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Income Tax Appellate Tribunal, “I” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the assessee is directed against the order dated 30- 06-2017 passed by the learned CIT(A)-17, Mumbai and it relates to A.Y. 2006- 07. The assessee is aggrieved by the decision of the learned CIT(A) in confirming the addition relating to bogus purchases of diamonds.
The assessee is engaged in the business of manufacturing and selling of Gold/silver jewellery and trading of Diamond and colour stones. During the course of survey proceedings conducted in the hands of Shri Hiren L Raval (Prop. of M/s Zalak Impex), it was noticed that he was not carrying on any genuine business activity in purchase and sale of diamonds, i.e., he has provided only accommodation entries. He also confirmed the same in the statement taken from him during the course of survey as well as during the course of assessment proceedings carried out in his hands. It was noticed that 2 M/s. Inter Carat Jewellery Pvt. Ltd.
the assessee has purchased diamonds from M/s Zalak Impex to the tune of Rs.201.28 lakhs and has sold diamonds to the tune of Rs.10.17 lakhs to it. Based on the above said information, the Assessing Officer reopened the assessment by issuing notice u/s. 148 of the Act. The assessee was also supplied with a copy of reasons for reopening. Before the Assessing Officer, the assessee contended that purchases made from the above said party are genuine. The assessee furnished copies of purchase bills and also details of payment made to the above said concern. The assessee submitted that the diamonds so purchased have either been used in making of jewellery or exported. The assessee has also furnished a statement reconciling the purchases of diamonds made from M/s Zalak Impex with its utilization/sales. However, the assessee could not furnish any other documents such as delivery challans, stock register, outward and inward register etc.
The AO noticed that the assessee has purchased same quality diamonds at different rates on the very same day. Since the assessee did not furnish any stock register, the AO rejected the reconciliation statement. The AO also tried to trace Shri Hiren Raval, the proprietor of M/s Zalak Impex, but he was not traceable. The assessee also could not produce Shri Hiren Raval. The assessee sought an opportunity to cross examination of Shri Hiren Raval, but the AO rejected the same by observing that the said request was not valid. In this regard, the AO placed reliance on the following case law:- (a) Dr. S.C. Gupta Vs. CIT (248 ITR 782)(All) (b) Ramesh T Savla Vs. ACIT [Tax Appeal No.655 of 2000 (ITA No.1610/B/93)]
Accordingly the AO held that the assessee has failed to prove the genuineness of purchases made from M/s Zalak Impex. He further relied upon the following case laws to come to the conclusion that the entire purchases made from M/s Zalak Impex should be disallowed:- (a) CIT Vs. Chandravilas Hotel (1987)(164 ITR 102)(Guj) (b) CIT Vs. Modi Stone Ltd (2011)(203 Taman 123)(Delhi) (c) Champalal Choudhary (2012)(54 SOT 398)(JP)
3 M/s. Inter Carat Jewellery Pvt. Ltd.
(d) J.R Solvent Industries (P) Ltd Vs. CIT (209 Taxman 18)(P & H) (e) CIT Vs. La Medica (250 ITR 575)(Delhi) The AO further held that even if the assessee was able to reconcile the quantity details, yet the assessee could not prove the purchases made from M/s Zalak Impex. Accordingly he held that it has to be inferred that purchases were made by the assessee from undisclosed parties out of unexplained sources of income. Since the sources of cash paid to undisclosed parties remains unexplained, the same is required to be added u/s 69C of the Act. The AO, by placing reliance on host of case laws, also held that the payment by way of cheques would not prove the genuineness of purchases.
Accordingly, the AO held that the purchases of Rs.201.28 lakhs made from and sales of Rs.10.17 lakhs made to M/s Zalak Impex are non-genuine. Accordingly he added the aggregate amount of Rs.211.45 lakhs to the total income of the assessee. The ld CIT(A) also confirmed the same and hence the assessee has filed this appeal.
The Ld A.R contended that the assessee has reconciled the purchases and sales, meaning thereby, the assessee could not have sold/utilised the diamonds without purchasing the same. Accordingly he submitted that the disallowance of entire amount of purchases is not justified. With regard to the statement given by Shri Hiren Raval, the Ld A.R submitted that it was a self serving statement and hence it cannot be used against the assessee. He also submitted that the assessing officer did not provide an opportunity to cross examine Shri Hiren Raval and hence his statement could not be relied upon by AO. He further submitted that the assessee has provided all details like invoices, details of payments etc., to prove the purchases. Since the assessee has stopped dealings with Shri Hiren Raval, it could not produce him before the AO. He submitted that the AO has placed his reliance on the statement given by Shri Hiren Raval disregarding various evidences furnished by the assessee.
