ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1,MANGALORE, MANGALORE vs. RAJ DIAMONDS, MUMBAI

4.1 As per the suspicious transaction report (STR) available with the Income Tax Department, and individual named Mr.Bhanwar Lal Gurjar transacted with M/s. Tanman Jewels Pvt Ltd. among several other entities, and engaged in covering unaccounted money through layering of funds. On the basis of above STR report the DDIT(Inv.), Surat formulated a report categorically concluding all business entities with whom M/s. Tanman Jewels Pvt Ltd. has financial transactions, to be accommodation entry providers/ beneficiaries. The assessee’s name also reflected in the report as given below:- PAN Name Aggregated Transaction Value (Rs.) AAJFM7227J M/s. Raj Diamonds 1,29,19,964 The assessee M/s. Raj Diamonds, reportedly had bogus purchases to the tune of Rs.1,29,19,964/- from the entity M/s. Tanman Jewels Pvt Ltd. Moreover, there was another information available with Income Tax Department that the assessee M/s. Raj Diamonds had a transaction to the tune of Rs.1,20,03,330/- with M/s. Vallabh Diamonds Pvt Ltd. As per this information, M/s. Vallabh Diamonds Pvt Ltd too is a bogus entity that engages in accommodation entries.

CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 5 of 18 4.2 The case of the assessee was reopened to verify the financial transactions of the assessee, M/s. Raj Diamonds with M/s. Tanman Jewels Pvt Ltd and M/s. Vallabh Diamonds Pvt Ltd and accordingly various notices were issued and duly served on the assessee as tabulated below:- Sl.No Notice(s)/ Order under section Date of Notice 1 148A(b) 10/03/2022 2 148A(d) 23/03/2022 3 148 23/03/2022 4 129 01/07/2022 5 143(2)* No valid Return filed by the assessee 6 142(1) 17/11/2022 7 Show Cause Notice 18/03/2023 The claim of the AO is that the assessee did not file any return of income in response to notice u/s. 148 of the Act, however, the assessee claimed that they had in fact filed a return of income on 22/04/2022 vide acknowledgment no. 591079640220422 but unable to e-verify the same due to the technical problems. The assessee also filed a condonation request to CPC on 05/12/2022 and 07/02/2023. However, as there was no change in the income with that of original return filed u/s 139(1) of the Act as well as return filed in response to notice u/s.153C of the Act and hence the assessee requested to consider the same as return of income filed in response to notice u/s. 148 of the Act. During the course of Assessment proceedings, the assessee filed all the details with regard to the transactions with M/s. Tanman Jewels Pvt Ltd and M/s. Vallabh Diamonds Pvt Ltd such as invoices, GST returns, details of bank statements which marks payments made by the assessee on account of purchase of Gold/ Diamond, ledger account of M/s. Tanman Jewels Pvt Ltd and M/s. Vallabh Diamonds Pvt CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 6 of 18 Ltd, statements of accounts, confirmation from parties, stock register of loose diamonds where the purchases are entered. However, the assessing officer concluded the assessment by passing the assessment order u/s. 147 of the Act dated 31/03/2023 by making addition of Rs.2,49,23,294/- being purchases from M/s. M/s. Tanman Jewels Pvt Ltd amounting to Rs.1,29,19,954/- and M/s. Vallabh Diamonds Pvt Ltd amounting to Rs.1,20,03,330/- by holding that the two entities are conclusively proved as bogus that performs accommodation entry operations to bring unaccounted money into the books of its beneficiaries.

6.2 The ld. CIT(A) by relying upon the various judicial precedents held that in the case of bogus purchases where sales are accepted, the addition can be made only to the extent of difference between the GP declared by the assessee on normal purchases vis-à-vis bogus purchases. During the course of appellate proceedings, the assessee also submitted its three years GP ratio and requested that if GP addition is to be carried out, the same may be restricted to three years weighted average GP earned by the assessee as below:-

CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 8 of 18 Particulars Assessment Assessment Assessment Weighted Year Year Year Average 2016-17 2017-18 2018-19 Turnover 16,75,26,457 25,75,11,142 71,26,74,674 1,13,77,12,273 Gross Profit 1,87,69,723 2,35,77,059 4,15,55,032 8,39,01,814 GP Ratio (IN 11.20% 9.16% 5.83% 7.37% %)

Thus, the average GP of 3 years works out to 7.37% and the assessee requested to restrict the addition to such gross profit % only.

