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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
ORDER Per Shri A.T.Varkey, JM These are cross appeals preferred by the revenue and assessee are against the order of the Ld. CIT(A)-10, Kolkata dated 08.09.2017 for AY 2008-09.
The main grievance of the assessee is against the action of the Ld. CIT(A) in partially confirming/restricting the addition made by the AO to the tune of Rs.22,55,929/- (20% of the purchases of Rs.1.,12,79,643/-) and the revenue is against the action of the Ld. CIT(A) in giving partial relief to the assessee by restricting the addition only to Rs.22,55,929/- when the AO added Rs.1.,12,79,643/-.
2 & 2470/Kol/2017 Shri Sharad Kumar Rampuria, AY 2008-09 3. Brief facts of the case are that the assessee is into manufacture of jewellery. The assessee has a proprietary concern under the name and style of M/s. Aishwarya Gems at Kolkata as well as a branch at Bikaneer (Rajasthan). The assessee is an individual and is assessed for income tax at Kolkata. The AO noted that there was an information received from the office of the ITO, Wd-1(2), Bikaneer on 24.03.2015 which in turn was based on a search and seizure operation conducted u/s. 132 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) in the case of Shri Rajendra Jain Group which was carried out by the Investigation Wing, Mumbai on 03.10.2013. From the said report it was revealed that M/s. Aishwarya Gems indulged in getting bogus purchase/accommodation entries from various concerns of Shri Rajendra Jain. Like Rs.78,61,387/- from M/s. Avi Exports, Rs./15,42,200/- from M/s. Moulimani Pvt. Ltd. and Rs.18,76,050/- from M/s. Sparsh Exports Pvt. Ltd. [Total Rs.1,12,79,643/- ] Information gathered from the statement recorded of Shri Rajendra Jain u/s. 132(4) of the Act revealed that he has admitted that bogus entries have been given to beneficiaries. Based on this information, the AO, Wd-1(2), Bikaneer after issuing notice u/s. 148 of the Act, later transferred the case to the AO/ITO, Wd-36(2), Kolkata. Though the legal issue of the validity of sec. 148 of the Act issued by ITO, Wd-1(2), Bikaneer has been challenged before us, we are inclined to first adjudicate the merits of the addition made by the AO and the action of the Ld. CIT(A) on appeal. The AO taking note that there was a specific information provided by the Directorate of Investigation, Mumbai that the purchases made by the assessee during the relevant assessment year to the tune of Rs.1,12,79,643/- from the firms controlled by Shri Rajendra Jain as bogus had ventured to make the addition u/s 144 of the Act. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who after hearing the Ld AR of the assessee has made a finding of fact that the purchases per se were not bogus, however, he made the GP addition of 20% of the purchase which comes to Rs.22,55,929/- (20% of Rs.1,12,79,643/-). The Ld. CIT(A) in his impugned order has held as under:
“1. I have carefully considered the action of the Ld.AO in disallowing a portion of the purchases amounting to Rs.1,12,79,643/- holding the same to be bogus. It is to be observed that as this is a reopened case, the assessment was also completed earlier u/s 143(3) on 30.12.2019 and therefore this is the second round of scrutiny assessment.
3 & 2470/Kol/2017 Shri Sharad Kumar Rampuria, AY 2008-09 2. It is also true and apparent that that whatever be the reasons, there has not been any compliance by the appellant before the Ld. AO, leading to the inevitable conclusion that the Impugned purchases were bogus. Therefore the documents and purported evidences filed in appeal contending that the purchases were genuine because the payments were made through bank, there was shifting of goods etc are matters which do not deserve any consideration in appeal, and they are being treated as such.
However, it also has to be said that the Ld. AO has not disturbed the figure of sale in any of the rounds of assessment, and therefore, if the purchases are held to be bogus, that would not explain the sales figures available and accepted. I find that the genuineness of the sales has not been disturbed by the Ld. AO, and therefore it can only be assumed that there were purchases, though plausibly not from the sources disclosed. Or in other words, It would be fair to assume that the purchases were made from parties other that the names disclosed. In the light of the various decisions by Hon’ble courts, it emerges that they have observed that in such disputed transactions, the element of profitability from such transactions needs to be bought to tax. In my considered opinion, it appears that there had been actual purchases by the appellant, though given the factual matrix there appears to be sufficient doubt whether the said purchases had been affected from the parties belonging to the Rajendra Jain and Others Group, who have supplied the impugned bogus bills. Another relevant factor which is apparent in the case is that the amounts of purchases which are alleged by the Ld. AO to be bogus are only a portion of the total purchases made by the assessee-individual. Therefore, in my considered view of the matter, while it appears that the purchases had been made from parties which were bogus, the purchases themselves, per se were not bogus. In saying this, a reference is made to the qualitative amounts disclosed by the assessee in the books of accounts as related to sales and closing stock, and that these amounts have not been questioned and disturbed by the Ld. AO. Before me the appellant / Ld. A.R has submitted that for the immediate preceding A.Y 2007-08, the disclosed GP was 13.00%. For the succeeding A.Y 2009-10, the disclosed GP was 10.61%, whereas the closed GP for the A.Y. under consideration, namely A.Y 2008-08 as 15.65%. It has been pleaded that the average of these three years works out to 13.08%, and that in view of the judicial precedents the GP addition for the element of profitability be restricted to this percentage on the impugned purchases of Rs.1,12,79,643/-.
