NAITIK GEMS,MUMBAI vs. INCOME TAX OFFICER-32(2)(4), MUMBAI

आदेश / O R D E R

Per Sandeep Gosain, Judicial Member:

3 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems 4. The brief facts of the case are that the assessee is a firm engaged in the business of diamond trading & export. The return of income was filed on 08.09.2010 declaring total income of Rs.2,90,786/-. Thereafter a search & seizure action was conducted in the Rajendra Jain group of cases by Investigation Wing, Mumbai. As a result of search, it was found by the Investigation Wing that this group is a leading ‘entry provider’ of Mumbai and there are many concerns floated by the group which provide accommodation entries of bogus sales and purchases. The AO received an information that assessee had also shown purchases from five concerns found in the list of entry providers related with Rajendra Jain group of cases. The name of the concerns as mentioned in the assessment order are M/s Adi Impex, M/s Kalash Enterprises, M/s Mayank Impex, M/s Nayan and M/s Sparsh Exports Pvt. Ltd. The total purchases from these 5 parties comes to Rs.8,90,18,159/-.During course of assessment, the A.O. asked the assessee to substantiate purchases from the above parties. In response certain details were filed by the assessee. Thereafter the AO after discussing the detail and modus operandi came to the conclusion that assessee has taken only

4 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems accommodation entries from these parties. However, it was accepted by the AO that there cannot be any sales without purchases and hence concluded that assessee had made additional profit by making purchases from grey market and considering 6% to be the fair profit margin, made additions to the total income of the assessee.

Now before us, the assessee has preferred the present appeal by raising the above grounds.

9. We have heard counsels for both the parties at length and perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities. 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. 3.4 & 3.5 of its order and the same is reproduced below:-

3.4 I have carefully gone through the assessment order as well as the written submission and details filed by the appellant. It is seen from record that the A.O. has not mechanically disallowed the entire disputed purchases amounting to Rs. 8,90,18,159/-, rather he has disallowed 6% of the amount of purchase in dispute. The AO has made the addition after giving detailed reason and after analyzing the modus operand! of the transactions of the doubtful purchases. On this issue, the AO has made the following remarks.

6 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems "8.4 Since, there is no real purchase of diamonds from the aforesaid hawala dealers, it implies that the firm has procured minimum 72448.51 carats from other sources better known to the assessee so as to manufacture and export during the year, and in such case the firm will be having nil closing balance. This shows that during the year minimum 72448.51 carats has come into business of the assessee. And in these circumstances the only inevitable conclusion to be drawn is that the assessee might have made these purchases from other parties/ open markets or through broker or from any other source best known to assessee.

7 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems 9.1 However, it is also a matter of fact that the diamonds shown to be purchased from aforesaid hawala dealers has entered into the stock register and the assessee has shown corresponding exports against the said purchases debited. This could only mean that the - diamonds were brought by the assessee from grey market (which is a very common practice prevalent in Surat and Mumbai), without bill, and to adjust this transaction into the books of accounts, he must have obtained bill from Rajendra Jain Group concern. As the assessee has demonstrated corresponding sale against the purchase from Rajendra Jain group concern, one can only conclude that that the purchases were made by the assessee from grey market and bills were obtained from Rajendra Jain group concern. It has been noticed that accommodation entries of bogus purchases are issued through a complex web of transactions including banks and angarias. 9.2 In such scenario, where, on one hand the genuineness of the purchase party is doubted but the genuineness of purchase on a whole cannot be doubted, the courts have taken a view that only the profit element embedded in such a transaction could be taxed. This is a fairly accepted principle and the same would also apply in this case.

8 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems However, what would be the fair margins in such transaction is the moot question. 9.3 Taking into consideration all these aspects, once again, the issue arrives, as to what would be the margin, one can expect while buying the material from grey market instead of norrmal course. Two aspects need to be taken into consideration in such circumstances. First is, diamonds in the grey market are always cheaper than the diamonds sourced from the me dealer. This is because, the genuine dealer would charge his incidental cost including hole administrative cost while selling the diamond in the market, whereas the petty dealers e grey market do not carry such incidental charges on such sales, wherein they are only king for a quick profit. Secondly, there is always an element of discount in the case of instant cash purchase. This is a common practice followed in the diamond market, and the entities operating in the market would always look for reaping such benefits. 9.4 Thus, from the above analysis of the facts, it is crystal clear that the purchases made by the assessee from the above concern and claimed as purchase expenses in his profit and loss account are not genuine.And there is profit element embedded in these transactions wherein the 9 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems purchases have been made from other entities not from the claimed entity i.e. aforesaid hawala dealers. 10 Now the question arises what should be the actual profit element embed in these accommodation entries as these entries are having some fixed percentage of profit or commission or any other benefits attached. Each and every trading unit has its different profit ratio depending on the items transacted. Therefore, the profit element embedded in these transactions should definitely be in real and close proximity to the nature of business and profession. 10.1 The normal profit percentage in case of diamond traders/manufactures is prevailing in the range of 6-10%. Therefore, the profit element in case of accommodation entries pertaining to diamond transactions should be in the same range. In case of metal business, the quantum of profit element as decided in various judicial pronouncements with respect to the bogus purchases has been considered at 12.5% and is based on the core fact that the sales tax on these items is 12.5%. In case of diamond business, the corresponding sales tax is applicable at the rate of 1%.

