PRANKIT EXPORTS, MUMBAI vs. ITO 25(3)(2), MUMBAI

आयकर अपीऱीय अधिकरण “C” न्यायपीठ म ुंबई में। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER आयकर अपीऱ सं./I.T.A. No.1441/Mum/2016 (नििाारण वर्ा / Assessment Year: 2007-08) बिाम/ Prankit Exports, ITO 25(3)(2) 301 Shviling Apartments, Mumbai Juhu 10t h Road, v. Vile Parle(W), Mumbai-400049 स्थायी ऱेखा सं./ PAN : AAAFP2359K (अपीऱाथी /Appellant) (प्रत्यथी / Respondent) ..

आयकर अपीऱ सं./I.T.A. No. 3133/Mum/2016 (नििाारण वर्ा / Assessment Year:2007-08) बिाम/ ITO 25(3)(2), Prankit Exports, 6t h floor, 301 Shviling Apartments, C-10 Pratyakshkar Bhavan, Juhu 10t h Road , v. BKC, Bandra (E), Vile Parle(W), Mumbai- 400051 Mumbai-400049 स्थायी ऱेखा सं./ PAN : AAAFP2359K (अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent)

Assessee by: Shri. R.K Sinha Revenue by : Shri. Rajat Mittal सुनवाई की तारीख /Date of Hearing : 15-01-2018 घोषणा की तारीख /Date of Pronouncement : 01-02-2018 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member These are cross appeals, filed by the assessee and Revenue, being ITA No. 1441/Mum/2016 and 3133/Mum/2016 respectively for assessment year 2007-08, which are directed against the appellate order dated

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 22.02.2016 passed by learned Commissioner of Income Tax (Appeals)-37, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2007-08 , the appellate proceedings had arisen before learned CIT(A) from the assessment order dated 27.03.2015 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) r.w.s 147 of the Income-tax Act, 1961 (hereinafter called “the Act”). 2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) in ITA no. 1441/Mum/2016, read as under:- “1. Assumption of jurisdiction by the AO for initiating reassessment proceeding is bad in law: 1.1 On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the assumption of jurisdiction by the Ld. Assessing Officer as the conditions laid down under section 147 to 151 of the Act for initiating reassessment proceeding have not been fulfilled. 1.2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the initiation of reassessment proceeding as there is no mention of the fact that satisfaction of the joint Commissioner has been taken for „the reasons for initiating reassessment proceeding' which is supplied to the assessee. 1.3. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the initiation of the reassessment proceeding even when the Ld. Assessing Officer erred in solely relying on the information of the investigation wing, Mumbai. The AO had not conducted any independent enquiry before issue of notice under section 148 of the Act. Hence, the Assessing Officer had no reason to believe that any income chargeable to tax has escaped assessment. 2. Assessment order is invalid for the reason that the procedure laid down by the hon'ble Supreme Court in the case of GKN driveshaft. (India) Ltd. 259 ITR 19 has not been followed: 2.1 On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the assessment order even when the Assessing Officer has not followed the procedure laid down by the hon'ble Supreme Court in the case of GKN driveshaft. (India) Ltd. 259 ITR 19 (SC). 3. Wrong addition on account of unexplained expenditure u/s 69C of the Act amounting to Rs. 77,70, 765/- : 3.1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the addition of Rs. 77,70,765/- on account of unexplained expenditure u/s 69C of the Act particularly

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 when the entire purchases from M/s Avi Exports have been recorded in the books of account. 3.2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the treatment of the purchases of Rs. 77,70,765/- as non-genuine by the Ld. Assessing Officer without appreciating the fact that the payments were made through account payee cheque. 3.3 On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the addition even when notice u/s 133 (6) of the act was issued to M/s Avi Exports was responded and also submitted ledger account, copy of bank statement, copy of PAN card, copy of sale bill of Vendor Form Copy, Custom attested Export Bills with Airway Bills and copy of confirmation (which is mentioned at para 6 of the assessment order). Hence the cross verification was also complete. 3.4. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in partially confirming the addition merely on 'the basis of third-party statement without giving opportunity to cross examine and without verifying the evidences filed by the appellant and without considering the documents available on his records. 3.5. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in estimating the net profit of 12.5% of the total purchase particularly when he has accepted that the Ld. AO has wrongly rejected the books of accounts. 4. Wrong addition on account of unexplained expenditure u/s 69C of the Act amounting to Rs. 29,09,702/- : 4.1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the addition u/s 69C of the Act when the purchases made are entered in the books of account. 4.2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the addition made by the AO simply because the letter under section 133 (6) of the Act was not responded by M/s Rajiv Impex and ignoring the fact that all the documents of the purchases were furnished to the AO. 4.3. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in estimating the net profit of 12.5% of the total purchase particularly when he has accepted that the Ld. AO has wrongly rejected the books of accounts 5. The appellant craved leave to add, alter or amend any of the aforementioned ground or grounds of appeal, which are without prejudice to each other, as and when an occasion may arise at the time of hearing.”