6.3 Considering the various judicial precedents pronounced by Hon’ble High Courts and ITAT, the ld. CIT(A) restricted the addition to the tune of weighted average gross profit for past three years i.e. 7.37% of the amount disallowed by the AO instead of disallowing the entire alleged bogus purchases and accordingly directed the AO to restrict addition to Rs.18,37,995/- (Rs.2,49,23,294 x 7.37%) and accordingly, the ld CIT(A) partly allowed the appeal of the assessee.

Sl.No Particulars 1 Copy of the ITR acknowledgment along with computation of total income, financials and Audit report filed for the AY 2018-19 2 Copy of the following details filed before A.O. in support of purchases from M/s. Vallab Diamonds Pvt Ltd. 2.1 Copy of the ledger account of M/s. Diamonds Pvt Ltd from 01/04/2017 to 31/03/2021 CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 9 of 18 2.2 Copies of the confirmation of accounts by M/s. Vallab Diamonds Pvt Ltd. 2.3 Copy of the 3 invoices issued 2.4 Copy of the ITR Ack. Filed for AY 2018-19 and 2019-20 in the case of M/s. Vallab Diamonds Pvt Ltd 2.5 Copy of the Bank statements of Vallab Diamonds Pvt Ltd., the following Bank: (1) Kotak Mahindra Bank for 01/08/2017 to 31/07/2017 (2) IDBI Bank for 01/12/2017 to 06/12/2017 2.6 Copy of the Bank Statement of the appellant for the period 01/06/2017 to 30/11/2017, 01/12/2017 to 31/12/2017, 01/04/2018 to 30/06/2018, 01/10/2018 to 31/12/2018, 01/01/2019 to 31/03/2019 in Bank of Baroda 2.7 Copy of the GSTR2A return wherein the purchase details are duly uploaded 2.8 Copy of the Company Master Data of M/s. Vallabh Diamonds Pvt Ltd., as per MCA and GST website 3 Copy of the following details filed before A.O. in support of purchase from M/s. Tanman Jewels Pvt Ltd. 3.1 Ledger account of M/s. Tanman Jewels Pvt Ltd for the period 01/04/2017 to 31/03/2018 3.2 Copy of the 3 invoices issued 3.3 Copies of the Confirmation of accounts by M/s. M/s. Tanman Jewels Pvt Ltd 3.4 Copy of the ITR filed Ack. Of M/s. M/s. Tanman Jewels Pvt Ltd for AY 2018-19 3.5 Copy of the Bank Statement of M/s. M/s. Tanman Jewels Pvt Ltd for the period 01/04/2017 to 31/03/2018 CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 10 of 18 3.6 Copy of appellant’s Bank account statement 3.7 Copy of GSTR2A return wherein the purchase details are duly uploaded by M/s. Tanman Jewels Pvt Ltd 3.8 Copy of Company Master Data of M/s. Tanman Jewels Pvt Ltd., as per MCA and GST Website 4 Copy of the Written submissions filed before CIT(A)- 2,Panaji along with the following relevant: 4.1 Copy of the statements showing the percentage GP/NP for the period 2013-14 to 2018-19 4.2 Copy of the Stock register.

CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 13 of 18 10.1 Further, in the present case the Revenue is challenging the restriction of disallowances by the ld. CIT(A) to Rs. 18,37,995/- being weighted average of gross profit for the past three A.Ys, whereas the assessee by way of cross objection is also challenging the addition of Rs. 18,37,995/- sustained by the ld. CIT(A) on the ground that the entire purchase made were genuine & therefore the entire addition ought to be deleted.

