. Ltd.) he pointed out that Section 292BB of the Act has been held to be prospective, i.e., applicable only from AY 2008-09. Finally Dr. G upta submitted that in any event the question as to the legal effect of the failure of the AO to issue a notice under Section 143(2) of the Act was a pure question of law and on the strength of the decision of the Supreme Court in National Thermal Power Co. Ltd. v. Commissioner of Income Tax (1998) 229 ITR 383 (SC) and Gedore Tools (P) Ltd. v. Commissioner of Income Tax (1999) 238 ITR 268 (Del) such a point could have been raised by the Assessee during the course of hearing in the ITAT, as long as it did not require any new or disputed facts to be brought on record. Reliance, in this regard, was also placed on the decision in Assam Company (I) Ltd. v. CIT (2002) 256 ITR 423 (Gau). 12. The Court first proposes to consider the question as to whether in terms of the proviso to Section 292BB of the Act, the Assessee was precluded, at the stage of the proceedings before the ITAT, from raising a contention regarding failure of the AO to issue a notice under Section 143(2) of the Act. The legal position appears to be fairly well settled that Section 292BB of the Act talks of the drawing of a presumption of service of notice on an Assessee and is basically a rule of evidence. In Commissioner of Income Tax v. Parikalpana Estate Development (P.) Ltd. (supra) in answering a similar question, the Court referred to its earlier decision in Commissioner of Income Tax v. Mukesh Kumar Agrawal (2012) 345 ITR 29 (All.) and pointed out that Section 292BB of the Act was a rule of evidence which validated service of notice in certain circumstances. It introduces a deeming fiction that once the Assessee appears in any proceeding or has cooperated in any enquiry relating to assessment or reassessment it shall be deemed that any notice under any provision of the Act that is required to be served has been duly served upon him in accordance with the provisions of the Act and the Assessee in those circumstances would be precluded from objecting that a notice that was required to be served upon him under the Act was not served upon him or not served in time or was served in an improper manner. It was held that Section 292BB of the Act is a rule of evidence and it has nothing to do with the mandatory requirement of giving a notice and especially a notice under Section 143(2) of the Act which is a notice giving jurisdiction to the AO to frame an assessment. The decision of the Allahabad High Court in Manish Prakash Gupta v. Commissioner of Income Tax (supra) is also to the same effect. 13. In Pr. CIT v. Shri Jai Shiv Shankar Traders Pvt. Ltd. (supra), this Court has also discussed the distinction between a failure to 'issue' notice and a failure to 'serve' a notice on an Assessee. It was held, after noticing the decisions of the Allahabad High Court in Commissioner of Income Tax v. Rajeev Sharma (2011) 336 ITR 678 and Commissioner of Income-tax-II, Lucknow v. Salarpur Cold Storage (P.) Ltd. [2014] 50 taxmann.com 105 (All.) and the decision of the Madras High Court in Sapthagiri Finance & Investments v. Income Tax Officer (2013) 90 DTR (Mad) 289), that Section 292 BB of the Act would apply insofar as failure of 'service' of notice was concerned and not with regard to the failure to 'issue' notice. In other words,