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 "On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting entire addition of Rs.93,45,409/-on account of bogus purchases." (ii) "On the facts and in the circumstances of the case and in law, the Id. CIT (A) has erred in not considering that the addition was made on the basis of information received from the DIT(Inv.) and Sales Tax Department, Maharashtra with regard to bogus purchases made by the assessee from dealers without supply of actual goods." (iii) "On the facts and in the circumstances of the case and in law the Ld. CIT (A) has erred in not considering that the hawala dealers have admitted on oath before the Sales Tax Authorities that they have not sold any material to anybody." (iv) "On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in not considering that the assessee could not prove the genuineness and creditworthiness of the purchase transactions during the course of assessment proceedings." (v) "On the facts and circumstances of the case and in law the Ld. CIT (A) has erred in estimating the profit at 12.5% on the total alleged bogus purchases from hawala dealers." (vi) "On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in not appreciating that purchases were made from some other parties which were not recorded in the books of accounts and only accommodation bills were obtained from hawala parties and there by attracting provisions of section 40A(3)." (vii) "On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in not appreciating the fact that applicability of provisions of 40A(3) attract 100% bogus purchases to be held as profit." (viii) "The appellant prays that the order of the Ld. CIT (A) on the above grounds be set aside and that of the Assessing Officer be restored." (ix) "The appellant craves leave to amend or to alter any ground or add a new ground, which may be necessary".

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 mention that the Revenue has originally processed return of income u/s. 143(1) of the Act and no scrutiny assessment u/s. 143(3) was framed by the Revenue . The Ld. DR did not objected to dismissal of the grounds of appeal being ground no.1 and 2 raised by the assessee challenged the reopening of the assessment u/s. 147 of the Act. Thus, keeping in view the factual matrix of the case we are inclined to dismiss the ground raised by the assessee being ground no. 1 and 2 challenging the reopening of the concluded assessment u/s. 147 of the Act. We order accordingly. 5. Now , we proceed to decide the appeals filed by the Assessee and the Revenue on merits . The brief facts of the case are that the search and seizure action u/s. 132 of the 1961 Act was carried out by the DGIT(Inv), Mumbai on 3rd October , 2013 in Shri. Rajendra Jain Group cases wherein statement on oath was recorded by Revenue of Shri. Rajendra Jain during the course of search and seizure operations u/s 132 that his companies/entities were involved in providing accommodation entries like bogus purchases, sales, unsecured loans, share capital etc.. The A.O observed from the information received from DGIT(Inv.), Mumbai that the assessee is also beneficiary who has obtained accommodation entries to the tune of Rs. 77,70,765/- through M/s. AVI Exports , one of the group concerns of Shri. Rajendra Jain Group, during the impugned assessment year under consideration. The AO invoked provisions of Section 147/148 after recording reasons to reopen the assessment as the income had allegedly escaped assessment. The notice dated 24-3-2014 u/s 148 was issued by the AO which was beyond four years from the end of the assessment year but however originally return of income was processed u/s 143(1) and no scrutiny assessment was framed by the Revenue u/s 143(2) r.w.s. 143(3). The assessee did not raised any objection to the reopening of the concluded assessment. The AO issued notices u/s. 133(6) to M/s. AVI Exports who in response submitted copies of ledger account of the assessee, books of accounts for the relevant period , copies of bank statement, copy of PAN card, copy of sale bill and copy of confirmation. The assessee was show-caused by the AO to substantiate that the transactions with AVI Exports were genuine in view of incriminating information in the possession of the AO but the assessee chose not to specifically reply to SCN issued by the AO and submitted that its earlier

