VARMAN EXPORTS,MUMBAI vs. ITO 19(3)(5), MUMBAI

Assessee challenged the orders of the Ld. CIT(A) in sustaining the reopening of assessment u/s. 147 of the Act and also sustaining the 2 to 3785/MUM/2018 (A.Ys: 2008-09 to 2012-13) M/s Varnam Exports disallowance made towards non-genuine purchases by the Assessing Officer estimating the profit element @5% on such non-genuine purchases.

Briefly stated the facts are that, there was a search and seizure action carried by the DDIT (Inv.) Mumbai in the case of Shri Gautam Jain and others on 03.10.2013 in Surat. During the course of the search it was revealed that the group concerns of the Shri Gautam Jain 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 Gautam Jain, the assessments of the assessee for all these Assessment years were reopened as the assessee made purchases from the concerns operated by Shri Gautam Jain 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 has objected for reopening of assessment and on merits furnished copies of invoices, bank statements, stock registers, ledger confirmations, copies of returns filed by the dealers. Not convinced with the information furnished by the assessee, the Assessing Officer based on the search and the statements of the Shri Gautam Jain and the 3 to 3785/MUM/2018 (A.Ys: 2008-09 to 2012-13) M/s Varnam Exports modus operandi adopted by the concerns which were operated by Shri Gautam Jain the Assessing Officer concluded that the assessee has obtained only accommodation entries and the goods were purchased only in the gray market.

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%, he estimated the profit element of the purchases on the purchases made in the gray market would be at 5%, 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 reopening the assessment and sustaining the addition made towards non-genuine purchases.

Before us, Ld. Counsel for the assessee has raised various objections in reopening the assessment and also on merits. In so far as the re-opening of the assessment is concerned, the counsel submits that the reasons do not convey what exact information received by the Assessing Officer and not known whether such alleged information had any vital link/nexus with formation of belief. No name of the assessee even in such alleged information, there is no independent application of mind. Therefore, the re-assessment proceedings are bad in law.

Ld. DR vehemently supported the orders of the Authorities below.

We have heard the rival submissions, perused the orders of the Authorities below. As far as the reopening of assessment is concerned, for all these Assessment years there were no scrutiny assessments made u/s. 143(3) of the Act but returns were only processed u/s. 143(1) of the Act. The assessments were reopened based on the search proceeding in the case of Shri Gautam Jain group, wherein the Assessing Officer found that Shri Gautam Jain through certain companies operated by them were providing only accommodation entries to various parties and it was found that the assessee is one of the beneficiary of such accommodation

In the case of CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. [291 ITR 500], the Hon’ble Supreme Court held that intimation u/s 143(1)(a) is not an assessment and held valid the notice issued u/s 148. Their Lordships clarified the matter as under: “17. The scope and effect of section 147 as substituted with effect from 1-41989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.” In the case of Kone Elevator India P. Ltd. v. ITO 340 ITR 454 (Mad), CIT v. Ideal Garden Complex P. Ltd. 340 ITR 609 (Mad), it is held that in the case of return of income processed u/s 143(1), the only condition to be satisfied for reopening is taxable income has escaped assessment and the assessee’s plea that no fresh material before the AO warranting reopening, is not relevant. confirmed the reopening done by the AO by issuing notice u/s 148 of the Act. Thus, Ground No.1 is dismissed

Coming to the merits of the case, the Ld. CIT(A) considering the submissions, evidences furnished by the assessee and the averments of the Assessing Officer and following the decision of the Hon’ble Gujarat High Court in the case of Simit P. Sheth [356 ITR 451] 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 5% adopted by the Assessing Officer observing as under: -

We agree with the Ld. CIT(A) that the only the profit element should be assessed in the purchases which were made by the assessee in the gray market. However as observed by the 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 the submission of the assessee that the assessee has already shown gross profit @9.29% as against the industry margin rate of 3 to 5%. Therefore, taking the totality of the facts and circumstances into consideration, we are of the view that the profit element margin embedded in these transaction should be taken @3% of the purchases made by the assessee in all these Assessment years. Accordingly, we direct the Assessing Officer to estimate the profit element @3% and re-compute the income of the assessee for all these Assessment years.