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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri Ravish Sood & Shri N.K. Pradhan
O R D E R
PER RAVISH SOOD, JM
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-51, Mumbai, dated 14.02.2018, which in turn arises from the assessment order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 26.12.2016 for A.Y. 2014-15. The assessee has assailed the impugned order before us on the following grounds of appeal: “1. The Learned CIT (Appeals) erred in considering purchases of Rs.38,94,670/- as bogus purchases.
2. The Learned CIT(Appeals) erred in adopting the gross profit margin of 8% on alleged Hawala purchases.
3. The Learned CIT(Appeals) failed to appreciate that the Appellant is a Trader in cut and polish diamonds only and not in the business of manufacturer and trader in gem & jewellary business P a g e | M/s Romil Diam Vs. ACIT-19(3)
4. The appellant reserves the right to add, alter or amend any ground or grounds of appeal on or before the hearing.”
2. Briefly stated, the assessee firm which is engaged in the business of trading of cut and polished diamonds had filed its return of income for A.Y. 2014-15 on 23.11.2014, declaring its total income at Rs.71,39,320/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2).
The A.O in the course of the assessment proceedings was in receipt of information from the DGIT (Inv.), Mumbai, that the assessee as a beneficiary had obtained accommodation entries of purchases from the following party:
Sr. No. Name of the hawala party Bill amount 1. Nice Diamonds 1,38,94,670/- Total 1,38,94,670/- On the basis of the aforesaid information the A.O called upon the assessee to explain as to why the purchases claimed to have been made from the aforementioned party may not be added to its total income. In reply, it was submitted by the assessee that it had made genuine purchase of diamonds from the aforementioned supplier party. However, the A.O was not convinced and was of the view that the assessee had not made any genuine purchases from the aforementioned concern and had only obtained accommodation bills from it. At the same time, it was observed by the A.O that the purchase of diamonds claimed by the assessee to have been made from the aforementioned party were duly reflected in its stock register and the corresponding sales against the same had also been accounted for in the books of accounts of the assessee. Accordingly, it was observed by him that the assessee had purchased the diamonds from the open/grey market and thereafter had booked the said purchase transaction by obtaining inflated bogus bills from the P a g e | M/s Romil Diam Vs. ACIT-19(3) aforementioned concern. In sum and substance, the A.O held a conviction that though the genuineness of the purchase party was under serious doubts but the genuineness of the purchases on a whole could not be doubted. On the basis of his aforesaid conviction the A.O restricted the addition in the case of the assessee to the extent of the profit element involved in making of such bogus purchase of diamonds from the open/grey market and made a consequential addition of Rs.6,94,734/- i.e 5% of the cost of Rs.1,38,94,670/-.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). As regards the contention advanced by the assessee that it had made genuine purchases from the aforementioned party, the same did not find favour with the CIT(A). Apart there from, the CIT(A) was of the considered view that now when the CBDT as per Instruction No. 2/08, dated 22.02.2008 had observed that in case of gems and jewellery business the profit margin varied from 6% of 8%, therefore, in the backdrop of the said fact the profit element in the hands of the assessee could safely be quantified at 8% of the aggregate value of the purchase transaction. In sum and substance, the CIT(A) not only upheld the view of the A.O that the assessee had not made any genuine purchases from the aforementioned supplier party but also enhanced the addition by revising the profit element rate to 8% as against 5% of the value of the purchases.
The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) at the very outset of the hearing of the appeal took us through the facts of the case. It was submitted by the ld. A.R that the CIT(A) had carried out the enhancement under Sec.251(2) without putting the assessee to any notice as regards the said purported enhancement which was sought to be made by him.
P a g e | M/s Romil Diam Vs. ACIT-19(3) Accordingly, it was submitted by the ld. A.R that the enhancement made by the CIT(A) at the back of the assessee was devoid of any force of law and was liable to be vacated on the said count itself. Apart there from, it was submitted by the ld. A.R that the quantification of the profit element as regards the unproved purchases was to be made only to the extent of bringing the G.P rate of such purchases at the same rate as that of the other genuine purchases. In support of his aforesaid contention the ld. A.R relied on the judgment of the Hon‟ble High Court of Bombay in the case of Pr. Commissioner of Income Tax- 17 Vs. M/s Mohhomad Haji & Adam Co. Ltd. (ITA No. 1004/Mum/2016, dated 11.02.2019) (copy placed on record). Accordingly, it was submitted by the ld. A.R that the addition in the case of the present assessee may also be restricted to the extent of the G.P rate of the genuine purchases that were booked by the assessee in its „books of account‟ for the year under consideration. In furtherance of his contention, it was submitted by the ld. A.R that as the G.P rate of the assessee worked out to 3% while for the GP rate in respect of the goods purchased from the aforementioned party viz. M/s Nice Diamonds was 4.48%, therefore, as a matter of fact no addition could be sustained in its hands.
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the order passed by the CIT(A). It was submitted by the ld. D.R that as the assessee had failed to substantiate the authenticity of the purchase transactions under consideration, therefore, the CIT(A) had in all fairness restricted the addition to 8%. It was submitted by the ld. A.R that in case of a bogus purchase transaction the entire addition of the impugned purchase transaction was liable to be added in the hands of the assessee. In support of his aforesaid contention the ld. D.R relied on the judgment of the Hon‟ble High Court of P a g e | M/s Romil Diam Vs. ACIT-19(3) Bombay in the case of Shoreline Hotel (P) Ltd. Vs. CIT, Central - 1(2018) 98 taxman.com 234 (Bom).
