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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI M. BALAGANESH, HONBLE
O R D E R PER C.N. PRASAD (JM) 1. These appeals are filed by the assessee against common order of the Ld. Commissioner of Income–tax (Appeals)–42, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 31.01.2018 for the A.Ys. 2009-10, 2010-11, 2011-12 & 2014-15 in sustaining the order of the Assessing Officer who estimated the profit element from alleged non-genuine purchases at 8%.
2 1440, 1441 & 1442/MUM/2018 (A.Ys: 2009-10, 2010-11, 2011-12 & 2014-15) M/s. Dev Diamonds 2. Briefly stated the facts are that, there was a search and seizure action carried by the DDIT (Inv.) Mumbai in the case of Shri Bhanwarlal Jain group and others on 03.10.2013. During the course of the search it was revealed that the group concerns of the Shri Bhanwarlal Jain group and others were merely providing accommodation entries through various benami concerns operated and managed by them. Based on the search action in the case of Shri Bhanwarlal Jain, the assessments of the assessee for all these assessment years were reopened as the assessee made purchases from the concerns operated by Shri Bhanwarlal Jain group and others. In the reasons recorded it was mentioned that assessee was one of the beneficiaries of various concerns from which assessee has made purchases. In the course of the reassessment proceedings the assessee was required to establish the genuineness of the purchases, assessee has provided details and furnished copies of invoices, bank statements, stock registers, ledger confirmations, copies of returns filed by the dealers and submitted that the purchases made are genuine. Not convinced with the information furnished and the submissions by the assessee, the Assessing Officer based on the search and the statements of the Shri Bhanwarlal Jain group and the modus operandi adopted by the concerns which were operated by Shri Bhanwarlal Jain group the Assessing Officer concluded that the assessee
The Assessing Officer also considering the report of Task Group constituted by the Department of Commerce wherein it was accepted that the margin in Diamond Industry ranges between 1 to 4.5%. However, he estimated the profit element of the purchases on the purchases made in the gray market would be at 8%, accordingly the Assessing Officer added the said purchases to the income of the assessee. On appeal the Ld.CIT(A) sustained the action of the Assessing Officer in estimating the profit element in non-genuine purchases @8%.
Before us, Ld. Counsel for the assessee submits that before the Assessing Officer assessee has furnished complete details regarding purchases made and the same were furnished even before the Ld.CIT(A). Ld. Counsel for the assessee submits that those details are appearing from Page Nos. 53 to 109 of the Paper Book filed, containing bank statements, statement of purchases, stock reconciliation, purchase invoices, sales invoices and corresponding sales, etc., Ld. Counsel for the assessee submits that all the details have been furnished demonstrating purchase, sale of goods, and payment by banking systems. Ld. Counsel for the assessee further submits that Assessing
4 1440, 1441 & 1442/MUM/2018 (A.Ys: 2009-10, 2010-11, 2011-12 & 2014-15) M/s. Dev Diamonds Officer has not proved that the amount which has been paid to so called hawala dealers has been returned back in cash. Therefore, the purchases cannot be treated as bogus purchases.
Ld. Counsel for the assessee further submits that assessee maintains stock register which clearly shows the sales and purchases co-relation, and the stock summary has been already submitted to Assessing Officer vide submission dated 11.11.2017. Ld. Counsel for the assessee further submits that Assessee is in the business of export of trading of polished diamonds and during the A.Y. 2009-10 the assessee has exported 9017.11 cts. to 5 parties and all the sales invoices were approved, authorized and checked by custom department as regard quantity and value is concerned. Learned Counsel for the assessee submitted that the Assessing Officer during the course of assessment has never challenged the exports made by the assessee. Further Learned Counsel for the assessee submitted that assessee cannot make the sales unless he purchased the same quantity from market. He submits that facts are similar in other Assessment Years also.