10 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems 10.2 It is pertinent to mention here that the minimum profit percentage, as explained in the instruction no. 02/2008 dated 22" February 2008, introduced by Hon 'ble finance minister for the assessee engaged in the business of manufacturing and or trading of diamonds as benign assessment procedure is at 6%. And hence it can be presumed that most of the traders in the market actually operate not below this level of margin in the open market. BAP was to be applicable for those diamond merchants, who were showing a profit margin of 6% of their turnover. Although, this BAP talks about the net profit margin (NP), for a petty dealer, operating without any establishment, the GP would be almost similar to NP. 10.3 In view of the fact that the bogus purchases(accommodation entries) has been recorded in the books of account of the assessee, I am of the considered opinion that the profit element embedded therein with respect to the transactions entered by the assessee with paper concern like aforesaid hawala dealers dealing in Diamond would be subject to tax. And I hereby consider that 6% of the total amount ofRs. 8,90,18,159/- which comes to Rs. 53,41,090/- should be taken as additional profit on unproved/

11 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems non-genuine purchase and added to the total income of the assessee.." 3.5 There is merit in the arguments of the AO as given above and following such arguments it is held that the A.O. was right in estimating additional profit on unproved/non-genuine purchases. The A.O. has fairly conceded in para 9.1 of his order that the appellant had incurred expenditure on such purchases, but such expenditures remain unexplained. Thus, some disallowance out of the disputed purchases will have to be made, but the question remains whether disallowance at the rate of 6% of the unproved purchases is fair or not. The main reason for adopting six percent as fair additional profit was because the AO thought that instruction no. 2 of 2008 dated 22.02.2008 will be applicable to this case. However, from a plain reading of instruction no. 2 of 2008 it is seen that this instruction was meant to be applicable for assessments made during FY 2008-09. Clearly, the assessment of the appellant has not been made during FY 2008-09. Further, the clause E of the said instruction states nthe 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". Thus, the benign assessment procedure (BAP) or the percentage mentioned in the instruction no. 2 of 2008 cannot be applied across the board in all cases of 12 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems assessees engaged in diamond business. In diamond trade the rate of VAT is stated to be 1% and in some places like Surat the same is stated to be fully exempt. The task .force group for diamond industry constituted by the Government of India, Ministry of commerce and Industry, after considering the BAP scheme, recommended presumptive tax for net profit calculated @2% of trading activity and 3% for manufacturing activity or @ 2.5% across the board. It is also stated that the operative profit in case of diamond trading for computation of ALP by the TP wing is consistently in the region of around 1.75% to 3%. It is also brought to my notice that in similar cases of diamond business, some CIT(A)'s have taken a view that 3% of the disputed purchases should be considered as fair additional profit. In view of the above and also since the profit margin is lesser in this sector, adopting 6% as the additional profit by the AO, is not based on correct footing. Considering the fact that the profit margin in this sector is around 2 to 3 percent and the taxes saved is also around 1%, I am of the considered opinion that if the addition is sustained to the extent of 3% of the disputed purchases, the same will meet the ends of justice. Thus, after considering the totality of facts the addition made by the AO is restricted to 3%, of the disputed purchases. Thus 3% of Rs. 8,90,18,159/-.which is Rs. 26,70,545/- taken as profit of the appellant on purchases that are not 13 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems fully and properly explained. Addition of Rs. 26,70,545/- is accordingly confirmed out of an addition of Rs.53,41,090/- and the balance is deleted. Grounds of appeal No. therefore partly allowed.

10. After having gone through the facts of the present case and hearing the parties at length, we find after analyzing the records contained in paper books filed by the assessee, AO had not mechanically disallowed the entire disputed purchases. Rather, the AO had disallowed 6% of the amount of purchases in dispute. The main reason for adopting 6% as fair additional profit was based on detailed reasons and only after analyzing the modus operandi of the transaction of doubtful purchases, which have already been mentioned above in its order. Moreover, we also found that the AO appreciated that instruction no. 2 of 2008 dated 22.02.2008 was not applicable for the year under consideration as from the plain reading of instruction no. 2 of 2008, it was observed that those instructions were meant to be applicable for assessments made during FY 2008-09. As in Clause E of the said instruction, it was clearly mentioned that ‘the rate of profit as a percentage of turnover would be reviewed

14 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems annually on the basis of revenue generation and results of scrutiny assessments, searches and surveys made during the year". Thus, considering the above instructions, we are also of the view that the same cannot be applied across the board in all cases of assessee’s engaged in diamond business.

15 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems considering all those facts, the Ld. CIT(A) had taken a balanced view and had restricted the additions @ 3% of the disputed purchases, which in our view, is correct.

ITA No. 4762, 4763, 4764/Mum/2017 (AY 2011-12, 2012-13 & 2013-14) filed by assessee and (AY 2012-13) filed by revenue. 14. Now we take up ITA No. 4762, 4763, 4764/Mum/2017 (AY 2011-12, 2012-13 & 2013-14) filed by assessee and ITA No. 5037/Mum/2017 (AY 2012-13) filed by revenue. Since we

16 4762, 4763, 4764 & 5037/Mum/2017 M/s Naitik Gems have already decided the similar grounds of appeal in AY 2010-11 on merits. Therefore, following our own decision in ITA No. 4761/Mum/17, we apply the same findings in these present appeals in order to maintain judicial consistency which is applicable mutatis mutandis.