4. Having considered all factors, in my considered view of the matter, it would be reasonable and fair if the G.P and the element of corresponding profitability for the purchases of Rs.1,12,79,643/- is worked out @ 20% of the purchases or an amount of Rs.22,55,929/-. The addition is therefore confirmed to this extent, and for the balance amount of addition the assessee-individual will be eligible for relief.” Aggrieved against the relief granted to the assessee, the revenue is in appeal and the assessee is against the action of the Ld. CIT(A) in confirming the addition of Rs.22,55,929/- before us.
We have heard rival submissions and gone through the facts and circumstances of the case. Before us, the Ld. AR submitted that based on the search conducted at the premises of Shri Rajendra Jain Group u/s. 132 of the Act and statement recorded of Shri Rajendra Jain u/s. 132(4) of the Act, similar addition was made in the case of Manoj Begani Vs. ACIT, 4 & 2470/Kol/2017 Shri Sharad Kumar Rampuria, AY 2008-09 ITA Nos. 932 to 936/Kol/2017 which was decided by order dated 15.12.2017, wherein the similar allegation was made by AO that the assessee of that case also had made bogus purchases from Mr. Rajendra Jain’s concern, though the assessee contended that purchases made were duly supported by documentary evidence was however, disallowed by the revenue authorities by treating the same as bogus in similar circumstances. However, when the appeal of the assessee reached the Tribunal, the Tribunal vide its order dated 15.12.2017 allowed the claim of the assessee for purchase made from Rajendra Jain’s concern by holding as under:
“15. We note that the AO disregarded all these documentary evidence and insisted the assessee to produce the Principal Officer of M/s. Vitrag and since the assessee failed to produce them, he made the disallowance of the entire diamond purchased by the assessee through cheques/RTGS. The assessee has produced the VAT return and VAT audit report also, which is placed at pages 73 to 86 of the paper book. The assessee has also produced the sales bill related to diamonds sold out by the assessee which was made out of the very same purchases disallowed by the AO which is found place from pages 56 to 59 of the paper book. We note that the AO has not disturbed the sales shown by the assessee in respect of the diamond purchased from M/s. Vitrag and M/s. Arihant and M/s. Kangan (AY 2010-11 to 2012-13). When the sales of the very same diamonds have been accepted by AO/CIT(A) without a murmur, the purchases could not have been disallowed without cogent material. In this case, for whatever reason best known for him, Shri Rajendra Jain who controls M/s. Vitrag and M/s. Arihant have made the statements wherein he explains in detail the modus of the whole operation, which defies logic and can be termed absurd on the face of it, and when the fact remains that he and his concerns were legally importing jewels/diamonds directly from foreign suppliers named in Box ‘B’ and that he admits of receiving the cheques/RTGS from assessee in Box ‘E’; and when the fact remains that Shri Rajendra Jain’s concern M/s. Vitrag and M/s. Arihant utilised the cheques/RTGS given by the assessee (for the diamond purchased by him) and in turn is remitted in foreign exchange towards the bills raised by the foreign exporters (Box ‘B’), in no way show that the assessee had made any purchase outside the books or from the grey market. We are unable to understand as to the role of the nine persons (whose names are appearing in Box ‘D’). The modus operandi as suggested by Shri Rajendra Jain does not fit into the logic or rational reasoning of a common prudent person. However, the uncontroverted fact remains that Shri Rajendra Jain and his concerns are legally importing the diamonds directly from foreign concerns stated in Box B on credit (we explained earlier), so it is not understood as to what is the role of persons named in Box ‘D’. Shri Rajendra Jain’s answer to question no. 26 that he and his concerns placed the orders with the foreign concerns named in Box ‘B’ and collects the diamond in his office/show room. Let us pause for a minute and let us discard the role of persons named in Box ‘D’ for argument sake and then see the whole transaction. The diamonds are legally imported from foreign concerns named in Box B, by concerns in Box C which are delivered to persons in Box ‘E’ i.e. assessee and cheques/RTGS are issued in the name of the concerns controlled by Shri Rajendra Jain in Box C i.e. M/s. Vitrag and M/s. Arihant which in turn they utilised the cheques/RTGS given by the assessee to remit the foreign exchange to the foreign concerns in Box ‘B’. So, from all these facts discussed above, the only probability is that the role of nine persons named in Box ‘D’ can only be that of Angadias and not as that what Shri Rajendra 5 & 2470/Kol/2017 Shri Sharad Kumar Rampuria, AY 2008-09 Jain has attributed them to do. No other role can be played by these people unless and otherwise the department is able to bring any evidence to show that after the issue of cheques/RTGS to Shri Rajendra Jain’s concerns M/s. Vitrag and M/s. Arihant, the money component i.e. the unaccounted money of the assessee has been given back to the assessee, whereas it is clearly stated by Shri Rajendra Jain to Q No. 18 that cash component is generally settled by the key person controlling the concern in Box ‘D’ directly or indirectly by cheques/RTGS services of Angadia. So, therefore, the entire disallowance of the purchase/expenditure is based on surmises and conjectures; and the assessee by furnishing the documents (supra) has discharged the burden of proof casted upon it to show that the entire purchase was done bonafidely and not with the unaccounted money of the assessee.”