9 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems the failure of the AO, in re-assessment proceedings, to issue notice under Section 143(2) of the Act, prior to finalising the re-assessment order, cannot be condoned by referring to Section 292BB of the Act. 14. Consequently, the Court does not find merit in the objection of the Revenue that the Assessee was precluded from raising the point concerning the non-issuance of notice under Section 143 (2) of the Act in the present case in view of the proviso to Section 292BB of the Act. 15. The Court also finds merit in the contention of the Assessee that in any event as far as AYs 2005-06 to 2007-08 is concerned, Section 292BB of the Act would not apply since it is prospective in its application, i.e., applicable from AY 2008-09 onwards. The legal position in this regard appears to be well settled as explained in CIT v. Kuber Tobacco Producers P. Ltd. (supra) and Commissioner of Income Tax v. Mohammad Khaleeq (supra). 16. As regards the objection of the Revenue to the ITAT permitting the Assessee to raise the point concerning non-issuance of notice under Section 143(2) of the Act for the first time in the appeal before the ITAT, the Court is of the considered view that in view of the settled legal position that the requirement of issuance of such notice is a jurisdictional one, it does go to the root of the matter as far as the validity of the reassessment proceedings under Section 147/148 of the Act is concerned. It raises a question of law as far as the present cases are concerned since it is not in dispute that prior to finalisation of the reassessment orders, notice under Section 143(2) of the Act was not issued by the AO to the Assessee. With there being no fresh evidence or disputed facts sought to be brought on record, and the issue being purely one of law, the ITAT was not in error in permitting the Assessee to raise such a point before it. This finds support in the decision of the Supreme Court in National Thermal Power Co. Ltd. v. Commissioner of Income Tax (supra) and the decision of this Court in Gedore Tools (P) Ltd. v. Commissioner of Income Tax (supra). 17. On the question of whether the notice under Section 143(2) of the Act was in the facts and circumstances mandatory, Mr. Sahni sought to distinguish the long line of decisions including the recent decision of this Court in Pr. CIT v. Shri Jai Shiv Shankar Traders Pvt. Ltd. (supra) on the ground that there was no occasion for the AO to issue any notice under Section 143 (2) of the Act since the Assessee had, in fact, not filed a return. He submitted that the original return was filed in the 'Saral Form' which had since been replaced with a different form for filing of returns. Consequently, the said return could not have been treated as a return filed pursuant to the notice issued to the Assessee under Section 148 of the Act. He further submitted that with no discrepancy having been found by the AO in the returns for AYs 2005-06 till 2007-08, which were processed under Section 143 (1) of the Act, there was no occasion for the AO to issue a notice under Section 143 (2) of the Act. Mr. Sahni submitted that in the circumstances, the action of the AO in finalising the reassessment orders without notice under Section 143 (2) of the Act was justified.

10 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems 18. The wording of Section 143(2)(ii) of the Act, which is applicable in the present case, requires the AO to be satisfied on examining the return filed that prima facie the Assessee has understated the income or has computed excessive loss or has underpaid the tax in any manner. The AO has the discretion to issue a notice under Section 143 (2) if he considers it necessary or expedient to do so. This exercise by the AO under Section 143 (2) of the Act is qualitatively different from the issuance of a notice under Section 142(1) of the Act, which as noted hereinbefore, is in a standard proforma. 19. The Court is unable to accept the submission of the Revenue that in the present case, no return was filed by the Assessee pursuant to the notice issued to it under Section 148 of the Act. If after receiving the letter dated 1st April 2011 of the Assessee the AO was of the view that the return originally filed in the Saral Form could not be treated as the return pursuant to the notice under Section 148 of the Act, then he should have drawn the attention of the Assessee to that fact. In the present case all that the AO did was to send a notice under Section 142 (1) of the Act. The Assessee was not made aware as to why he was required to file a return. Had a notice been issued to him under Section 143 (2) of the Act, the AO would have been obliged to let the Assessee know why he was being asked to file a return notwithstanding his letter dated 1st April 2011. In the circumstances, the Assessee was justified in proceeding on the basis that it had not committed any default in communicating to the AO that the return already filed should be treated as the return filed pursuant to the notice under Section 148 of the Act. 20. The proposal to reopen an assessment under Section 147 of the Act is to be based on reasons to be recorded by the AO. Such reasons have to be communicated to the Assessee. However, merely because the Assessee participates in the proceedings pursuant to such notice under Section 148 of the Act, it does not obviate the mandatory requirement of the AO having to issue to the Assessee a notice under Section 143(2) of the Act before finalising the order of the reassessment. 21. In this context reference may be made to the decision of the Madras High Court in Sapthagiri Finance & Investments v. Income Tax Officer (supra) where again the Assessee did not file a return pursuant to Section 148 of the Act. The AO then issued a notice to it under Section 142(1) of the Act. The Assessee thereafter appeared before the AO and stated that the original return filed should be treated as the return filed in response to the notice under Section 148 of the Act. In those circumstances, the High Court observed that if there was some explanation that was required to be offered by the Assessee, notwithstanding the above submission made by it, the AO ought to have issued a notice under Section 143(2) of the Act. The Madras High Court observed: "Merely because the matter was discussed with the Assessee and the signature is affixed it does not mean the rest of the procedure of notice under Section 143(2) of the Act was complied with or that on placing the objection the Assessee had waived the notice for further processing of the reassessment proceedings. The fact that on the notice issued u/s 143(2) of the

