ACIT,CIR--1, THANE vs. DEVILAL B.JAIN, THANE

Shri Devilal B. Jain, ACIT Cir -1, R. No. 22, B-Wiong, 6th Prop. Of M/s New Marble बिधम/ House, 19-C, Bihari floor, Ashar IT Park, Vs. Chambers, Ambedkar Wagle Industrial Estate, Road, Thane (W)-400 601 Thane (W)- 400 604 स्थायीलेखासं./जीआइआरसं./ PAN No. AAACD2920M (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant Shri D. G. Pansari, DR : by प्रत्यथीकीओरसे/Respondentby : Shri Nilesh Joshi, AR सुनवाईकीतारीख/ : 25.04.2019 Date of Hearing घोषणाकीतारीख / : 17.06.2019 Date of Pronouncement आदेश / O R D E R Sandeep Gosain, Judicial Member: The present Appeal has been filed by the revenue against the order of Commissioner of Income Tax (Appeals)-3, Nasik

Shri Devilal B. Jain (Camp Office Thane), dated 07.03.17 for AY 2010-11 on the grounds mentioned herein below:-

1.1 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in granting above relief to the assessee without appreciating the finding of the A.O. in the remand report on this issue.

1.2 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance made on account bogus creditors of Rs. 73,30,003/- to Rs. 5,93,451/- by sustaining the disallowance @ 10% of the total unproved purchases and.

1.3 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in granting above relief to the assessee without appreciating the finding of the A.O. in the remand report on this issue.

1.4 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in granting

Shri Devilal B. Jain the above relief to the assessee without appreciating the decision of Hon'ble Gujarat High court and approved by Hon'ble Supreme Court in the case of N. K. Proteins Ltd Vs DCIT, in Special Leave Appeal (CC No. 769 of 2017 ) wherein it was held that when the entire purchases have been found to be bogus then confirming disallowance on percentage basis goes against the principle of section 68 & 69C.

2. The order of the CIT(A) may be vacated and that of the Assessing Officer maybe restored.

2. As per the facts of the present case, the assessee is proprietor of M/s New Marble House and is engaged in the business of marbel. On the basis of information received from the investigation wing, AO noticed that assessee was a beneficiary of hawala entry operators. Thus after carrying out necessary verifications, assessment order u/s. 143(3) was passed by the AO thereby making additions and determining the income of the assessee at Rs. 3,48,00,800/-

Shri Devilal B. Jain 3. Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties partly allowed the appeal of the assessee.

Shri Devilal B. Jain Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above grounds raised by the revenue in para no. 5.4 to 5.6 & 6.3 to 6.7 of its order and the same is reproduced below:-

5.4. I have carefully considered the appellant's submissions, observations of the AO in the assessment order and the remand report. The appellant had shown purchases amounting to Rs. 2,64,07,574/- from various parties which appeared in the list of Sales-tax Department who had indulged in Hawala transactions i.e. providing only bills without there is being any actual purchase or sale transaction.

5.5. Before the case is discussed, it is important to know the background in which the case of the appellant was selected for scrutiny. i. As per Section 3 of the MVAT Act, 2002, every registered dealer, is liable to pay tax on a sale transaction with a purchasing dealer whose turnover of sales or purchases has exceeded rupees five lakh. Under the Scheme of the Act, the purchasing dealer is also entitled to claim by way of a set off under Section 48 the tax paid on his purchases as ITC (Input Tax

Shri Devilal B. Jain Credit). The selling dealer issues a tax invoice, which shows the amount of tax recovered from the purchasing dealer. The sale made by the selling dealer needs to be accounted in his turnover of sales while filing the tax return and pay the due taxes. The Sales Tax Authorities found that a large number of selling dealers had neither filed their returns nor paid the taxes collected by them from purchasing dealers. The Sales Tax Authorities denied the benefit of set-off of Input Tax Credit to purchasing dealers, who went into appeal before Hon'ble Bombay High Court against the said orders.