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, as is discernible from the orders of the lower authorities the assessee had failed to discharge the „onus‟ as regards proving the authenticity of the purchases which were claimed by it to have been made from the aforementioned party viz. M/s Nice Diamond, which is stated to be a group entity managed and controlled by Shri Bhanwarlal Jain, an infamous accommodation entry provider. Accordingly, we are in agreement with the observations of the lower authorities that the assessee had not made any genuine purchases from the aforementioned party, but after procuring the goods from the open/grey market had thereafter obtained the inflated accommodation bills from the said concern. At the same time, as the purchases and corresponding sales of the diamonds claimed by the assessee to have been purchased from the aforementioned party are found recorded in its „books of account‟, therefore, we are persuaded to subscribe to the view taken by the lower authorities that the addition in the hands of the assessee was liable to be restricted only to the extent of the profit element involved in the said bogus/unproved purchase transactions. As a matter of fact, the entire controversy hinges around the aspect as to what would be the justifiable quantification of the profit element involved in making of such bogus/unproved purchases by the assessee. Insofar, the enhancement of the profit element from 5% to 8% of the aggregate value of the purchase transactions by the CIT(A) is concerned, we are of the considered view that as the same had been carried out by him without putting the assessee to any valid notice as regards his intention of making of such enhancement, as mandated in P a g e | M/s Romil Diam Vs. ACIT-19(3) sub-section (2) of Sec. 251, therefore, the same on the said count itself cannot be sustained and is liable to be vacated. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Delhi in the case Gedore Tools (India) Pvt. Ltd. vs. CIT (1998) 233 ITR 712 (Del). Apart there from, we are unable to persuade ourselves to subscribe to the contention advanced by the ld. D.R that the entire value of the bogus/unproved purchases were liable to be added in the hands of the assessee. We find that it is not the case of the revenue before us that the CIT(A) had erred in restricting the addition only to the extent of the profit element involved in making of the bogus purchases under consideration. In fact, the A.O himself had restricted the addition to the extent of the profit element involved in making of the unproved/bogus purchases by the assessee. As regards the reliance placed by the ld. D.R on the judgment of the Hon’ble High Court of Bombay in the case of Shoreline Hotel (P) Ltd. Vs. CIT, Central-1 (2018) 98 taxman.com 234 (Bom), we find that as the facts involved in the said case are distinguishable, therefore, the same would not assist the case of the revenue. In the aforesaid case it was observed by the Hon‟ble High Court that the assessee was unable to produce any material which could substantiate that it had made any purchase of goods as claimed by it. In fact, the CIT(A) while revising the order under Sec. 263 of the Act, had observed, that as the assessee was engaged in running of a hotel, therefore, there was no corresponding sales against the purchases made by it. We find that the facts in the case before us are admittedly on a different footing. The assessee before us had made purchases of diamonds which as observed by the lower authorities had thereafter been sold. Accordingly, as observed by us hereinabove, the reliance placed by the ld. D.R on the aforesaid judicial pronouncement which is distinguishable on facts would thus not assist its case. As a matter of P a g e | M/s Romil Diam Vs. ACIT-19(3) fact, we find that as the sales of the goods had duly been accounted by the assessee in its „books of account‟, therefore, the addition in its case as observed by the authorities below was liable to be restricted only to the extent of the profit which it would have generated by making such purchases from the unorganised sector operating in the open/grey market. Insofar the quantification of such profit element is concerned, we find that the Hon’ble High Court of Bombay in its recent judgement in the case of Pr. Commissioner of Income Tax-17 Vs. M/s Mohhomad Haji Adam & Company (ITA No. 1004 of 2016, dated 11.02.2019) while upholding the order of the Tribunal, had observed, that the addition in the hands of the assessee as regards the bogus/unproved purchases was to be made to the extent of bringing the G.P rate of such purchases at the same rate as that of other genuine purchases. The Hon‟ble High Court while concluding as hereinabove had observed as under:
“8. In the present case, as noted above, the assessee was a t r a d e r o f f a b r i c s . T h e A O f o u n d t h r e e e n t i t i e s w h o w e r e indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sale declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trade. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries Ltd. (supra) cannot be applied without reference to the facts. In fact in paragraph 8 of the same Judgment the Court held and observed as under- “So far as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6 % gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly P a g e | M/s Romil Diam Vs. ACIT-19(3) as a result of which profit comes to 5.66% Therefore, considering 5.66 % of Rs.3,70,78,125/- which comes to Rs.20,98,62 1.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue.” In these circumstances, no question of law, therefore, arises. All 9. Income Tax Appeals are dismissed, accordingly. No order at costs.” As such, the Hon‟ble jurisdictional High Court had observed that the addition in respect of purchases which were found to be bogus in the case of the assessee before them, who was a trader, was to be worked out by bringing the G.P. rate of such bogus purchases at the same rate of other genuine purchases. We thus respectfully following the aforesaid judgment of the Hon‟ble High Court direct the A.O to restrict the addition insofar the bogus/unproved purchases aggregating to Rs.1,38,94,670/- in the case before us is concerned by bringing the G.P. rate on the amount of such bogus purchases at the same rate as that of the other genuine purchases. Needless to say, the assessee in the course of the „set aside‟ proceedings shall furnish the requisite details before the A.O who shall after making necessary verifications restrict the additions in terms of our aforesaid observations. The order passed by the CIT(A) is „set aside‟ and the matter is restored to the file of the A.O to give effect to our aforesaid directions.
The appeal of the assessee is allowed for statistical purposes.