SEJAL GEMS P. LTD,MUMBAI vs. DCIT CEN CIR 1(2), MUMBAI

5 M/s. Sejal Gems Pvt. Ltd. The absence of these supporting evidences lent credence to the AO's finding that the purchases shown to have been made by the appellant from aforesaid 13 concerns were nothing but accommodation entries without any actual movement or delivery of goods.

6.3.2A perusal of the relevant invoices reveals that out of aforesaid 13 concerns of Bhanwarlal Jain Group, many concerns were having common addresses, as brought out in the table below: - Sr. Name Address No.

7 M/s. Sejal Gems Pvt. Ltd.

“11.I have carefully gone through the assessment order passed by the Assessing Officer and the written submissions of the appellant on the issue. I have also considered various case laws relied upon by the appellant. My observations are as under.

12.The AO has formed his view about the bogus nature of the purchase made by the appellant from M/s.Daksh Diamonds on the 8 M/s. Sejal Gems Pvt. Ltd. basis of various incriminating. documents and evidences seized during the course of search & seizure action in the case of Bhanwarlal Jain Group, which has established that the said group was engaged in providing accommodation entries of bogus sales/purchases/loans to various beneficiaries.

13.In my opinion, simply relying upon the information received from the DGIT(Inv.) regarding the default committed by M/s. Daksh Diamonds cannot be taken as the sole basis to treat the entire purchases made from it as bogus or non-genuine. The Assessing Officer has primarily relied on the conclusions drawn by the Investigation Wing on the basis of the statement given before the Income tax authorities and heavy reliance on such statement to treat entire purchases made from the above party as bogus, cannot be held to be justified. The information received from the DGIT(Inv.) was a piece of evidence to initiate in-depth independent investigation on the issue, which the Assessing Officer has not fully carried out. Further full enquiry on the given set of facts and circumstances and without appreciating the evidences submitted by the appellant in respect of the purchases made from the alleged bogus party has remained to be carried out before arriving at the conclusion that impugned purchase debited in the books of the appellant are bogus.

14.It is not the case of the Assessing Officer that the above party i.e. M/s. Daksh Diamonds specifically stated that it had made bogus sales to the appellant. The purchase invoices, payments to the parties through cheques and closing stock inventory submitted by the appellant are certain important evidences regarding the purchases made by the appellant that cannot be set aside summarily. Therefore, the conclusion drawn regarding the purchases made from M/s.Daksh Diamonds being entirely bogus, is not justified.

15.In this regard, the ratio was laid down by the Hon'ble High Court of Bombay in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd., is very relevant, wherein it was held that — “When the assessee have filed letter of confirmations of the suppliers, Bank statements highlighting the payment entries through account payee cheque, copies of invoices, stock reconciliation statements before the AO; and merely because the suppliers did not appear before the AO, one cannot conclude that the purchases were not made by the assesses. The AO cannot disallow the purchases on the basis of suspicion because the suppliers were not produced before them."

9 M/s. Sejal Gems Pvt. Ltd. 16.The facts and circumstances as outlined above, clearly suggest that the purchases by the appellant from M/s.Daksh Diamonds cannot be doubted but a major flaw in these transactions is the unverifiable nature of transactions of these purchases from M/s. Daksh Diamonds as it was not found available at the given address. Thus the purchase prices shown on the invoices are not subjected to verification and as such it was difficult to establish the correctness of the purchase prices paid for the materials purchased from them. Such verification of the sale price shown on the invoices/bills was necessary to ascertain the correctness of the profits shown by the appellant for the period under consideration. This verification was also vital to determine as to whether the purchase prices shown on the bills/invoices, are as per prevailing market prices of the materials purchased and to ascertain that the price paid for the materials purchased from M/s.Daksh Diamonds is not over invoiced. In the absence of any such verification of the correctness of the price paid for the materials purchased by the appellant, the purchase price paid as mentioned on the invoices/bills cannot be accepted as the correct price paid for the goods purchased from M/s.Daksh Diamonds. In view of the same, the possibility of over-invoicing of the materials purchased to reduce the profit, 'cannot be ruled out. Therefore, the gross profit rate shown by the appellant for the year under consideration cannot be relied upon. In the circumstances, the correct approach in such transactions would be to estimate the additional benefit or profit earned on these purchases and not to disallow the entire purchases from M/s. Daksh Diamonds. The disallowance of the entire amount of purchases from M/s.Daksh Diamonds would not be logical and would amount to travesty of justice. In my view either the purchases from above mentioned party are over invoiced or the purchases were actually made but not from the said party from which it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation.