10.2 On perusal of the reassessment order passed the AO, we observed that the AO had initially made an allegation that on verification of bank’s response in pursuance to notice u/s 133(6) of the Act, the AO found that the assessee claimed to have paid M/s Tanman Jewels Pvt Ltd through RTGS which was not correct as the same did not reflect in the said HDFC statement of M/s Tanman Jewels Pvt Ltd and accordingly the AO issued SCN dated 18/03/2023 stating transactions with above two entities are not reflected in their bank account statement. The assessee firm furnished its reply dated 23/03/2023 by stating that only last 3 entries were transferred to HDFC A/c & other payment/RTGS were transferred to IDBI Bank of M/s Tanman Jewels Pvt Ltd. The assessee also filed the banks statement. Thereafter, considering the reply of the assessee & going through the banks statement furnished by the assessee, the AO admitted that credits for payment made by the assessee are reflected.

10.3 The AO, thereafter changed his stand & alleged that after the receipt of money by M/s Tanman Jewels Pvt Ltd from the assessee firm, these amounts were transferred by M/s Tanman Jewels Pvt Ltd though the entries in bank statement which were foreign remittances. Thus, the allegation of the AO is that the payments made by the assessee were utilized by the M/s Tanman CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 14 of 18 Jewels Pvt Ltd for making the foreign remittances towards the alleged overvalued imports. We could not understand how these foreign remittances made by M/s Tanman Jewels Pvt Ltd are related to the purchases made by the assessee firm for which the assessee had made payments to M/s Tanman Jewels Pvt Ltd as observed by the AO himself. The AO had himself admitted the fact that there is movement of goods & in turn the assessee had made payments through bank. The assessee firm had no control over its creditors how they are utilizing the money after its receipts. Further, the AO had made another allegation that during the course of assessment proceedings, a notice u/s 133(6) of the Act was issued to assessee which was returned by the postal authorities with comments “Left Place”. The DDIT(Inv)-1, Surat on the request of AO had also sent an inspector for physical verification of the registered office of M/s Tanman Jewels Pvt Ltd, however it was learnt from the neighbors that the said premises is shut for more than 3 years. To add credence, a 131(1)(d) commission was issued to DDIT(inv), Unit-1, Surat. Based on this, the address of M/s Tanman Jewels Pvt Ltd was verified. The inspector thereafter submitted his report that office had been closed with no business activity being undertaken in this premises for at least the last 5-6 years. The ld CIT(A) however observed that since the AO himself had contended that both the parties i.e. M/s Tanman Jewels Pvt Ltd and M/s Vallabh Diamonds Pvt Ltd. were importing at higher price, which indicates that at least these parties do exist and carry out business Activity. We are of the considered opinion that before both the Authorities below, the assessee had submitted the copy of the master data of both the companies as per the Ministry of Corporate Affairs as well as GST website. Further, the assessee firm also filed confirmation letter received from both the creditors. During the course of the assessment proceedings also a reply from M/s Tanman Jewels Pvt Ltd was received by the AO through email CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 15 of 18 confirming the transaction with M/s Raj Diamonds (assessee) by furnishing evidences in the form of bills, ledger extracts and bank statements. Therefore, the AO in our opinion failed to establish with lucid & cogent evidences that the purchases made by the assessee firm was bogus. We are also of the opinion that suspicion however strong cannot take the place of truth. The AO’s suspicion was so driven by the so called report of DDIT, Surat that even after admitting the fact that the evidences in the form of bills, ledger extracts and bank statements evidencing the payments, Goods movement in respect of bills produced were furnished by the assessee, but without finding any defects in these evidences, the AO held that it is only a camouflage. The AO had neither given any findings on the details of evidences produced before him nor find any defects in the audited books of accounts.