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 reply be taken on record and it has nothing further to add. The AO also issued notice dated 23.02.2015 u/s 131 to said Sh. Rajendra Jain to attend the proceedings personally but he did not attended nor filed any details. The A.O also issue notice dated 23-02-2015 u/s. 133(6) to M/s. Rajiv Impex which stood un-replied/un-complied with . The assessee was confronted by the AO about the aforesaid non compliances but the assessee did not submitted any further reply/explanations. Since the said purchases remained unverifiable , the A.O rejected the books of accounts of the assessee u/s. 145 of the 1961 Act and held that the purchases shown by the assessee were not genuine which was added back to the income of the assessee by the AO as unexplained expenditure in the hand of the assessee. The assessee also failed to produce these parties before the A.O. Thus, the A.O held that the assessee booked bogus purchases to the tune of Rs. 77,70,765/- and 29,09,702/- which was added to the income of the assessee by the AO u/s. 69C of the Act, vide assessment order dated 27.03.2015 passed by the AO u/s. 143(3) r.w.s 147 of the Act. 6. The assessee carried the matter by filing first appeal before the learned CIT-A . The assessee submitted before learned CIT(A) that merely because notices u/s. 133(6) to M/s. Rajeev Impex was returned unserved, the A.O has rejected the books of accounts which is not correct as the said reasons are not stipulated u/s. 145 of the Act for rejection of the books of accounts . It was submitted that the A.O has not pointed out any defects in the books of accounts as proper books of accounts were maintained which were audited by tax auditors u/s 44AB. It was submitted that the said party might not have replied as verifications are conducted in the month of February 2015 while the purchases relates to F.Y 2006-07 and thus the matter is very old . It was also submitted that the A.O has not rejected the sales made by the assessee and assessee has maintained complete quantity wise details of stock and stock register. It was submitted that quantitative reconciliation of the stock was submitted and no defect is pointed out by the AO in the said stock reconciliation . The assessee submitted that the overall GP ratio is 14.69% and while on these disputed transactions GP ratio is 14.3% and the tax auditor has not made any adverse comments on the transactions entered

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 into by the assessee and the books of accounts maintained by it. It was submitted that if additions as were made by the AO are sustained then it will lead to unrealistic G.P ratio of 63.68% and net profit ratio of 53.9% which is unrealistic and impossible to achieve. It was submitted that goods were purchased based upon H Form issued from Sales Tax Department and were meant for export only . it was also submitted that purchases and consequent export of the said material was duly confirmed , appraised and attested by custom for which remittance were received through proper banking channel from overseas and there was one to one co-relation between the purchase and the sale for which complete details were submitted . It was submitted that the AO did not found any purchases outside books of account. It was submitted that purchases and sales were properly recorded in the books of accounts . It was submitted that proper books of accounts were maintained by the assessee including purchase register, sale register, stock register, ledger, day book , bank book etc. and no defects or irregularity were found by the auditor or by the AO. It was submitted that the payments were made through cheques for said purchases and quantitatively stock was tallied. it was submitted that merely relying on the statement of Shri. Rajendra Jain is not sufficient to fasten tax liability on the assessee more so said statement was not furnished to the assessee nor said Shri Rajendra Jain was offered by the AO for cross examination by the assessee and hence principle of natural justice were breached by Revenue. The learned CIT-A after considering the submissions of the assessee on merits brought to tax 12.5% profit amounting to Rs.13,35,058/- embedded on such alleged bogus purchases to the tune of Rs. 1,06,80,467/- from M/s AVI Exports and M/s Rajiv Impex, vide appellate order dated 22-02-2016:-