17.As of now the issue of bogus purchases has been much discussed and debated by the various courts and tribunals. In many judicial pronouncements on the issue, the courts have taken a consistent view that in case of non-existent parties from whom the purchases are shown to have been made, only pert of such purchases can be disallowed, particularly in the cases where the corresponding sales are not doubted. Alternatively, the profit embedded in such sales against the alleged bogus purchase, can only be brought to tax.

18.In the case of CIT-1 Vs Simit P. Sheth, of 2012, order dated 16.01.2013, while deciding a similar issue the Hon'ble High Court of Gujarat has held that: - “We are broadly in agreement with the reasoning adopted by the Commissioner (Appeals) with respect to the nature of 10 ITA No.3872/M/2017 M/s. Sejal Gems Pvt. Ltd. disputed purchases of steel. It may be that the three suppliers from whom the assessee claimed to have purchased the steel did not own up to such sales. However, vital question while considering whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to ascertain whether the purchases themselves were completely bogus and non-existent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation.

In the present case, CIT believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence therefore, the Commissioner (Appeals) believed assessee s theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of accounts.

That being the position, not the entire purchase price but only profit element embedded in such purchases can be added to the income of the assessee. So much is clear by decision of this Court. In particular, Court has also taken a similar view in case of Commissioner of Income Tax-IV vs. Vijay M Mistry Construction Ltd. vide order dated 10.01.2011 passed in Tax Appeal No. 1090 of 2009 and in case of Commissioner of Income Tax-I vs. Bholanath Poly Fab Pvt. Ltd. vide order dated 23.10.2012 passed in Tax Appeal No. 63 of 2012. The view taken by the Tribunal in case of Vijay Proteins Pvt. Ltd. Vs. CIT reported in 58 ITD 428 came to be approved.” (Emphasis supplied)

19.Similarly while dealing with an identical issue, in the case of CIT v. Bholanath Poly Fab (Purchase) ltd. ITA.No.No. 63 of 2012, in the order dated 23/10/2012, the Hon'ble High Court of Gujarat has held as under: - “We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assesses did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such 11 M/s. Sejal Gems Pvt. Ltd. purchase, but the profit element embedded therein would be subject to tax. This was the view of this court in the case of Sanjay Oilcake Industriesv. CIT (2009] 316 ITR 274 (Guj). Such decision is also followed by this court in a judgment dated August 16,2011, in Tax Appeal No. 679 of 2010 in the case of CIT v. KishorAmrutlal Patel. In the result, tax appeal is dismissed."

20.In view of the facts and circumstances and the judicial pronouncements cited above; what can be disallowed or taxed in the instant case of the alleged bogus purchases is only the excess profit element embedded in such purchases shown to have been made from M/s. Daksh Diamonds. The appellant has not placed any evidence on record that the goods were purchased from the above party at arms' length price. The appellant has also not placed on record any comparable bills/invoices for purchases of similar items made from other parties to establish that the purchases from M/s. Daksh Diamonds in question was at par with the purchases made from other parties during the period under consideration. The possibility of such purchases from unregistered dealers without invoices cannot be ruled out. Hence possibility of such purchases from unregistered dealers without invoices cannot be ruled out. In view of the above, the correctness of the purchase prices mentioned on such bills/invoices issued by M/s. Daksh Diamonds in question cannot be accepted and some additional profit needs to be estimated on such purchases made from M/s. Daksh Diamonds. As the purchases invoices issued against the alleged bogus purchases remains unverifiable, and part of the profit element on the purchases made from M/s. Daksh Diamonds already included in the above gross profit rate shown for the year under consideration, it would be fair and just, if the additional gross profit @ 12.5% is applied on such total alleged bogus purchases amounting to Rs. 1,05,18,970/-, the additional gross profit on such purchases would come to Rs. 13,14,871/-which need to be added to the income of the assessee on account of alleged bogus purchases for the year under consideration and the balance addition made amounting to Rs. 92,04,099/-is hereby deleted. The Assessing Officer is directed accordingly. Hence, grounds no. 1 & 2 are partly allowed.”