4 M/s. Inter Carat Jewellery Pvt. Ltd.
The Ld A.R submitted that the SMC bench of Tribunal has considered an identical issue in the case of M/s Exim Gems (ITA No.346/M/2017 dated 31.7.2017). The SMC bench noticed that Task Force Group for diamond industry constituted by Government of India, Ministry of Commerce and industry has suggested Benign Assessment Procedure (BAP) scheme and recommended presumptive tax for net profit calculated @ 2% for trading activity and 3% for manufacturing activity or 2.5% across the board. Accordingly the SMC bench sustained the addition to the extent of 2.5% of value of alleged bogus purchases. The Ld A.R also placed reliance on the decision dated 30.10.2017 rendered by the co-ordinate bench in the case of M/s Choron Diamond (I) P Ltd (ITA No.4449/Mum/2016 & others), wherein also identical issue was considered. The bench noticed that the Ld CIT(A), in the above said case, has considered the CBDT Instruction No.2/2008 dated February 22, 2008, wherein the profit rate of 6% was considered reasonable. The bench also noticed that another co-ordinate bench had sustained identical addition to the extent of 4% in the case of M/s Amy Diam Vega Jewellery P Ltd Vs. DCIT (ITA No.5799 to 5801/Mum/2016 dated 28.09.2017). Then the coordinate bench took note of BAP scheme suggested by Task Force Committee, wherein profit range of 1.5% to 4.5% was recommended for manufacturing activities and profit range of 1% to 3% was recommended for trading activities. Accordingly, on a conspectus of the matter, the Co-ordinate bench sustained addition to the extent of 2% of the alleged bogus purchases.
The Ld A.R also placed reliance on another decision of co-ordinate bench dated 31.7.2015 rendered in the case of Tristar Jewellery Exports P Ltd (ITA No.7593/Mum/2011 & others), wherein the case of purchases made from M/s Zalak Impex was considered. The Ld A.R submitted that the co-ordinate bench has deleted the entire addition. He also relied upon the decision dated 30-01- 2018 rendered by the co-ordinate bench in the case of M/s Amity Interlinks Steels P Ltd (ITA No.3243/Mum/2012 & others), wherein addition to the extent of 2.5% was confirmed, after observing that the AO has failed to carry
5 M/s. Inter Carat Jewellery Pvt. Ltd. out any further investigation to disprove the evidences furnished by the assessee.
The Ld A.R further submitted that the alleged bogus purchases, in the instance case, constitute approximately 7% of the total purchases. He further submitted that the AO has added the sales value also and the same is not justified, since the assessee has already offered the sales to taxation. The Ld A.R further submitted that the assessee has been incurring gross loss in AY 2004-05 and 2005-06, but declared Gross profit rate of 10.43% and net profit rate of 2.92% during the year under consideration. He submitted that these figures show that the assessee has been making sincere efforts to make profits and in this context also, the allegation of bogus purchases is not justified. He submitted that the gross profit rate declared in the subsequent years was around 8% only and hence the assessee has declared highest G.P rate of 10.42% during the year under consideration. Accordingly he submitted that the assessee had no reason to enter into bogus transactions. Accordingly, the Ld A.R submitted that no addition is warranted in the facts and circumstances of the case. In the alternative he submitted that the addition may be sustained to the extent of 2.50% as held in other cases.
On the contrary, the ld D.R submitted that the assessing officer has re- opened the assessment on the basis of statement given by Shri Hiren Raval, the proprietor of M/s Zalak Impex that he was providing only accommodation bills without actually supplying materials. He also reconfirmed the same during the course of assessment proceedings carried out in his hands. The AO has asked the assessee to produce Shri Hiren Raval, but the assessee has failed to produce him before the AO. On the contrary, the assessee has simply placed reliance on the invoices and payment details, which have been disowned by Shri Hiren Raval. He submitted that the surrounding circumstances show that the purchases made by the assessee were bogus and hence the AO, inter alia, placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Sumati Dayal (214 ITR 801) to reject the entries
6 M/s. Inter Carat Jewellery Pvt. Ltd. made in the books of accounts of the assessee. He submitted that the assessee did not advance its case properly before Ld CIT(A) and hence the Ld CIT(A) was justified in confirming the additions made by the AO.