11 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems Act, the assessee had placed its objection and reiterated its earlier return filed as one filed in response to the notice issued u/s 148 of the Act and the Officer had also noted that the same would be considered for completing of assessment, would show that the AO has the duty of issuing the notice under Section 143(3) to lead on to the passing of the assessment. In the circumstances, with no notice issued u/s 143(3) and there being no waiver, there is no justifiable ground to accept the view of the Tribunal that there was a waiver of right of notice to be issued u/s 143(2) of the Act." 22. The decisions of the Allahabad High Court in Commissioner of Income Tax v. Rajeev Sharma (supra) and Commissioner of Income-tax-II, Lucknow v. Salarpur Cold Storage (P.) Ltd. (supra) also reiterate the above legal position. As far as this Court is concerned, the decision in Director of Income Tax v. Society For Worldwide Interbank Financial Telecommunications (2010) 323 ITR 249 (Del) and the recent decision in Pr. CIT v. Shri Jai Shiv Shankar Traders Pvt. Ltd. (supra) hold likewise. 23. With the legal position being abundantly clear that a reassessment order cannot be passed without compliance with the mandatory requirement of notice being issued by the AO to the Assessee under Section 143(2) of the Act, the ITAT was in the present case right in concluding that the reassessment orders in question were legally unsustainable.” 8. Since the Revenue could not produce before us any evidence to show that notice u/s. 143(2) has been issued or served to the assessee the re- assessment made u/s. 143(3) r.w.s. 147 is void ab-initio in view of the above decisions of the Hon'ble Allahabad High Court in the case of ACIT v. Greater Noida Industrial Development Authority (supra) and the Hon'ble Delhi High Court in the case of ACIT v. Geno Pharmaceuticals (supra). Thus, respectfully following the said decisions we hold that the re-assessment made u/s. 143(3) r.w.s. 147 of the Act is legally unsustainable. Thus, quash the re-assessment order passed by the Assessing Officer u/s. 143(3) r.w.s. 147 of the Act dated 31.01.2014 for the Assessment Year 2011-12 under appeal.”

12 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems 7. As we have decided the preliminary legal issue in favour of the assessee we are not adjudicating the other legal aspects and grounds on merits as they would become only academic at this stage.

13 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems processed u/s. 143(1) of the Act. Subsequently, based on the information received from DGIT(Inv.), Mumbai that the assessee was one of the beneficiary of the accommodation entries provided by Shri Bhanwarlal Jain the assessment was reopened. The re-assessment was completed u/s.143(3) r.w.s. 147 of the Act on 30.11.2006 determining the income of the assessee at ₹.7,92,251/. While completing the re-assessment the Assessing Officer treated purchases of ₹.33,06,105/- and ₹.50,83,000/- made from M/s. Nice Diamonds and M/s. Millennium Star respectively as non-genuine. However, he estimated the profit element embedded in such non-genuine purchases at 5% and brought to tax. On appeal the Ld.CIT(A) sustained the reopening of assessment. On merits he directed the Assessing Officer to estimate the profit margin @8% and reduce the profit margins already shown by the assessee in its books in respect of the said purchases.

14 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems (i) Balaji Health Care Pvt. Ltd., v. ITO in ITA.No. 566 & 567/JP/2018 dated 30.01.2019. (ii) Dulraj U. Jain v. ACIT in Writ Petition No. 1641 of 2018 dated 06.07.2018 (Bombay) (iii) M/s. Damodar Oil Mills Company Pvt. Ltd., v. ITO in ITA.No. 515/JP/2016 dated 11.05.2018. (iv) Meta Plast Engineering Pvt. Ltd., v. ITO in ITA.No. 5780/Del/2014 dated 06.04.2018. 12. Coming to the merits of the case, Learned Counsel for the assessee submits that the purchases are genuine. Assessee has produced copies of bills, ledger accounts, bank statements, confirmations of accounts, copies of acknowledgement filing of return of income of supplies etc. Therefore, it is submitted that purchases made by the assessee are genuine. It is submitted that no addition is warranted.

15 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems 3. On the basis of information received and also on perusal of the records of the assessee, it is noticed that the above mentioned assessee has availed accommodation entries from the said group concerns during the year under consideration. 4. Details of the Hawala entities from whom the assessee has obtained accommodation entries for the year under consideration are given as under: Sr.No. Name of the hawala entities Amount involved 1. Nice diamonds ₹.3306105/- 2. Millennium Stars ₹.5083000/- Total ₹.83,89,105/- 5. On the basis of the aforesaid information available with the undersigned, I have reason to believe that income chargeable to tax, as indicated above, to the tune of ₹.8389,105/- or any other income chargeable to tax which comes to my notice subsequently in the course of the proceedings for re-assessment, has escaped assessment within the meaning of section 147 of the IT Act 1961. The assessee has, therefore, failed to disclose true and complete particulars of income for the year under consideration. Accordingly, the case is proposed to be reopened u/s. 147 of the Income-tax Act for A.Yr. 2011-12. 6. As per the Proviso to Sec. 151(2) of the Income-tax Act 1961, permission of the Jt. Commissioner of Income-tax Range 19(3), Mumbai is hereby sought to reopen the case of the assessee for A.Y. 2011-12 by issue of notice u/s. 148 of the Income-tax Act, 1961. Put up for kind perusal and sanction please. (Dharmendra Sharma) I.T.O. 19(3)(2), Mumbai Dated: 07/03/2016