During the course of hearing in WRIT PETITION NO.33 OF 2012 in case of M/S.Mahalaxmi Cotton Ginning vs The State Of Maharashtra & Ors on 11 May, 2012 and other similar cases, before Bombay High Court, State Government filed affidavits submitting that investigation revealed the existence of large-scale Hawala transactions where there was no sale of goods and the selling dealer had merely issued tax invoices to the purchasing dealer in order to defraud the Revenue and to allow the benefit of a set off. The modus operandi discussed in the said judgement is reproduced in the following Paras.

Shri Devilal B. Jain 13. After the enforcement of the MVAT Act, 2002, with effect from 1 April 2005, the State Government introduced e-filing of returns. With the introduction of electronic returns, the operating system has been so designed so that it can detect mismatches between the claims of input credit where these do not match with a deposit of tax in the Government Treasury.

This would have been an insuperable task in the conventional manual processes but is made possible with the introduction of e- filing. Nearly 35000 notices have been issued to Hawala beneficiaries involving a quantum of nearly Rs. 1,000 Crores.

---------The State has explained that it does not at an administrative level reject claims for set off merely on the ground of a mismatch. Where investigations reveal Hawala transactions or acts of fraud, collusion or connivance, steps are taken to issue summons te the selling dealers and to proceed against them by recourse to due process of law. Also, in those cases, where no element of fraud, collusion or connivance on the part of the purchasing dealer is shown the authorities would take steps to pursue the selling dealer. If the steps

Shri Devilal B. Jain adopted against the selling dealer result in a recovery of the tax, a set off or refund, as the case may be, would be granted to the purchasing dealer.

Petitions, the State Government had filed affidavits in reply pointing out that investigation revealed the existence of Havala transactions where there was no sale of goods and the selling dealer had merely issued tax invoices to the purchasing dealer in order to defraud the Revenue and to allow the benefit of a set off. In the present case it has been stated on affidavit by the State that a number of dealers from whom the Petitioner purchased goods are untraceable.

(Only relevant paras reproduced) ii. In the said appeals, the purchasing dealers took a plea before the High Court that as he has paid the tax to the selling dealer, he should not be denied the benefit of a set off of taxes paid, which is arbitrary. However the State government in an affidavit before the court submitted that investigations revealed that there was a ,existence of large-scale Hawala racket,

Shri Devilal B. Jain wherein the selling dealers merely issued tax invoices to the purchasing dealer without any sale of goods. As per the information on the website of Sales Tax Department, www.mahavat.gov, the investigations revealed 2162 alleged non-genuine dealers who had issued false bills without delivery of goods as on April 2014. There were about 35,000 such Hawala beneficiaries who took the bills from such selling dealers without any purchase of goods. The court did not accept the plea of the purchasing dealer and held that if the set off is allowed to the purchasing dealer though the tax has not been paid actually, it would defeat the legitimate interests of the Revenue. iii. From the discussion above, it can be made out that the purchasing dealers allegedly purchased the goods from non-genuine dealers, who did not supply any goods but issued only bills to purchasing dealers. The Sales Tax Department made further enquiries and found that the selling dealers were not available at the given addresses. Further the selling dealers have not filed any returns showing the sales made to the purchasing dealers. The Sales Tax Department could trace and record of statements of such selling dealers, who categorically stated that there was no supply of goods, only the bills were issued. Further the cheques received from the Shri Devilal B. Jain purchasing dealers against such bills, were deposited in their bank accounts and the cash was withdrawn and paid back to the purchasing dealer after deduction of fixe* amount of commission, which was roughly at the rate of 1%. The refunded amount also included the Sale Tax collected from the purchasing dealer. In this way, there was a collusive transaction between the purchasing dealer and the selling dealer, who defrauded the revenue by claiming set off of taxes, which were actually not paid. As the selling dealer had refunded the VAT amount along with the amount received for alleged purchases, it was natural that the selling dealer did not file any returns and subsequently did not deposit tax into the government account. The Sales Tax Department recovered the Tax from such purchasing dealers.

