HAR GOBIND & SONS,MUMBAI vs. ITO 31(1)(5), MUMBAI

At the time of hearing, the Ld A.R did not press the ground relating to non-issue of notice u/s 143(2) of the Act and hence the said ground is dismissed as not pressed. The remaining grounds relate to the addition of Rs.35.28 lakhs relating to alleged bogus purchases.

The assessee is a partnership firm and is engaged in the business of manufacture and export of diamond studded jewellery. The assessing officer received information that one Shri Praveen Kumar Jain and his group of companies were engaged in providing only accommodation bills without actually supplying materials. It was noticed that the assessee has purchased diamonds from a concern named M/s Mohit International belonging to Praveen Kumar Jain group. Hence the AO re-opened the assessment.

During the course of assessment proceedings, the AO issued notice u/s 133(6) of the Act to M/s Mohit International, but the same was returned un- served. The AO deputed an Inspector to serve the notice, but he reported that the concern was not available in the given address. Hence the AO asked the assessee to produce the above said supplier, but the assessee could not produce it. It was notice that Shri Nilesh Parmar was the proprietor of M/s Mohit International and he had also confessed before the Investigation wing that he was providing only accommodation bills. Hence the AO asked the assessee to prove the genuineness of purchases. The assessee furnished copies of purchase invoices, payment details, export invoices and contended that the diamonds purchased from M/s Mohit International has been used in manufacturing of jewellery and the said jewellery has also been exported to a concern named M/s Butani Jewellery Ltd located in Hongkong.

The AO also observed that the Tax auditor has reported assessee has not maintained stock register. Hence the AO did not accept the reconciliation of purchases with sales. Accordingly the AO came to the conclusion that the assessee has failed to prove the genuineness of purchases and accordingly disallowed entire purchases of Rs.35.45 lakhs made from M/s Mohit International.

Before Ld CIT(A), the assessee reiterated the very same contentions urged before the AO. Besides that, the assessee has also furnished certain additional evidences in the form of confirmation letter obtained from M/s Mohit International, the income tax return copy of Shri Nilesh Parmar, proprietor of the above said concern, his retraction statement. The assessee submitted that the AO was not correct in observing that it did not maintain stock register. The assessee submitted that it has maintained stock register and the auditor has only reported that he has not examined the same. The Ld CIT(A) refused to accept the additional evidences and also did not accept other contentions of the assessee. Accordingly he confirmed the addition.

The Ld A.R submitted that the assessee has discharged the initial burden of proof placed upon it to prove the genuineness of purchases. He submitted that the assessee has furnished invoice copies, payment details, quantity details etc. to prove the purchases. He submitted that the diamonds purchased from M/s Mohit International has been used to manufacture jewellery and the jewellery so manufactured has been exported to Hong Kong. He submitted that the AO has not doubted the export sales. He submitted that the assessee could not have exported jewellery without purchasing diamond. He submitted that the assessee has maintained stock register and the tax auditor has only stated that he has not verified the same. He submitted that the assessee has reconciled the purchases with consumption/sales and the said reconciliation has not been found fault with by the tax authorities. In the alternative, he submitted that the addition may be restricted to 5% of the value of purchases.

He submitted that the G.P rate declared by the assessee during the year under consideration has gone up by 3% vis-à-vis last year. The disallowance made by the AO would give astronomical G.P rate of 68.55%, which is unheard in diamond industry. He submitted that the AO has made the impugned addition without rejecting the book results and further, he has made the addition only for the reason that the supplier did not appear before him. He submitted that the said reasoning of AO would fail in view of the decision rendered by Hon’ble Bombay High Court in the case of Nikunj Exim Enterprises P Ltd (372 ITR 619). He submitted that the assessee has filed confirmation letter, income tax statement of Shri Nilesh Parmar as additional evidences before Ld CIT(A), but the same has not been admitted by him. He further submitted that Shri Nilesh Parmar has retracted from his statement.

On the contrary, the Ld D.R strongly placed reliance on the order passed by Ld CIT(A).

We have heard rival contentions and perused the record. The assessee is engaged in the business of manufacture of diamond jewellery. We notice that the assessee has reconciled the purchases and sales, i.e. the assessee has shown that the diamonds purchased from M/s Mohit International has been consumed and the jewellery has been exported to Hong Kong. The Ld A.R also took us through the reconciliation statement furnished before the tax authorities. For instance, the assessee was having opening stock of 23.56 carats of diamonds as on 01-04-2006. It purchased diamonds weighing 60.76 carats from 08-04-2006 to 03-05-2006. Together with opening stock, the aggregate quantity of diamond available with the assessee would be 84.32 carats. On 05-05-2006, the assessee has used & sold 52.49 carats of diamonds, which may consist of opening stock and part of purchases. This fact demonstrates that a part of purchased diamonds has been sold on 05-05- 2006. So is the case in the subsequent sales also. This reconciliation statement amply proves that the diamonds purchased by the assessee during the year under consideration has been in fact, used and sold. As rightly pointed out by Ld A.R, the assessee could not have sold the diamond studded jewellery without actually purchasing diamonds. In the instant case, the assessee has exported the jewellery and the AO has not doubted the said export also. In this kind of situation, what is required to be taxed is the profit element, if any, involved in the purchases and hence there is no justification in disallowing entire amount of purchases.

When the assessee is able to reconcile the purchases with sales, the argument of the assessing officer that the accommodation bills have been taken by the assessee only to reduce the profits would fail. As noticed earlier, the disallowance of purchases would give a G.P ratio of 68.55%, which is unheard of in the diamond trade. This factual position also does not support the argument of the AO. Under these set of facts, we are of the view that the ld CIT(A) was not justified in confirming the disallowance of entire amount of purchases.

There is no doubt that the responsibility to prove the purchases claim is placed upon the assessee. In the instant case, the assessee has not produced the supplier before the AO. The assessing officer also could not serve notice u/s 133(6) of the Act to the supplier. The proprietor of M/s Mohit International, Shri Nilesh Parmar has admitted that he has only provided accommodation entries, but the said statement was later retracted by him. All these facts show that there is a possibility that the assessee might have sourced the diamonds from some other source also. In that event, there is a possibility that the assessee might have made some profit. In that case, we are of the view that the issue agitated before us may be resolved by estimating profit element embedded in the purchases.

We notice that the assessee has accepted for an addition of 5% and the Ld A.R also submitted the same as his alternative contention. We find merit in the said contentions, since the purchases and sales have been reconciled. Accordingly we set aside the order passed by Ld CIT(A) and direct the AO to restrict the addition to 5% of the value of alleged bogus purchases made from M/s Mohit International.

In the result, the appeal of the assessee is partly allowed. Order has been pronounced in the Court on 21.5.2018.