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 of the total alleged bogus purchases to the tune of Rs. 1,06,80,467/-. The Ld. Counsel for the assessee submitted that the assessee in the business of trading and exports of diamond during the assessment year under consideration . It was submitted that originally return of income was processed u/s. 143(1) and no scrutiny assessment u/s 143(3) was framed by the revenue . It was submitted that notices u/s 148 were issued on 26.03.2014 which is after 4 years from the end of the A.Y. . On merits, the Ld. Counsel for the assessee argued for the deletion of the additions to the tune of 12.5% being profits estimated of the alleged bogus purchases as sustained by the Ld. CIT-A . It was submitted that it was merely on the basis of statement on oath of Shri. Rajendra Jain recorded during course of search u/s 132 conducted by Revenue against Rajendra Jain Group cases , the additions have been made. It was submitted that the A.O had made the additions without any evidence on record . It was submitted that merely because one of the parties namely M/s. Rajeev Impex from whom purchases were made to whom notices u/s. 133(6) were issued by the AO has not replied to the said notice , the books of accounts were erroneously rejected u/s. 145(3) . It was submitted that no addition can be sustained and prayer is made by learned counsel for the assessee for deletion of the additions as were sustained by learned CIT(A). The Ld. DR on the other hand relied upon the order of the A.O and the pressed for sustaining the additions to the tune of 100% of the alleged bogus purchases as were made by the A.O.. 8. We have considered rival contentions and perused the material on record including orders of authorities below . We have observed that the assessee is in the business of trading and exports of diamonds . It is observed that the assessee filed return of income originally u/s. 139(1) on 21.10.2007 with Revenue declaring total income of Rs. 16,16,550/-, which return of income was originally processed by Revenue u/s. 143(1) . The Revenue did not frame scrutiny assessment u/s 143(3) r.w.s. 143(2) so far as return of income filed u/s 139(1) is concerned. Based on the incriminating information from DGIT(Inv.), Mumbai, the case of the assessee was reopened u/s. 147 of the Act by the AO by issuance of notice u/s. 148 dated 26.03.2014 which was beyond four years from the end of the assessment year and the reason

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 recorded by the AO for reopening of the assessment u/s. 147 of the Act are as under:- “An information vide letter bearing no. DGIT(Inv)/ information/ Diamond 2013- 14 dated 14-03-2014 has been received in the office of Addl. CIT-Range20(2), Mumbai from the office of Director General of Income-tax (Inv), Mumbai wherein the sharing of information in the cases of beneficiaries of accommodation entries provided by Rajendra Jain Group, Snjay Choudhary Group, and Dharmichand Jain Group was intimated. In the above mentioned letter the information was forwarded that during the search and seizure action which was carried out on 31.10.2013 was noticed that Shri Rajendra Jain, Shri Sanjay Choudhary and Shri Dharmichand Jain are some of the entry providers operating in Mumbai, indulging in providing accommodations entries in the nature of bogus sales and unsecured loans. As per the list provided by DGIT (Inv) Prankit Exports (AAAFP2359D) has taken a accommodation entry from M/s. Avi Exports on account of sale transaction for the amount of Rs. 77,70,765/- during the FY 2006- 07. As stated above this is bogus sales shown by the assessee Rs. 77,70,765/-. In view of the above, I have reason to believe that the income of Rs. 77,70,765/- chargeable to tax has escaped assessment for the AY 2007-08 under consideration within the meaning of explanation 2(c) to the provisions of Section 147 of the IT Act 1961.” The reopening of the assessment u/s. 147 of the Act was done by the Revenue based upon statement on oath of Shri. Rajendra Jain recorded by Revenue during the course of search proceedings u/s. 132 conducted against Shri Rajendra Jain group cases wherein he admitted that his concerns inter-alia including AVI Exports are engaged in providing bogus accommodation entries wherein only accommodation bills were issued for sale, purchase etc without actually supplying any material physically and the assessee was also beneficiary of the accommodation entry by way of bogus purchase bills to the tune of Rs. 77,70,765/- from AVI Exports wherein the assessee merely obtained accommodation bills towards purchases without actually getting the material physically . The assessee had conceded the legal ground so far as challenge to reopening of the assessment u/s 147 is concerned. The A.O issued notices u/s. 133(6) to AVI Exports as well as Rajeev Impex from whom the assessee had allegedly made purchases . AVI Exports submitted replies along with the copy of the