5.6. On going through the facts of the case discussed above, It is seen that during assessment, the appellant had submitted the purchase and sales bills, quantitative tally of the stock. However, the assessee was not able to produce the confirmations from the said suppliers or produce them for proving the genuineness of the purchases. On the other hand, the AO had the affidavits of the suppliers and had also made enquiries under 133(6) and found these suppliers not available for verification. Under these

Shri Devilal B. Jain circumstances the AO added the purchases being non genuine.

During appellate proceedings, the assessee has produced affidavits from these suppliers in which they have stated that they had given affidavits to MVAT Authorities under pressure. They have also given confirmation of accounts showing that they have received the payments and have supplied the goods. The AO in the remand report is not satisfied with the explanation of the assessee because he wanted to examine these suppliers to ascertain the truth. However, neither the „assessee could produce them nor the AO could locate them. As per the inspector’s report these parties are still not available.

Sr. Name of the Party Remarks D. No. No. transport receipts, statement of Bank accounts. 3. Lalit Kumar Kishormal Filed Affidavit, Confirmation of 376-394 Mehta Prop Of account for F.Y. 2009-10 and ledger Shri. Adinath account for FY. 2008-09, and 12-13, Enterprises bills, transport receipts, statement of Bank accounts. 4. Haresh Ruparel Prop. Filed Affidavit, Confirmation of 395-411 Of Shree Jalaram account for F.Y. 2009-10, bills, Enterprises transport receipts and satement of Bank accounts.

It was submitted by the assessee that in view of submissions above, the addition for the reason that payment was not made to the sundry creditors during the year is uncalled for.

Shri Devilal B. Jain 6.3. The additional evidence submitted by the assessee was forwarded to the AO vide letter dated 20.10.2014. Vide letter dated 23-01-2017,

2.1. During the course of assessment proceedings from the details placed on record it was seen that the assessee had shown following names in list of sundry creditors: Sr. no. Name of the suppliers Amount (Rs.) 1. M/s Mehta Enterprises 10,00,827 2. M/s Satyam Trading Co. 13,91,900 3 Sh. Adinath Enterprises 19,91,130 4 Shree Jalaram Enterprises 15,50,656 5 M/s Shubham Enterprises 13,95,490 Total 73,30,003 2.2. During the assessment proceedings the Inspector was asked to visit all these addresses. The Inspector has reported non- existence of these parties or the addresses on the given address. Therefore the amount of Rs. 73,30,003/- were treated as unexplained cash credit u/s 68 of the IT Act and added to total income by the AO.

Shri Devilal B. Jain 2.3. During the remand proceedings a letter dated 11.11.2016 was issued to the assessee to produce the above mentioned parties before the undersigned for verification. However, in response to this letter assessee has expressed inability to produce the above parties before the undersigned to verify the genuineness of the transactions. Therefore, statement of assessee Sh. Devilal Jain was recorded on 12.01.2017. In his sworn statement, assessee in reply to Q. No. 9, stated that he had made purchases from these parties during the FY. 2008-09. Further, he stated that he has cleared entire dues from the above said parties except one party sh. Jalaram Enterprises of Rs. 15,50,656/-. In support of his claim he has submitted bank statements reflecting payments and ledger account of these parties.

5.4. From the above facts and statements recorded u/s 131 of the Act, it is crystal clear that: i. As per inspector's report these parties are non- existence. ii. Assessee is repeatedly fails to produce these parties for the verification. iii. The proved bogus party M/s. Shubham "Enterprises also show credit of Rs.13.95.490/-.