17.As could be seen from the above the Ld.CIT(A) did not agree with the Assessing Officer that the purchases by the assessee are bogus/non- genuine. However, the Ld.CIT(A) observed that purchases made cannot be doubted and there is a major flaw in these transactions is the unverifiable nature of transactions as the parities are not found available in the given address. However, we see that the parties haveresponded in these cases for the notices issued u/s. 133(6) of the Act, they have filed Ledger Account of the assessee in their books of accounts, Copies of Sales Invoices issued by them, their Bank statements reflecting the payments made by the assessee to them, Copies of acknowledgement of Income-tax Returns filed by them, 12 M/s. Sejal Gems Pvt. Ltd. Audited Profit & Loss A/c and Balance Sheets to show that the transactions of sales made to the assessee are genuine. On a careful consideration of the submissions made by the assessee, we find considerable force in the submissions not to treat the purchases made by the assessee from the parties as non-genuine/bogus.

18.The reason for treating these purchases as non-genuine /bogus is the statements given by Bhanwarlal Jain group and non-submission of delivery invoices by the assessee. It is the submission of the assessee that the statements given by Bhanwarlal Jain group have been retracted by them subsequently and there is a practice of hand delivery of such precious and light weighing materials like Diamonds is prevailing in the industry. Therefore, no adverse conclusion can be drawn merely due to absence of documents proving deliveries. The analysis furnished before us on the Gross Profit margin shown by the assessee also suggest that assessee is consistent in showing overall Gross Profit around 6% in these Assessment Years. The average Gross Profit shown by the assessee stood at 6.04% for these Assessment Years. Therefore even if we go by the submissions of the Ld.DR that the profit element should be estimated at 6% as per the CBDT Circular the assessee has already shown 6.04% of overall Gross Profit during these three Assessment Years. The disallowance/estimation of profit on purchases by treating them as bogus cannot be made only on the statements recorded from third parties, especially when those parties have responded to the notice issued u/s.133(6) of the Act by filing all necessary documents to prove that they have made sales to the assessee. It is also the submission of the assessee that none of the impugned parties have been declared as Hawala dealers or suspicious dealers by the Sales Tax Department and the genuineness of the purchases have been doubted merely on the basis of the statement given by the Bhanwarlal Jain group. The assessee has furnished all necessary evidence to prove the genuineness of the purchases, the parties have also responded to the notices u/s. 133(6) of the Act by filing necessary evidence as to prove that the purchases are genuine. Thus the assessee discharged the onus to prove the genuineness of the transactions made by the assessee from the impugned parties. The Assessing Officer completely failed to make further enquiries in these cases. The documents furnished by the supplier of the goods have not been disproved by the Assessing Officer in these matters.

19.We also find that the Coordinate Bench in the case of Indo Unique Trading Pvt Ltd. v. DCIT in ITA.No. 6341/Mum/2016 considered almost an identical situation wherein the suppliers have responded to the notices issued u/s. 133(6) of the Act and confirmed the transaction by filing various details before the Assessing Officer, in such circumstances the Coordinate Bench accepted the contentions of the assessee that the purchases cannot be treated as bogus simply relying on the statements in the case of Bhanwarlal Jain group. While holding so the Coordinate Bench observed as under: - 13 M/s. Sejal Gems Pvt. Ltd. “10.We have heard rival contentions and perused the record. We notice that the assessing officer has reopened the assessment for the second time after expiry of four years from the end of the assessment year, on the basis of information received from the investigation wing about the bogus nature of transactions entered by Shri Bhanwarlal Jain group. Even though the AO has mentioned the reasons that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, yet he has not specified the manner of failure.