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 ledger account of the assessee in its books , books of accounts, copy of PAN card, copy of sale bill, confirmation but M/s Rajeev Impex never replied to the notices issued by the AO u/s. 133(6). The assessee could not produce the parties before the A.O and the AO rejected books of accounts u/s 145(3) and made the additions to the tune of 100% of the alleged bogus purchases which was reduced to 12.5% by learned CIT-A by estimating profits embedded in such alleged bogus purchases by relying on several decisions of the Courts under similar circumstances which found mentioned in the appellate order of learned CIT(A), as under:- “ 6. Ground Nos. 3 & 4 are in relation with addition on account of unexplained expenditure u/s. 69 C after rejection of books of accounts u/s. 145 of the Act. For the sake of convenience both the grounds are disposed together. 6.1 The assessment was reopened on the ground that the Assessing officer had received information from DGIT (Inv.) M/s. Prankit Exports is one of the beneficiary who obtained accommodation entries of Rs.77,70,765/-, through M/s. AVI Exports, one of the group concerns of Shri Rajendra Jain Group during the F.Y.2006-07 relevant to the year under consideration. Accordingly, the AO has reason to believe that an amount of Rs.77,70,765/- is simply an accommodation entry and no actual transactions were carried out by the assessee and thus, the said amount was escaped assessment for A.Y.2007-08. The Assessing officer has issued notice u/s.133(6) of the I T Act to M/s. Avi Exports and M/s. Rajiv Impex. However, the A.O. has further issued show cause notice to appellant to substantiate the transactions as genuine by producing the proprietor of M/s. AVI Exports i.e. Shri Rajendra Jain. However, Shri Rajendra Jain neither attended nor filed any details. M/s. Rajeev Impex was also one of the purchase party of the appellant. M/s. Rajeev Impex has also not submitted the reply in response to notice u/s.133(6) of the Act. Therefore, the A.O. has rejected the books of accounts u/s.145 of the Act. The AO treated the claim of purchases amounting to Rs.77,70,765/- from M/s. AVI exports and Rs.29,09,702/- from M/s. Rajeev Impex as unexplained expenditure u/s.69 C of the Act and added the same to the total income of the assessee. 6.2 In this regard the appellant has submitted that the appellant had maintained regular books of account, according to mercantile system of accounting and in accordance with the Accounting standards. There was neither any change in the method of accounting as compared to earlier year nor any change in any accounting policy. The books of accounts are audited under section 44AB of the I T act, 1961. The entire tax audit report is already submitted before AO during assessment proceedings. There were no adverse remark by Tax Auditor. 6.3 It is clear that when the Assessing Officer does not accept the assessee's method of accounting then he has to resort to the provision of sec. 145(3) for computation of income. The Karnataka High Court in

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 the case of Karnataka State Forest Industries Corpn. Ltd. Vs. CIT (1993) 201 ITR 674 has held that the assessing officer's power under section are not arbitrary and he must exercise his discretion and judgement judicially. A clear finding is necessary before invoking the provision sec.145(3) of the I T Act. The Assessing officer has not been able to point out any defect or mistake or error in the books of accounts. He accepted the sales receipts. The Assessing officer has to bring on record the material on the basis of which he has arrived at the conclusion with regard correctness or completeness of the accounts of the assessee or the method of accounting employed by it. The Assessing officer has simply rejected on the basis of noncompliance with the 133(6) and failure to produce the suppliers before Assessing officer after 3 years from the date of purchase. The Assessing officer in appellant's own case has accepted the books of accounts on similar facts for the A.Y.2010-11. In the case of ACIT vs. ITD Cementation India Ltd (2014) 146 ITD 59 /160 TTJ Mumbai, it has been held that "where books of account of assessee were audited and auditor had not given adverse comments on maintenance of books of account or stock register, it was apparent that assessee's books of account are genuine and the Assessing officer was wrong in rejecting the same. In appellant's case, auditor has not given any adverse comments in maintenance of books of account or stock register. 6.4 In view of the above, it is difficult to accept that the books of account of the assessee are defective or incomplete from which the correct profit cannot be computed. The auditor has not given any adverse comment in maintenance of books of accounts or stock register. The Assessing officer has also not specified for reasons of rejecting the books of accounts. 6.5 During the appellate proceedings, the appellant has vehement argued though the appellant could not produce M/s. Avi Exports before the AO but documentary evidence like Purchase Bills and Confirmation of accounts from M/s Avi Exports and M/s. Rajeev Impex, Copy of all relevant bank statements, where these payments made to these parties through normal banking channel have been reflected were submitted during the assessment proceedings. The appellant has also submitted the decision of Hon'ble ITAT in the case of Shri Hiralal Chunnilal Jain in ITA No.4547/Mum/2014 and Bombay High Court decision in the case M/s. R.W.Promotions P. Ltd., Mumbai in ITA No.1489 of 2013. 6.6 Identical issue came up before the Hon'ble High Court of Gujarat in the case of Commissioner of Income v. Bholanath Poly Fab. P. Ltd. Reported in 355 ITR 290 (Guj.) In this case, the assessee was engaged in the business of trading in finished fabrics. The AO disallowed purchase amounting to Rs.40,69,546/- as bogus/unexplained. The CIT(A) confirmed the action of the AO. The issue was carried in appeal before the Hon'ble Tribunal which concurred with the finding of the revenue authorities below that such purchase was made from bogus parties. After adverting to the facts and data placed before it, the Hon'ble Tribunal noted that the entire cloth of 1,02,514 metres was sold during the year and therefore, accepted the assessee's contention that finished goods purchased by the appellant may not be from the parties shown in the accounts but from other parties. In view of this the Hon‟ble