From the detailed order passed by this author of the order in the case of Manoj Begani (supra) dated 15.12.2017, we note that we had an occasion to analyze the allegation which were of similar/identical raised by the Revenue against this assessee which is before us; And in that case (Manoj Begani) we have carefully considered and dealt in depth in respect to modus operandi as suggested by Shri Rajendra Jain u/s. 132(4) of the Act and found it to be unbelievable and absurd which defied logic from the facts laid before us. We found in that case (Manoj Bengani) that Shri Rajendra Jain and his concerns named therein were legally importing the diamonds directly from foreign countries/concerns on credit and the assessee in that case had purchased the diamonds by issuing cheques/RTGS and that the assessee had produced VAT return and VAT audit report and the supporting bills of purchase; and later when sales of diamonds purchased from Shri Rajendra Jain concerns took place, evidences were led by that assessee to substantiate the sales. In that case also the AO without a murmur has accepted the sales even though he disbelieved the purchases of the diamonds which were eventually sold and shown as part of turnover in sales as in the present case before us. In the case of (Manoj Bengani) after analysing the evidences furnished by the assessee and the modus operandi as suggested by Shri Rajendra Jain, we had no hesitation in finding that the allegation of Revenue had no legs to stand and we held that the purchase of diamonds by that assessee from Shri Rajendra Jain concern cannot be held to be bogus. In the case in hand, we note that due to reopening notice being sent by AO [Bikaner/ Rajasthan] to the branch shop at Bikaner (Rajasthan), the assessee raised the objections of territorial jurisdiction, since the assessee was being assessed regularly at Kolkata for a very long time and so when the department realized that jurisdiction in the 6 & 2470/Kol/2017 Shri Sharad Kumar Rampuria, AY 2008-09 case of assessee was at Kolkata, they transferred the assessment to Kolkata AO at the fag end and AO/ITO, Wd-36(2), Kolkata ultimately passed order u/s. 144 of the Act rejecting the contention of assessee that purchases from Shri Rajendra Jain & other concerns are genuine and made the additions on the entire purchase made from Shri Rajendra Jain & other concerns to the tune of Rs.1,12,79,643/-only on the statement recorded during search in the concerns of Rajendra Jain, Sanjay Choudary and Dharmachand group, the AO concluded that the purchases from these concerns made by assessee are not genuine. During appeal, the Ld. CIT(A) accepts that the assessee produced all documents to support the purchases made from Shri Rajendra Jain concerns including the proof of payments made through banking channel, however the Ld. CIT(A) brushed aside the same on the unreasonable contention that “the documents and purported evidence filed in appeal contending that the purchases were genuine because payments were made through banks, there was shifting of goods etc. are matters which do not deserve any consideration in appeal and they are being treated as such”, which action of Ld. CIT(A) cannot be countenanced in the backdrop of the jurisdictional dispute between the assessee and department and at the fag end only the AO at Kolkata issued notices to assessee and framed assessment. The Ld. CIT(A) taking note of this fact ought to have resorted to the procedure envisaged under Rule 46 of the Income Tax Rules, 1962 (hereinafter the “Rules”) and called for the remand report in accordance to law and dealt with the merits of the evidence/material produced by the assessee to show that the goods purchased from Shri Rajendra Jain & other concerns are genuine by adducing evidence to show that it was purchased with proper bills/vouchers like VAT documents, VAT audit, and to substantiate transport of goods from Shri Rajendra Jain’s concern to assessee’s place at Bikaner/Kolkata, payments made through bank etc. which could have negated the allegation made by Shri Rajendra Jain as we did while adjudicating the merits of such an addition in case of Manoj Begani (supra) wherein we held that purchases made by the assessee from Shri Rajendra Jain’s concern are not bogus and modus operandi as suggested by Shri Rajendra Jain u/s. 132(4) is absurd and defies all logic. So, similarly, in this case, when the assessee produced the documents/materials as aforesaid, the Ld. CIT(A) has shut it down in an arbitrary manner 7 & 2470/Kol/2017 Shri Sharad Kumar Rampuria, AY 2008-09 which action is anti-thesis to Rule of Law particularly Rule 46 of Rules as aforesaid and therefore, the order of Ld. CIT(A) is erroneous. Be that as it may, we note that though the Ld. CIT(A) opined at para 2 of his impugned order that since assessee did not adduce any evidence before the