We heard the parties and perused the record. We notice that the AO has placed his reliance fully on the statement given by Shri Hiren Raval and accordingly disallowed entire purchases made from M/s Zalak Impex. We also notice that the AO has also added the sales value of Rs.10.17 lakhs also. With regard to the addition of Rs.10.17 lakhs, we agree with the contentions of Ld A.R that the said addition is liable to be deleted, as the assessee itself has already offered the same as its income in the form of sales. Accordingly we direct the AO to delete the addition of Rs.10.17 lakhs, referred above.
With regard to the disallowance of purchases made from M/s Zalak Impex, the contention of the assessee is that it has made one to one reconciliation of purchases of diamonds with sales/manufacture. It is the contention of the assessee that it could not have sold/utilised diamonds without purchasing the same. There is merit in the said contentions of the assessee. We notice that the AO has placed reliance on various case laws to support the disallowance made by him. However, the issue under consideration being a factual issue, the same is required to be decided on the basis of facts surrounding the issue. As noticed earlier, the AO has placed his entire reliance on the statement given by Shri Hiren Raval, while the contention of the assessee is that the statement so given by Shri Hiren Raval is a self serving statement. We notice that the assessee has sought for an opportunity to cross examine Shri Hiren Raval, but the same has been denied by the AO. We notice that the assessee has furnished copies of invoices and payment details to prove the genuineness of purchases. We notice that the AO did not examine those details.
From the quantity details furnished in the Annual report, we notice that the assessee does not hold any stock of diamonds as at the year end, meaning
7 M/s. Inter Carat Jewellery Pvt. Ltd. thereby all the opening stock and purchases have been consumed or sold during the year under consideration. Hence there is merit in the contentions of the assessee that it could not have sold/utilised the diamonds without actually purchasing the same.
However, it cannot be said that the assessee could conclusively prove that the diamonds were purchased from M/s Zalak Impex, since the assessee did not produce the Shri Hiren Raval or could obtain confirmation from him. Hence one of the possible views is that the assessee could have purchased diamonds from some other person and could have obtained only the bills from the above said concerns. There is also a possibility; in that case, the assessee could have purchased goods at a price lower than the apparent consideration. We notice that the AO has also visualised this possibility and accordingly observed that the assessee could have made payments from undisclosed sources. In that case, the disallowance of entire amount of purchases is not warranted. Since these are all only inferences which are not supported by any material, the observation of the AO that disallowance u/s 69 of the Act is to be made cannot be upheld.
Since the purchases made from M/s Zalak Impex were not conclusively proved, we are of the view that the profit element embedded there in may be added as per the alternative prayer of the assessee. For this proposition, we draw support from the decision rendered by Hon’ble Gujarat High Court in the case of Simit P Sheth (356 ITR 451). According to Ld A.R, these diamonds have been exported and hence there will not be much variation in the prices as the prices of diamonds would depend upon the quality. The Ld A.R also submitted that the gross profit rate would have gone down, if the purchases were bogus and prices were inflated, while the fact remains that the G.P rate has actually gone up during the year under consideration vis-à-vis other years. On these set of facts, we find merit in these submissions of Ld A.R. The Ld A.R has submitted that the profit element may be estimated at a reasonable
8 M/s. Inter Carat Jewellery Pvt. Ltd. rate and he suggested a rate of 2.50% by taking support from the orders passed by the Tribunal.
We have noticed that the Task force committee has recommended profit range of 1.5% to 4.5% for manufacturing activities and profit range of 1% to 3% was recommended for trading activities. The assessee has undertaken both trading and manufacturing activities. Accordingly we are of the view that the profit element embedded in the impugned purchases may be estimated at 3%. Accordingly we set aside the order passed by Ld CIT(A) and direct the AO to sustain the addition to 3% of the value of alleged bogus purchases and in our view, the same would meet the ends of justice. We order accordingly.
Since, we have disposed of the main appeal itself, Stay Application filed by the assessee shall become infructuous.
In the result, the appeal filed by the assessee is partly allowed and Stay Application filed by the assessee is dismissed. Order has been pronounced in the Court on 07.03.2018.