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 ITAT was of the view that only profit margin embedded in such purchases would be subjected to tax. The Hon'ble Tribunal relied on its earlier in the case of M/s. Saket Steel Traders v. ITO (ITA No. 2801/Ahd/2008 dated 20.05.2008) and also made reference to the decision in the case of Vijaya Protein v. CIT 58 ITD 428 (Ahd.). On appeal by the department the Hon'ble HC of Gujarat, dismissed the appeal. The head note is as under: "Income from undisclosed sources - Assessment - Assessee trading in finished fabrics - Whether purchases themselves bogus -Whether parties from whom such purchases were made bogus-questions of fact - Tribunal finding assessee did purchase cloth and sell finished fabrics - Not entire purchase price but profit element embedded in purchases liable to tax- Income tax Act, 1961. The assessee for the assessment year 2005-06 was engaged in the business of trading in finished fabrics. The assessing officer held that purchases worth Rs.40,69,546/- were unexplained and disallowed the expenditure claimed by the assessee and computed the total income of Rs.41,10,187/-. In so far as the question of bogus purchases was concerned the Tribunal concurred with the Revenue's views that such purchases were allegedly made. Such notices were returned unserved by the postal authorities with the remark that the addresses were incomplete. The inspector deputed but the Income Tax Department also could not find any of the parties available at the given addresses. The assessee was unable to produce any confirmation from any of the parties. Though the assessee had claimed to have made payment by account payee cheques, upon verification it was found that the cheques were encashed by some other parties and not by the supposed sellers. However, the Tribunal was of the opinion that though the purchases might have been made from bogus parties the purchases themselves were not bogus. The tribunal adverted to the facts and data on record and came to the conclusion that the entire quantity of opening stock, purchases and the quantity manufactured during the year 2005-06 were sold by the assessee. Therefore the purchases of the entire 1,02,514 metres of cloth were sold during the year 2005-06. The Tribunal therefore accepted the assessee's contention that the finished goods were purchased by the assessee though not from the parties shown in the accounts but from other sources. The Tribunal was of the opinion that not the entire amount but the profit margin embedded in such amount would be subject to tax. 6.7 In the case of M/s. Sanjay Oilcake Industries v. Commissioner of Income tax reported in 316 ITR 274 (Guj) The Hon'ble Court had upheld the action of the CIT(A) and ITAT in determining estimated addition of 25% of the purchases in cases involving bogus purchases. The head note is as under:- Assessment income from undisclosed sources - Additions on account of inflated purchase price - Estimate- Not a question of law - No material produce by assessee to disprove inflated purchases - Tribunal's order in accordance with law - Income Tax Act, 1961. Whether an estimate should be at a particular sum or at a different sum can never be a question of law. 12

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 For the assessment years 1984-85 and 1985-86 the Assessing Officer made additions to the income of the assessee on account of inflated purchase price of oilcakes. The Commissioner (Appeals) held that 25 per cent of the value of the purchase price was not genuine and the addition made by the Assessing Officer was accordingly restricted to 25 percent of the amount paid to the parties from whom the assessing officer had disallowed the entire purchases. On cross appeals by the assessee and the revenue the Tribunal confirmed the order of the Commissioner (Appeals.) The assessee sought modification of the order on the ground that the tribunal had failed to consider various pieces of evidence enumerated by it in the application. The Tribunal rejected the application holding that there was no apparent error or record which would permit the Tribunal to undertake review of its own order. On a reference to the High Court " Held that the finding of the Assessing Officer had been accepted by the Commissioner (Appeals) an the Tribunal that the apparent sellers who had issued sale bills were not traceable. The goods were received from the parties other than the persons who had issued bills for such goods. Though the purchases were shown to have been made by making payment therefore by account payee cheques and the cheques had been deposited in bank accounts ostensibly in the name of the apparent sellers, thereafter the entire amounts had been withdrawn by bearer cheques and there was no trace or identity of the person withdrawing the amount from the bank accounts. Both the Commissioner (Appeals) and the Tribunal had come to the conclusion that in such circumstances the likelihood of the purchase price being inflated could not be ruled out and there was no material to dislodged such finding. The assessee had by evidence available on record made it possible for the recipients not being traceable for the purpose of inquiry as to whether the payments made by the assessee had been actually received by the apparent sellers. Hence the estimate made by the appellate authorities did not warrant interference. 6.8 Recently in the case of Commissioner of Income tax v Simit P Sheth 356 ITR 451 (Guj) the Hon'ble Court has given a finding that estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick could be adopted and finally confirmed the action of the ITAT in determining 12.5% of the bogus purchases as the profit embedded in such transaction. The head note is as under: Income from undisclosed sources - Assessee trading in steel- Finding that purchase recorded by it were not bogus but from other parties not recorded in books - Estimation of profit element embedded in purchases Tribunal justified in estimation on the basis of facts Income tax Act 1961. The assessee was engaged in the business of trading in steel on wholesale basis. During the course of the reassessment proceedings for the year 2006-07, the Assessing Officer noticed that some of the supplies of steel to the assessee had made their statements on oath to the effect that they had not supplied the steel to the assessee but had only provided sale bills. In turn they were receiving a small commission. The Assessing Officer concluded that the total purchase of Rs.41,04,903/- cumulatively made from the three parties were bogus.