AO, the allegation that purchases are bogus is an inevitable conclusion (which according to us, is erroneous because assessee for just cause can bring evidence/additional evidence which it could not produce before the AO in accordance to Rule 46A of the Rules which Ld. CIT(A) did not invoke, which omission vitiates the finding on the facts narrated above). However, we note that at para 3, the Ld. CIT(A) after going through the audited financials of the assessee has made a finding in his own words “Another relevant factor which is apparent in the case is that the amounts of purchases which are alleged by the Ld. AO to be bogus are only a portion of the total purchases made by the assessee-individual. Therefore, in my considered view of the matter, while it appears that the purchases had been made from parties which were bogus, the purchases themselves, per se were not bogus”[ Emphasis given by Ld CIT(A)] 6. Moreover, we note that the AO only on the basis of the statement recorded during search in the concerns of Rajendra Jain, Sanjay Choudary and Dharmachand group concluded that the purchases from these concerns made by assessee are not genuine. However in order to ascertain the veracity of the statement of Shri Rajendra Jain, the department ought to have confronted, the assessee with the statement of Shri Rajendra Jain and Dharmichand Jain and given an opportunity to the assessee to cross examine them, failure to do so has made the statement of all these persons which have been adversely relied upon by the AO against assessee to make addition, is legally fragile as held by Hon’ble Supreme Court in Andaman Timber Industries (supra), so on this score alone the action of AO to make the entire purchase price from concerns of Rajendra Jain & others to the tune of Rs.1,12,79,643/-as addition only on statements of third persons without being tested by cross-examination is vitiated; and without any other corroborative material to substantiate the allegation levelled against the assessee, the Revenue appeal fails.
Coming back to the facts and circumstances as discussed at para 5 supra, we confirm the Ld. CIT(A)’s finding in para 3 as reproduced above that the purchases made by the assessee from the concerns of Mr. Rajendra Jain & other concerns cannot be held to be 8 & 2470/Kol/2017 Shri Sharad Kumar Rampuria, AY 2008-09 bogus. However, after having said so, we do not countenance the action of estimation resorted to by the Ld. CIT(A) again on the peculiar facts of the case. We note that the assessee for AY 2007-08 disclosed GP @ 13% and for the subsequent assessment year 2009-10 the disclosed GP was 10.61% whereas the disclosed GP for AY under consideration viz. AY 2008-09 was 15.65%. Even after taking note that the average of the three years is 13.08% still the Ld. CIT(A) made addition of 20% of the purchases of goods of Rs.1,12,79,643/- and confirmed the addition of Rs.22,55,929/-. Since the aforesaid figures have not been controverted by Revenue, we note that the assessee in this assessment year has disclosed GP @ 15.65% which is the highest in the previous as well as the subsequent assessment years are concerned and even if for argument sake we take that assessee had indulged in purchases from grey market and resorted to get bogus bills from Shri Rajendra Jain & other concerns, then also the settled position of law on this issue is that only the GP addition for the element of profitability be restricted to the percentage of the purchases made from Shri Rajendra Jain’s concerns which in this case is to the tune of Rs.1,12,79,643/-. This exercise of computing the reasonable GP on this amount [Rs.1,12,79,643/.] according to us, can be safely taken as the average of assessee’s GP for three years which comes to 13.08%; Before we do so, we note that the goods purchased from Shri Rajendra Jain & other concerns has been sold out by the assessee and duly reflected by the assessee in its audited books, which sale figures have not been disturbed by the AO, which means the sales of goods purchased from Shri Rajendra Jain’s & other concerns to the tune of Rs.1,12,79,643/- has been accepted by AO. In other words, when sales of goods which is supposed to have been purchased from Shri Rajendra Jain’s & other concerns have been accepted by the AO without a murmur, then the entire purchases from Shri Rajendra Jain’s concerns cannot be added as done by the AO. We note at the cost of repetition that the settled position of law on this issue is that, when the purchases are not bogus, the GP addition for the element of profitability be restricted to the percentage of the purchases made from Shri Rajendra Jain’s concerns which can be taken safely as the average of assessee’s GP for three years which comes to 13.08%; in this context we note that for this Assessment Year 2008-09, the assessee suo motu has offered higher GP of