S. GUPTA & CO.,JAIPUR vs. ITO 12(2)(1), MUMBAI

सुनवाई क� तार�ख / : 26.04.2018 Date of Hearing घोषणा क� तार�ख / : 16.05.2018 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order by the Commissioner of Income Tax (Appeals) dated 18.03.2016 and pertains to the assessment year 2007-08.

read as under:

1. The order passed by the Learned CIT(A) u/s. 143(3)/147/250 of the Income Tax Act, 1961 is void ab-initio and deserves to be quashed.

2. Under the facts and circumstances of the case the Learned CIT(A) has erred in confirming the addition of Rs. addition of Rs.77,62,182/- u/s. 69C on account of alleged bogus purchases.

M/s. S. Gupta & Co 3. Brief facts of the case are as under:

The assessee firm is a commission agent and dealing in precious stones. The assessee filed ROI on 08.11.2007 declaring NIL income. the Assessing Officer received information from the ACIT, Central Circle-I, Jaipur that during the course of search and seizure action in the Vijay Group and Lalwani Group of Jaipur it was seen that the assessee has entered into bogus purchase transactions with 6 parties viz; Vaishali Gems Groups Rs.15,36,406/-, Anshu Gems Rs.25,04,836/-, Saloni Exports Rs.1,17,101/-, Riddhi Siddhi Gems Rs.4,72,834/-, Sudh Laxmi Gems Rs.9,04,150/-, Vijay Gems Rs.12,26,855/- totaling to Rs.77,62,182/-. After recording reasons, the assessment was reopened by issue of notice u/s.148. During reassessment proceedings, the Assessing Officer issued notice u/s. 142(1) to the assessee requiring him to produce details of purchases made and also details of payments made to these 6 parties. The assessee filed copy of ledger A/cs, purchase bills, copy of bank statement. The assessee stated that the payments have been made by crossed account payee cheques. It was also stated that the assessee is maintaining stock register and the purchases are verifiable in terms of quantity of stock. The assessee furnished complete details of parties along with confirmations, PAN and complete address of the parties. However, the Assessing Officer held that it has been found during the course of search and seizure that the assessee has obtained a bill and issued a cheque on commission basis, therefore the explanation or reference of confirmation, PAN and addresses are meaningless. The assessee had relied on the decision in the case of CIT vs. Nikunj Eximp Enterprises Pvt Ltd. However, the Assessing Officer found that the assessee's case is different from the case of Nikunj

M/s. S. Gupta & Co Eximp as in the assessee's case they have been categorically asked to establish the purchase shown from the above mentioned parties. Further, the fact that bogus purchase bills have been obtained from the above mentioned parties has also been communicated to the assessee, unless otherwise established, such arranged evidences could not be regarded as genuine evidences of genuine purchases. The assessee had submitted a copy of decision of Hon'ble Jaipur ITAT in one of group cases namely M/s.Marine Mineral and Herbal Remedies Pvt Ltd vs.ACIT CC-I, Jaipur. The AO found that the said decision of Hon'ble ITAT Jaipur goes against the assessee wherein the Hon'ble ITAT has very categorically held that in such circumstances such purchases is to be taken as bogus.

Further the AO opined that when there is claim of purchases and it is unearthed that no such purchases has actually been made from such party then it is quite obvious that entire claim of such assessee is a bogus one. Accordingly the AO was of the view that the entire purchases be disallowed. Further the AO held that when purchase has been shown in the books of accounts and payment has been made later on, it is very obvious that first credit of such purchase has been made and thereafter payment has been shown through Hawala operators. Therefore, the AO held that the source of cash paid to the parties from whom actual purchases have been made comes u/s.69C because payment shown through account payee cheque is not in respect of actual purchase but in respect of bogus purchases. Taking into account the facts and circumstances of the case, the Assessing Officer disallowed the entire bogus purchases of Rs.77,62,182/- and added to the total income of the assessee.