Shri Devilal B. Jain iv. Assessee is only submitting bank statements and ledger account of these parties. Payments is made through the banking channels itself is not a conclusive proves for the genuineness of the transactions. In this regards reliance may be placed on the Hon'ble Supreme Court judgments in the case of CIT Vs. Maohankala (2007) 291 ITR 278 (SC).

6.4 In response to the remand report, it was stated by the assessee by submission dated 23.02.^2017 and 06.03.2017 that in marble business, the purchases are made through the agent and assessee was able to discharge its onus by providing confirmations from the creditors and also affidavits from them having the material supplied. As the assessee never came in direct contact with the|» suppliers, therefore it is not possible to the assessee to produce them. Further the assessee has provided copies of the invoices, ledger accounts, bank statements, stock statements and copy of the VAT return to prove that the assessee made the purchases from the creditors. He also submitted quantitative details in respect of these four creditors to show that there are sales against the purchases made from these suppliers. He also submitted that the AO is not justified in making the addition only because there are credit balances at the end of the assessment year. He submitted that he' had submitted ledger accounts of Shri Devilal B. Jain these parties of subsequent years to show that assessee has purchased material from these parties in subsequent years and was also making payments by cheque. The accounts statement shows the genuineness of these persons and there are no credit balances in subsequent years as the entire payments have been made. He submitted that the AO has not examined the ledger accounts of Shubham Enterprises a/id Jalaram Enterprises, where also the payments have been made in subsequent years.

6.5 On going through the affidavits of these four creditors, it is noticed that the wording of the affidavit is same as that of hawala dealers, discussed in para 5.1 above. In their affidavits, these suppliers have also mentioned that there was VAT survey and VAT authorities taken declarations under pressure that they have not supplied goods to Devilal Jain. When these facts were confronted to Shri Joshi vide order sheet dated 06.02.2017, he stated that none of these parties have been listed as hawala dealers by Sales Tax Authorities. He also stated that neither the AO has doubted the purchases from these 4 suppliers nor the Sale Tax Authorities treated 4hem as hawala dealers. He reiterated that in Marble business, the purchases are •rS0e through the broker only and the assessee hardly comes in direct contact with He pleaded that in Shri Devilal B. Jain order to prove the genuineness of these purchases, the assessee had asked the broker to get their confirmations and affidavits from these parties. He further stated that it is by mistake the same wordings which was applicable in the case of hawala dealers has been copied in case of these suppliers also. He added that the AO had not disallowed the purchases but had added these credits u/s 68 6.6 I have gone through the assessment order, the "additional evidence submitted by the assessee during remand proceedings, the remand report and submissions of the assessee from time to time. As far as the addition in respect of these 5 creditors is concerned, the AO had added amount of Rs. 77,30,003/- u/s 68, which included amount of Rs. 13,95,490/-, the credit balance in case of Shubham Enterprise which was also a hawala dealer. There was no information or allegation against remaining 4 parties being involved in any Sale Tax violation. The assessee on his part discharged its onus by submitting copies of the bills, bank statements, quantitative tally of the stock to show that the purchases have been made and there are corresponding sales against these purchases. The assessee also showed that in subsequent years, payments have been made to all the 5 parties including Shubham Enterprises arid Jalararh

Shri Devilal B. Jain Enterprises. Therefore it would not be appropriate to making addition u/s 68 in respect of these creditors.

In the case of CIT Vs. Vardhman Overseas Ltd. Hon'ble Delhi High Court has held that no addition can be made under section 41(1) unless it is shown that liability had ceased to exist.. In CIT Vs. Sugauli Sugar Works Ltd, Hon'ble Supreme Court has held that the liability ceased to exist or not was not a matter to be decided by considering the assessee's conduct alone, but was a matter to be decided only if the creditor was also before the concerned authority and that in the absence of the creditor it is not possible for the concerned authority to come to the conclusion that the debt was barred by limitation and had become unenforceable. There are many circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the limitation Act. In CIT Vs. Bhogilal Ramjibhai Atara 222Taxman 0313, Hon'ble Gujrat High Court held that there was nothing on record to suggest that there was remission or cessation of liability. The AO has not brought out any facts on record that the liability'has ceased to exist. On the other hand, the ledger accounts submitted by the assessee show that payments have been made in subsequent years. The very fact that liability has been Shri Devilal B. Jain settled shows that there was no cessation or remission of liability as per provisions of section 41(1) also.