Ld. Counsel for the assessee placed reliance on the following decisions in support his submissions: - (i). Shah diamonds v. ITO in ITA.No. 4013/Mum/2017 dated 07.12.2017 (ii). Dhawal Exim Pvt. Ltd., v. ITO in ITA.No. 6711/Mum/2016 dated 30.11.2018
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, the report of the task group formed under Department of Commerce for diamond sector wherein the margin from diamond industry was suggest to be only 1 to 4.5% 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 addition of the 8% adopted by the Assessing Officer observing as under: - “6.3.25 The next contention of the appellant is that addition made by the AO @ 8% of Purchase value is excessive as the global margin of diamond industries is in the range of 1 to 4% and same was accepted by department of commerce. The appellant has placed reliance on judicial precedents and the recommendations of the task group formed under Department of Commerce for diamonds sector in this regard. I have considered the submission of the appellant. 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 appellant. This being the position, it needs to be determined what should be the fair profit rate out of the bogus 6 1440, 1441 & 1442/MUM/2018 (A.Ys: 2009-10, 2010-11, 2011-12 & 2014-15) M/s. Dev Diamonds 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. For the aforesaid reasons, the reliance of the appellant on the recommendations of the task group formed under Department of Commerce for diamonds sector, is also misplaced as the recommendations are for computation of income under BAP (Benign Assessment Procedure) i.e. when the assessee opts for BAP, which is not the case here. Keeping in view the fact that in the instant case, the AO has received information regarding escapement of income on account of bogus purchases, such recommendation shall not be applicable in the present case, as is apparent from the guidelines issued by board as discussed hereinafter. 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.
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. 6.3.26 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 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 16.08.2017 in the case of ITO 5 (3) (1), Mumbai vs M/s Ratnalaya Diamonds Pvt. Ltd. vs. in ITA No. 3760/Mum/2016 has upheld an addition @ 6% of the purchases shown from the impugned bogus parties. Further, the Hon'ble
7 1440, 1441 & 1442/MUM/2018 (A.Ys: 2009-10, 2010-11, 2011-12 & 2014-15) M/s. Dev Diamonds ITAT, Mumbai in the 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.”
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 as observed by the Ld.CIT(A) and Assessing Officer, 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. It is the submission of the assessee that the assessee has already shown gross profit @9.33%, 7.33%, 7.10% and 6.95% for the A.Ys. 2009-10, to 2011- 12 & 2014-15 respectively as against the industry margin rate of 1 to 4.5%.
Coordinate Bench of the Mumbai Tribunal held as under: - “5. I heard the parties and perused the record. There is no dispute with regard to the fact that the assessee has correlated the purchase quantity with a particular sales/export, meaning thereby, the goods have reached the hands of the assessee. When the goods have reached, it may not be proper to disallow entire amount of purchases, since the assessee could not have sold the goods without purchasing the same. The Ld CIT(A) has taken the support of the decision rendered by Hon’ble Gujarat High Court in the case of Simit P Sheth (38 taxmann.com 385) and also the decision rendered in the case of Sanjay Olicake Industries (316 ITR 274) to come to the conclusion that the profit element embedded in the purchases could be assessed. Since the purchases have been made from a group, which had taken a different stand, the Ld CIT(A) took the view that there is possibility of inflation of purchase price, from which the assessee could have made profit. The said profit was estimated at 3% on the basis of Benign Assessment procedure guidelines and the Transfer Pricing adjustments generally made.
6. From the foregoing discussions, I am of the view that that the decision so reached by Ld CIT(A) cannot be found fault with, in the facts and circumstances of the case. It is also pertinent to note that the assessing officer has proceeded to assess the amount of Rs.34,75,143/- on the impression that the assessee has received the above said amount from M/s Daksh Diamonds. Before Ld CIT(A), the assessee has shown that it has purchased diamonds from M/s Daksh Diamonds and has also exported the same. This fact shows that the AO, after reopening of assessment, has misguided himself during assessment proceedings. The ld CIT(A) has correctly appreciated the facts and has rendered his decision. Accordingly I uphold the order passed by Ld CIT(A) on this issue.”
In the case of Dhawal Exim Pvt. Ltd., v. ITO (supra) the Coordinate Bench of the Mumbai Tribunal held as under: -
“It is a fact on record that the assessee has failed to prove the purchases from the declared sources, which in other words demonstrates that the assessee has purchased the goods/diamonds from unknown sources/grey market, thereby, avoiding payments of VAT and other taxes, as may be applicable to such transactions. Thus, to that extent the assessee has suppressed his actual profits. In these circumstances, the gross profit rate declared by the assessee under normal circumstances cannot be applied to unproved purchases. After considering the overall facts and circumstances of the case, we are of the considered opinion that learned CIT(A) is more than reasonable in estimating the profit on the bogus purchases @3%. Therefore, we are not inclined to interfere with the aforesaid decision of the learned CIT(A). Accordingly, the grounds raised are dismissed.”
It is the finding of the Ld.CIT(A) 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
9 1440, 1441 & 1442/MUM/2018 (A.Ys: 2009-10, 2010-11, 2011-12 & 2014-15) M/s. Dev Diamonds 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 all these Assessment years. 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 are partly allowed.
Order pronounced in the open court on the 08th August, 2019