11.On the contrary, we notice that the assessee has proved the genuineness of purchases by obtaining confirmation letters in the form of affidavits from all the suppliers. The AO has done independent enquiry during the course of assessment proceedings by issuing notices u/s 133(6) of the Act to all the suppliers. We notice that the notices were duly served upon the suppliers and they have also responded by filing their replies duly confirming the transactions. The AO has rejected the replies by observing that the replies lacked details and they did not mention about the nature of transactions. In our view, the said observations are vague in nature. On the contrary, a perusal of the affidavits furnished by the suppliers would show that they have confirmed the sales effected by them to the assessee. Further they have also verified and signed the ledger account copies as available in the books of account. When the suppliers confirm that the transactions of sales made by them to the assessee are genuine, that too, in response to the notices issued by the AO u/s 133(6) of the Act during the course of assessment proceedings, in our view, the said replies cannot be rejected without bringing on record any material to show that they are not true. We notice that the AO did not bring any material on record and he simply relied upon the report given by the investigation wing. As per Ld A.R, the statement given by Shri Bhanwarlal jain is a general statement only. The assessee, as stated earlier, has furnished confirmation of ledger accounts and also affidavits to prove the genuineness of transactions. We notice that the AO could not controvert those documents.

12.In view of the foregoing discussions, we are of the view that the assessee has duly discharged the burden to prove the genuineness of purchases. On the contrary, the AO has simply relied upon the report given by the investigation wing. In this view of the matter, we are of the view that no addition is called for on account of alleged bogus purchases. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the impugned addition.”

20.In view of what is discussed above, we are of the view that the assessee has duly discharged its burden of proving the genuineness of the purchases and the Assessing Officer without making proper investigation, simple relied 14 M/s. Sejal Gems Pvt. Ltd. on the statements of third party to treat the purchases as bogus. Assessing Officer could not prove that the information furnished by the suppliers are not genuine so as to treat the sales made by them are only bogus. In the circumstances, we set aside the orders of the lower authorities and delete the disallowance made towards bogus purchases for all these Assessment Years i.e. 2011-12 to 2013-14 which are under appeal before us.”

16.As could be seen from the above, the facts in the case of the assessee and also the decision referred to above are almost identical. The parties have confirmed by filing replies to notices u/s. 133(6)of the Act along with the ledger account of the assessee in their Books of Accounts, copies of sales invoices issued by them to the assessee, thereby statements reflecting payments made by the assessee to them, copy of acknowledgment of Income Tax Returns filed by them to show that the transaction of sales made to the assessee are genuine. We also find that the Gross Profit margin shown by the assessee is ranging in between 7.02% to 7.62%consistently. Further, the disallowance/ estimation of profit of purchases by treating them as bogus cannot be made only on the statements recorded from third parties, especially when the suppliers have responded to the notice u/s. 133(6)of the Act and filed all the necessary documents to prove the genuineness of the purchases made by the assessee. Thus the grounds raised by the assessee on merits are allowed. As we have allowed the appeals of the assessee on merits for the reasons and discussions made therein, the Revenue’s appeals are dismissed.

17.Coming to the appeals in the case of M/s. Ariha Diamond Jewellery Pvt. Ltd., and M/s. Sejal Gems Pvt. Ltd., facts being identical, we reject the grounds raised by the assessee in reopening the assessments beyond four years for the Assessment Years 2008-09 & 2009-10 and on merits facts are almost identical, however, the suppliers though not responded to the notices issued u/s. 133(6) of the Act they have given ledger confirmations which have been furnished to the Assessing Officer to prove the genuineness of the transaction. Hence, in view of the above discussion made in the appeals in the case of M/s. Sejal Exports (India), the decision taken therein applies Mutatis Mutandis to the appeals in the case of M/s. Ariha Diamond Jewellery Pvt. Ltd., and M/s. Sejal Gems Pvt. Ltd. Thus, the grounds raised by the assessee on merits are allowed. As we have allowed the appeals of the assessee on merits for the reasons and discussions made therein, the Revenue’s appeals are dismissed.”

Order pronounced in the open court on 22.03.2019.