16 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems the concerns namely M/s. Nice Diamonds and M/s Millennium Stars which are group concerns of Shri Bhanwarlal Jain. Assessing Officer has definitely applied his mind and satisfied that assessee has availed accommodation entries, based on the information as well as the records of the assessee and has reason to believe income has escaped assessment. In the circumstances the contention of the assessee that reasons were recorded on a borrowed satisfaction is misplaced. Assessing Officer has information in his hand and verified such information and came to the conclusion that income had escaped assessment and therefore recorded his own satisfaction and the reasons for reopening assessment was rightly done by the Assessing Officer. Therefore, the contention of the assessee that reasons were recorded on a borrowed satisfaction is rejected. The case laws relied on by the assessee also distinguishable on facts. None of the decisions have application to the facts of the assessee’s case. Thus, we reject Ground No.1 and dismiss the same.

17 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems Vijay Proteins Ltd. [58 Taxmann.com 44] and the CBDT Instruction No. 2/08 dated 22.02.2008, held that it would be appropriate if the reasonable profit margin arising to the assessee on account of alleged hawala purchases is adopted at @8%. However, he directed the Assessing Officer to reduce the profit margin already shown by the assessee in its books in respect of the said hawala purchases from out of the profit margin of 8% observing as under: - “6.5 There cannot be any dispute about a well settled legal proposition that tax can be levied only on real income. It is an elementary rule of accountancy as well as of taxation laws that profit from business cannot be ascertained without deducting cost of purchase from sales, otherwise it would amount to levy of income tax on gross receipts or sales. Such a recourse is not permissible unless it is specifically authorized to do so under any particular provisions contained in the Act. The Hon'ble Jurisdictions! High Court in the case of Hariram Bhambhani (ITA No. 313 of 2013) has held that only the profit attributable to the unaccounted sales can be brought to tax. It is further observed that the Hon'ble Gujarat High Court in the case of Simit P Sheth (38 Taxrnann.com 385) has held that not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee. Similar view has been taken by the Gujarat High Court in the cases of Vijay M Mistry Construction P Ltd (355 ITR 498), Bholanath Poly Fab (P) Ltd (355 ITR 290) and Vijay Proteins Ltd. (58 Taxmann.com 44). it has further been held by the Hon'ble High Courts that the estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick can be adopted. 6.6 Now the issue to be adjudicated is what is the reasonable profit percentage to be adopted for computing the profits arising from the alleged hawala purchases. It is pertinent to mention that the CBDT through instruction No. 2/08 dated 22/02/2008 has revised the rate of profit margin from 8% to 6% in respect of gems and jewellery business. Thus, it can be seen that the Income Tax Department considers 6% of profit margin to be reasonable for the business of

18 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems Gems & Jewellery. However, this margin of 6% is reasonable for an assessee which is not indulging in hawala purchases. It has been noted by the Hon'ble Gujarat High Court in the case of Simit P Sheth (supra) that the margins in respect of hawala purchases are much higher due to savings on account of evasion of various government levies. Therefore, it will be appropriate if the reasonable profit margin arising to the assessee on account of the alleged hawala purchases is adopted of 8%. However, the AO while making the addition on account of the additional profit margins arising on the hawala purchases should reduce the profit margins already shown by the assessee in its books in respect of the said hawala purchases from the said profit margin computed by adopting profit margin of 8% for the alleged hawala purchases. Accordingly, Ground Nos. 3 to 5 of the appeal are partly allowed.”

Order pronounced in the open court on the 25th September, 2019

Sd/- Sd/- (RAJESH KUMAR) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai / Dated 25/09/2019 Giridhar, Sr.PS

19 ITA NOs. 3431 & 3432/MUM/2018 (A.Ys: 2008-09 & 2011-12) M/s. Sukun Gems 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