At the same time, it is seen that the said 4 creditors could not be produced for verification. The affidavits have also been given by them in a very causal and routine manner without application of mind. In this background, the said suppliers were required to be examined as held by Hon'ble Supreme Court in the case of Mehat Parikh & Co v. CIT (1956) 30 ITR 181. Further the assessee has also submitted that he was making the purchases through the broker and hardly came in contact these parties. The broker in his statement has also stated that in case the ^suppliers were not able to provides the bill for the supply made by them, he arranged bills for the material from the other contacts in the market. The Sale Tax Authorities conducted enquiries in respect of those dealers who did not pay Sale-Tax. (1"here were other parties who did not default on the Sale-Tax but they also engaged in the same business of accommodation entries, that is supply of the bills without supply of the material, which was procured from other parties. These 4 creditors appear to be similar in nature that they only provided bills, j IHs' not known at what price the appellant actually made the purchases from third parties. Under such circumstances the likelihood of the purchases

Shri Devilal B. Jain being inflated cannot be ruled out. Therefore it would be appropriate if 10% of the amount of purchases of Rs. 59,34,513/-(73,30,003 - 13,95,490) amounting to Rs. 5,93,451/- is disallowed to the appellant. As addition in case of Shubham Enterprises has already been made, therefore amount of Rs. 13,95,490/- pertaining to Shubham has been excluded while making this disallowance. This addition will be over and above the income shown by the appellant in his return of income. In the result, the addition restricted to Rs. 5,93,451/-.

6.7. Ground of appeal is partly allowed.

7. After having gone through the facts of the present case and hearing the parties at length, we find that as per records, the assessee is proprietor of M/s New Marbal House and is engaged in the business of trading of marbal. The AO made additions in the case of assessee on the basis of information received from investigation wing on which, it was noticed that assessee was a beneficiary of hawala entry operators as he had shown purchases amounting to Rs. 2,64,07,574/- from various parties, who were listed by the sales tax authorities as hawala operators. However Shri Devilal B. Jain during the course of first appellate proceedings, the assessee had submitted the required documents including copies of invoices, statement of account, comparative chart of gross profit and net profit for the year under consideration and two preceding years. It was submitted by Ld. AR that GP of the assessee is around 10% to 13% in different years. Therefore, if the entire purchases, which were disallowed by the AO are to be added then in that eventuality, the GP would rise to 94%, which are very abnormal.

10. After appreciating the facts, we find that AO had not disallowed the purchases, however had added these credits u/s 68 of the Act. Ld. CIT(A) after considering the facts of the case and also keeping in view the remand report, had correctly appreciated that as far as the addition in respect of 5 creditors are concerned, the AO had added amount of Rs. 77,30,003/- u/s 68, which included amount of Rs. 13,95,490/-, the credit balance in case of Shubham Enterprise which was also a hawala dealer. However, there was no information or allegation against remaining 4 parties being involved in any Sale Tax violation. In this respect, the assessee had discharged its onus by submitting copies of the bills, bank statements, quantitative tally of the stock to show that the purchases have been made and there are corresponding sales against these purchases. Apart from that, it was also shown that in the subsequent years, payments had been made to all the 5 parties including Shubham Enterprises arid Jalararh Enterprises. Therefore in these circumstances, we are Shri Devilal B. Jain also of the same view that when once against the purchases and payments had been made, therefore no additions u/s 68 of the Act are sustainable in respect of those creditors.

Shri Devilal B. Jain 12. Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, these grounds raised by the revenue stands dismissed.