M/s. S. Gupta & Co 4. Upon the assessee’s appeal, the ld. Commissioner of Income Tax (Appeals) held as under:

As regards the re-opening the ld. Commissioner of Income Tax (Appeals) held as under: The 1st ground of appeal is against the reopening of assessment The ground states that the AO was not justified in reopening the assessment. During appeal, nothing was argued on this ground. In any case, I find that the AO reopened the assessment based on cogent material in his possession indicating escapement of income. There was no scrutiny assessment in this case and the reopening is made within 4 years of the end of the AY. 1 therefore fail to appreciate the grievance of the appellant on this issue. As such 1 dismiss this ground of appeal and uphold the action of the AO in reopening the assessment.

The appellant is alleged to have made bogus purchases from 6 parties viz; Vaishali Gems Groups Rs. 1536406, Anshu Gems Rs.2504836; Saloni Exports Rs.1117101, Riddhi Siddhi Gems Rs.472834, Sudh Laxmi Gems Rs.904150, Vijay Gems s.1226855 totaling to Rs.7762182. The AO required the appellant to produce details called for through notice u/s. 142(1) detailed above. The appellant filed copy of ledger A/cs, purchase bills, copy of bank statement 5.3 Before me during hearing the same arguments were repeated as made before the AO. I find from the assessment order that the AO has held in page No.7 that the purchases from these 6 parties has actually been made but they are to be held as bogus as the genuineness of the purchases has not been established. Further during the course of search and seizure proceedings in the case of Vijay Group and Lalwani Group of Jaipur it was noticed that the appellant has obtained purchases bills from the above mentioned 6 parties. The hawala dealers have admitted during the course of action u/s.132 of the I T Act that they used to issue such bills and obtain cheque and thereafter charging commission, used to return cash to the appellant. One Mr. Khushi Kumar Ameriya who is an employee of the appellant has admitted and very categorically stated the appellant used to obtain bogus purchases from Vijay and Lalwani group. I also note that the AO did not doubt the sales made but it is equally true that such sale is not of the same goods shown in the name of the purported suppliers because there is no purchase from them. The appellant seeks to discharge his onus by simply producing copies of the invoices and ledger accounts with proof of payment. He seems to forget that it is his claim

M/s. S. Gupta & Co that purchases have been made from the purported suppliers. The AO is merely seeking to verify this claim.

5.4 The appellant would have me believe that the findings of the search and seizure action in Vijay Group and Lalwani Group of Jaipur should be brushed aside and that the purchases should be believed as genuine simply because he has made payment in cheques to these 6 suppliers. I also find that the AO has relied on the statement of Mr Khushi Kumar Ameriya recorded on 21/05/2009 u/s 132(4) of the Act. The statement is recorded in Hindi and as per answer to Ql, Mr Ameriya accepts that he is associated with the present appellant for the past 12-13 years. He stated that he is looking after the banking operations of the present appellant and is also a director in a sister concern of the appellant by the name of Clarity Gold Pvt Ltd. He further explained the modus operandi very clearly in his answers to Q 6 to Q 11 that various suppliers belonging to the Vijay Group and Lalwani Group do not actually supply the material' but only furnish the bill. The said bill is paid in cheque and the cash returned by the concern to the appellant and his sister concerns. From his answers I find that the 6 bogus suppliers are part of the Vijay Group and Lalwani Group which was also searched. The specific answer to Q 11 explains the matter clearly. Therein he has stated that the present appellant alongwith other sister concerns obtain bogus purchase bills only from these 6 parties. He has then identified the bogus purchasers in each concern as a part of the same answer. I find that S Gupta & Co (the present appellant) has obtained bogus bills of Rs 77,62,182 from these 6 parties as per the statement of Mr Ameriya. The relevant parts of the statements are annexed to this order.