10.4 Now on perusing the order of the ld CIT(A), we observe that before the ld CIT(A) also, the assessee furnished the following evidences in order to establish the legitimate purchase as below- • Ledger extracts of both suppliers • Copy of invoices • Confirmation from both the parties • Purchase Register • Bank statement of appellant reflecting payment made • Sales bill • GST returns • Stock statements The ld. CIT(A) also neither pointed out any defects in the evidences produced nor given any findings on the documentary evidences, had merely stated that the AO had relied on information received from the investigation department and the said information cannot be negated fully and the possibility of purchasing the goods from grey market or in cash at lower rates and with the help of accommodation entry providers recording the same at inflated price CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 16 of 18 in the books of a/c cannot be ruled out. Thus, as can be seen above the ld CIT(A) also solely based on guess & surmises held that there may be possibility of the assessee availing accommodation entry. The ground No. 3 taken by the Revenue that the ld. CIT(A) erred in estimating the income based on weighted average GP despite accepting that there is possibility of the assessee availing accommodation entries itself demonstrates that the order passed by the ld. CIT(A) is on pure guess, surmises & conjectures. The main contention of the ld CIT(A) is that if the entire purchases are disallowed, the corresponding sales also need to be ignored but the AO has not done so. Therefore, in the opinion of ld. CIT(A), this leaves with one sided adjustment in case of the assessee which is not justified. We are of the considered opinion that this is not a case of inflating the purchase value or quantity in order to reduce the profit of the assessee firm so as to see the corresponding sales. In fact, in the present case, on the basis of suspicious transaction report (STR) ,the DDIT(Inv.), Surat formulated a report categorically concluding all business entities with whom M/s. Tanman Jewels Pvt Ltd. has financial transactions alleged to be accommodation entry providers/ beneficiaries. Thus, the allegation is that the assessee firm without making actual purchases had obtained an accommodation entry in order to reduce its profit. Therefore, the adoption of GP rate by the ld. CIT(A) is not at all justified. In our opinion, the AO had no option but to add the entire bogus purchases to the income of the assessee if the AO with cogent material/evidences able to establish that it is not an actual purchases but merely an accommodation entry. However, if the AO failed to establish with cogent material/evidences of the same, the entire addition on this account shall be sustained.

10.5 We are of the considered opinion that the onus is first on the assessee to establish the genuineness of the purchases made CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 17 of 18 by them. Once the assessee firm established the same with cogent evidences & explanation that the purchases are genuine, then the Revenue cannot act unreasonably & reject the evidences & explanation to hold that it was income merely on the basis of suspicion report. We are of the considered opinion that the assessee firm before both the Authorities below had submitted the Copy of the invoices, Ledger Account, Purchase register, Confirmation of Accounts, Bank statement evidencing payments, Copy of GSTR-2A, Copy of Master data as per the MCA, Copy of Stock statement etc & both the Authorities below did not find any defects in these evidences. Further, the accounts of the assessee are audited by a chartered accountant. The AO himself had already accepted the returned income by passing the assessment order u/s 143(3) r.w.s. 153C of the Act on 27/07/2021 after scrutinizing the details as called for u/s 143(2) as well as 142(1) of the Act. In our opinion the Revenue could not establish any inherent weakness in the explanations/evidences or rebut it by putting to the assessee some evidences which it has in its possession. We are of the considered opinion that the entire exercise of reopening of already concluded assessment proceedings are purely based on surmises & conjectures. The ld. CIT(A) also based on possibility of the assessee availing accommodation entries estimated the income based on weighted average GP ratio which in our opinion will not be sustain.

10.6 Now coming to the reliance placed by the Revenue in the case of PCIT Vs. Kanak Impex (India) Ltd (supra), we are of the considered opinion that facts of the present case are noticeably distinguishable from the fact of that case as in the present case the assessee firm all along appeared before both the Authorities below & furnished the evidences & explanations with regard to genuineness of the purchases made whereas in the case relied upon by the revenue, the assessee did not appear before the Assessing CO 20/Bang/2025 M/s. Raj Diamonds, Mumbai Page 18 of 18 Officer during the course of the reassessment proceedings and failed to prove genuineness of the purchases, the Assessing Officer made the additions on account of bogus purchases. Further, in our opinion the decision of the Hon’ble Gujarat High court in the case of N K Industries Ltd Vs. Deputy Commissioner of Income Tax, (2016) 72 taxmann.com 289 as relied upon by the Revenue is also clearly distinguishable on the fact of the present case as we have held that the allegation of accommodation entry/bogus purchase could not be established by the Revenue. In view of the above discussion, we are inclined to set aside the order of the ld. CIT(A) and direct the AO to delete the entire additions of Rs. 2,49,23,294/- as made under the head “Income of Business & Profession”.