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 He thus treated such purchase as bogus purchases and added the entire amount of Rs. 41,04,903/- to the gross profit of the assessee. He also rejected the books of account and estimated the assessee's business profit at Rs. 5 lakhs. The Commissioner (Appeals) held that the assessee had made purchases from other parties in the open market. Therefore he retained 30 percent of the purchases cost at the probable profit of the assessee. He reduced the additions from Rs.41,04,903/- to Rs.12,31,471/- and deleted the balance of Rs.28,73,432/-. While doing so he deleted the addition of Rs. 5 lakhs as made by the assessing Officer on the ground that the addition on account of bogus purchase had already been made. The Tribunal was of the opinion that twelve and half percent of the disputed purchases should be retained in the hands of the assessee as business profits. On appeal to the High Court : Held dismissing the appeal that the Commissioner (Appeals) believed that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. That being the position, not the entire purchase price but only the profit element embedded in such purchases could be added to the income of the assessee. In essence the Tribunal only estimated the possible profit out of purchases made through non genuine parties. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick could be adopted. 6.9 On consideration of the facts available on record that Shri Rajendra Jain found to be engaged in accommodation entries, where purchase is held as bogus then the corresponding sales must also be held bogus as without the material being purchased, sales are not possible. Therefore, without the corresponding sales being held bogus, it cannot be a case of bogus purchases. In other words, in a case where the purchase is shown being bogus and it is not possible to complete the corresponding sale transaction without a genuine purchase of such material, the sale must also be bogus. However, if it is possible to complete the sales or the production as shown, even without the material involved in the suspicious purchases, it needs to be shown whether the sale transaction was effected or production was done even without using such material or whether such materials were also used. Unless it is shown that such materials were not used in corresponding sales or the production as shown, purchases cannot be held bogus and it will be a case of purchase from bogus parties. However if the material has been used in the sales, or as the case may be in production, it cannot be a case of bogus purchases. Rather it will be a case of purchase from bogus parties. 6.10 The facts in the present case shows that appellant could not produce the parties from whom goods are stated to have been purchased. The suppliers were found to be engaged in providing bogus bill without actual dealing of goods. In this regard, the appellant has stated that they had submitted copy of purchases bills, confirmation and corresponding sales in respect of purchases. As mentioned above the AO has never disputed of sales receipts. Since the sales receipts was not doubted or disputed by the A.O and he has accepted the sales receipts of the appellant as it is, therefore, the AO cannot deny that