5.5 The appellant has made detailed submissions as to why his purchases from these 6 companies should be considered as genuine. The submissions have already been reproduced in para 4 above. The appellant states that he has discharged his primary onus by providing all documentary proof of purchase and existence of the supplier. He also states that he has no physical contact with the supplier as the transaction is arranged through brokers. However no evidence whatsoever towards this claim of brokers has been filed before me or the AO. While making these submissions, the appellant has given a complete go by to his own statement on oath recorded during the search on the Vijay Group & Lalwani Group (The 6 parties are part of the Vijay Group & Lalwani Group) that he is obtaining only bogus bills from those concerns. The appellant would have me believe that documentary evidence should be read in isolation without reference to his own sworn statement. I am afraid I cannot agree with the appellant. The sworn statement has not been retracted and explains the detailed modus operandi which is why it is made part of this order. The appellant has not identified the brokers through whom the transaction is allegedly arranged. In the light of this and the emphatic statement of Mr Ameriya, I am constrained to hold that the appellant has indeed made bogus purchases from the 6 bogus suppliers.

M/s. S. Gupta & Co 5.6 The statement of Mr Ameriya clearly indicates that the appellant has obtained only bogus bills from the 6 parties mentioned above. The entire modus has been clearly explained in the statement. The appellant is attempting to side track the issue to the Sales Tax matter and seek shelter of various judicial decisions. It is clear from the facts above, that this is not a case where the information has been received from the sales tax dept. The issue of bogus purchase is emerging from a search action and NOT the sales tax dept. Going further, a key person of the appellant group has categorically admitted on oath that they are obtaining bogus bills from some concerns of the searched parties. On going through the statement, I am of the opinion that the AO is correct in treating the- purchase from these 6 parties as bogus and I therefore uphold the addition of Rs.77,62,182/-.

"Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to lax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the AO has cause or justification to know or suppose (hat income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Managnese Ore Co, ltd. v. ITO(1991) 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction ITO v. Selected Dalurband Coal Co, (P.) Ltd. (1996) 217 ITR 597 (Supreme Court): Raymond Woollen Mills Ltd. v. ITO (1999) 236 ITR 34 (Supreme Court).”

M/s. S. Gupta & Co 13. In these circumstances learned departmental representative has referred to Hon’ble Gujarat High Court decision in the case of Apex Appeal No. 240 of 2003 in the case of N K Industries vs Dy CIT, order dated 20.06.2016, wherein hundred percent of the bogus purchases was held to be added in the hands of the assessee and tribunals restriction of the addition to 25% of the bogus purchases was set aside. It was expounded that when purchase bills have been found to be bogus 100% disallowance was required. The special leave petition against this order along with others has been dismissed by the Hon’ble Apex Court vide order dated 16.1.2017.

"Considering the law declared by the Supreme Court in the case of Vijay Proteins Ltd. Vs. Commissioner of Income Tax, Special Leave to Appeal (C) No.8956/2015 decided on 06.04.2015 whereby the Supreme Court has dismissed the SLP confirmed the order dated 09.12.2014 passed by the Gujarat High Court and other decisions of the High Court of Gujarat in the case of Sanjay Oilcake Industries Vs. Commissioner of Income Tax (2009) 316 ITR 274 (Guj) and N.K. Industries Ltd. Vs. Dy. C.I.T., Tax Appeal No.240/2003 decided on 20.06.2016, the parties are bound by the principle of law pronounced in the aforesaid three judgments.

M/s. S. Gupta & Co (in writ petition no 2860, order dt. 18.6.2014). However, the facts of that case were different inasmuch as sales were to the Government department. However the facts and circumstances of the present case indicate that assessee has engaged into dealings in the grey market. Dealings in the grey market give the assessee various savings at the expense of the Exchequer. Hence, on the overall consideration of facts and circumstances and following the decision of Hon’ble Gujarat High Court in the case of CIT vs Simit P. Sheth [2013] 356 ITR 451 (Guj.) we hold that a disallowance of 12.5% of the bogus purchase would meet the end of justice. Accordingly, we modify the order's of authorities below and direct that the disallowance in this case should be restricted to 12.5% of the bogus purchase.