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 purchases were not made by the appellant and the material was not used for sale. 6.11 The AO had made the addition as Shri Rajendra Jain is engaged in accommodation entries. This may be a good reason for making further investigation but the AO did not make any further investigation and merely completed the assessment on suspicion. Once the assessee has brought on record the details of payments by account payee cheque, it was incumbent on the AO to have verified the payment details from the bank of the assessee and also from the bank of the suppliers to verify whether there was any immediate cash withdrawal from their account. No such exercise has been done or findings recorded. There was no detailed investigation made by the AO himself. It is also found that the payments have been made by account payee cheque which are duly reflected in the bank statement of the assessee. There is no evidence to show that the assessee has received cash back from the suppliers. Merely because the suppliers did not appear before the AO or some confirmation letters were not furnished, one cannot conclude that the purchases were not made by the assessee. This view is supported by the decision of Nikunj Eximp Enterprises vs. CIT 216 Taxman 171 (Born). To this extent I am in view with the appellant, if appellant has fulfilled its onus making the payment by cheque and has supplied the addresses of the sellers then it cannot be presumed that supplier were bogus simply because the sellers have not appeared before the A.O. or not complied with the notice u/s.133(6) of the Act. There is a considerable time gap between the period of purchase transaction and period of scrutiny proceedings. The AO has not brought any material on record to show that there is suppression of sales. It is basic rule of accountancy as well as of taxation laws that profit from business cannot be ascertained without deducting cost of purchase from sales. Estimation of profit ranging from 12.5% to 15% has been upheld by the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Sheth 356 ITR 451 (Guj) depending upon the nature of business. 6.13 Considering the totality of the facts before me, as well as the judicial opinion available, I am inclined to agree with the appellant's stand that the addition is excessive. The A.O. has disallowed the amount of Rs.1,06,80,467/-. I am of the view that estimation of profit at 12.5% would meet the ends of justice. Therefore, I direct the AO to estimate profit of 12.5% on the total purchases in question which works out to Rs.13,35,058/-(12.5% of Rs.1,06,80,467/-). The appellant therefore gets relief of Rs.93,45,409/- (Rs.1,06,80,467/- Rs.13,35,058/-) The ground raised are partly allowed.”

The assessee had claimed that purchases were genuine and submitted quantitative reconciliation and correlation of the purchases with sales . The assessee also claimed that the purchases of the diamond so made from these two parties were infact exported and custom authorities had endorsed on the export documents. It was claimed that the purchases and sales were

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 entered in books of accounts and nothing has been found by the AO as to any transaction being carried out by the assessee out of books of accounts . However, Shri Rajendra Jain of AVI Exports has given a statement on oath during search operations u/s 132 that his concerns only provide accommodation entries by way of purchases, sales etc. wherein only bills are issued without actually supplying any material . The assessee being asked could not produce the said party before the AO. With respect to Rajiv Impex, the said party never submitted replies to notices u/s. 133(6) issued by the AO . The assessee also could not produce this party before the authorities below. The said purchases are existing in books of accounts of the assessee and onus is on the assessee to prove that the purchases are genuine. Under these circumstances , the possibility of assessee buying the material actually from grey market at lower rates and obtaining corresponding bills from the said parties namely AVI Export and Rajeev Impex to reconcile the quantitative records and books of accounts cannot be ruled out . Under these circumstances , we are inclined to confirm aforesaid well reasoned appellate order of the Ld. CIT-A which aimed to make additions to the income by estimating profits embedded in the said alleged bogus purchases which profits the assessee gained by obtaining material from grey market at lower rate while obtaining bills from these parties namely AVI Exports and Rajiv Impex to reconcile records and books of accounts. The profits estimated by the learned CIT(A) appears to be reasonable keeping in view factual matrix of the case and in such type of cases, fair estimation of profits is required to be made which requires some guess work and in our considered view, the estimation made by learned CIT(A) is reasonable and fair as it could not be said to be arbitrary or excessive to call for interference by us and more-so estimation made by learned CIT-A is backed by judicial precedence as is found mentioned in learned CIT(A) appellate order . The learned CIT(A) has rightly relied upon the orders of the Hon’ble Courts as is contained in his appellate orders wherein estimation of embedded profits in the case of alleged bogus purchases were upheld by Hon’ble Courts. Reference is also drawn to decision of Hon'ble Supreme Court in the case of Kachwala Gems v. Jt. CIT [2007] 288 ITR 10/158 Taxman 71 (SC), wherein Hon'ble Lordships held as under :

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 "4. The facts of the case are in a short compass. The appellant-assessee deals in precious and semi-precious stones. In the course of assessment, the Assessing Officer noticed the following defects in the books of account of the assessee :

'1. The assessee has not maintained and kept any quantitative details/stock register for the goods traded in by the assessee.

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016 cent to 35 per cent.

Mumbai, dated: 01.02.2018

I.T.A. No. 1441/Mum/2016 I.T.A. No. 3133/Mum/2016

Nishant Verma Sr. Private Secretary copy to… 1. The appellant 2. The Respondent 3. The CIT(A) – Concerned, Mumbai 4. The CIT- Concerned, Mumbai 5. The DR Bench, 6. Master File // Tue copy// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI