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Facts
The assessee, a company engaged in trading plastic raw materials and bullions, filed its return for AY 2017-18 declaring a loss. The Assessing Officer (AO) disallowed purchases amounting to Rs. 6,76,07,844/- from M/s. Shashwat Jewellery Pvt. Ltd. deeming them bogus. The CIT(A) restricted the disallowance to 2% of these purchases.
Held
The Tribunal noted that the assessee failed to prove the genuineness of the purchases from M/s. Shashwat Jewellery Pvt. Ltd. The statements of the directors of M/s. Shashwat Jewellery Pvt. Ltd. indicated it was a paper company. The Tribunal observed suspicious transactions with M/s. Tanvi Gold Pvt. Ltd. and M/s. Shashwat Jewellery Pvt. Ltd., and the lack of proper documentation. The matter was restored to the CIT(A) for fresh adjudication.
Key Issues
The primary issue is whether the purchases made from M/s. Shashwat Jewellery Pvt. Ltd. were genuine or bogus, and consequently, whether the entire amount should be disallowed or restricted.
Sections Cited
Section 37, Section 143(1), Section 142(1), Section 250, Section 133(6), Section 68, Section 69C
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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: MS. KAVITHA RAJAGOPAL & SHRI GAGAN GOYAL
PER GAGAN GOYAL, A.M: This appeal by revenue is directed against the order of National Faceless Appeal Centre (for short “NFAC”) Delhi dated 08.12.2023passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2017-18. The revenue has raised the following grounds of appeal:-
1. 1 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition to a certain percentage without duly appreciating the fact that the Assessing Officer had conducted inquiries to ascertain the genuineness of the purchases. Furthermore, statements of the directors of M/s. Shashwat Jewellery Pvt. Ltd. were recorded under oath, thereby establishing that M/s. Shashwat Jewellery Pvt. Ltd. is a paper company not engaged in any genuine business activities but rather involved in providing accommodation entries through bogus purchases/sales only".
2 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance to 2% of the bogus purchase made from M/s. Shashwat Jewellery Pvt. Ltd. without appreciating the fact that, Hon'ble Supreme Court in the case of NK Proteins Ltd us. DCIT (2017) 292 CTR 354 (SC) has held that, once the categorical finding is made that the purchases made from certain party are bogus, it is not incumbent to restrict the disallowance to certain percentage of such purchase".
3 "Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in limiting the disallowance to 2% of the purportedly bogus purchase from M/s. Shashwat Jewellery Pvt. Ltd. without properly appreciating the fact that the Assessing Officer had conducted exhaustive inquiries, obtained information on M/s. Shashwat Jewellery Pvt. Ltd., and conclusively established that the said company is merely a paper entity involved in facilitating accommodation entries".
4 The appellant prays that the order of the CIT (A)-NFAC, Delhi on the grounds be set aside and confirm the order of the AO. 2. The appellant craves leave to add, amend or alter all or any of the grounds of appeal.
The brief facts of the case are that the assessee is a company and has e- filed its return of income for A.Y. 2017-18 on 30.10.2017 declaring a loss of Rs. - 13,72,272/-. The Assessee’s return was processed under section 143(1) of the Act and thereafter was selected for scrutiny in the CASS cycle and notices were issued to the Assessee under sections 142(1) of the Act. In response to the notices the Assessee, through e-proceedings, filed its submission. The Assessee Company is engaged in the business of trading Plastic raw materials and bullions.
The AO in his order dated 23.12.2019 held that the Assessee Company had obtained bogus bills for non-existing purchases amounting to Rs. 6, 76, 07,844/- for A.Y. 2017-18 and thereby reduced its taxable income. The AO thus disallowed the said amount and added it back to the income of the Assessee. The Assessee being aggrieved by this order of the AO preferred an Appeal before the Ld. CIT (A). In his order dated 08.12.2023 the Ld. CIT (A) allowed the appeal of the Assessee and deleted the above mentioned addition/ disallowances made by the AO and restricted the disallowance to 2% of the alleged bogus purchases. Aggrieved by this order of the Ld. CIT (A) the Revenue preferred the present appeal before us.
4. We have gone through the order of the AO passed under section 143(3) of the Act, order of the Ld. CIT (A) passed under section 250 of the Act and submissions of the Assessee along-with grounds taken before us. It is observed that the Assessee filed its return of income for A.Y. 2017-18 on 30.10.2017 declaring a loss of Rs. (-) 13,72,272/-.We observe that the Assessee had purchased gold bars from M/s. Shashwat Jewellery Pvt. Ltd. amounting to Rs. 6, 76, 07,844/- .In order to verify the genuineness of transactions, a notice u/s. 133(6) of the Act was issued to M/s. Shashwat Jewellery Pvt. Ltd by both post and email but no reply was given to said notice. Thereafter, the Assessee Company was asked to submit the details of transactions with M/s. Shashwat Jewellery Pvt. Ltd. The Assessee company thus submitted the ledger a/c. and Tax invoices (purchase invoices) and also submitted the details of the sales made to M/s. Tanvi Gold Pvt. Ltd. by the Assessee Company against the purchases made from M/s. Shashwat Jewellery Pvt. Ltd. These sales amounted to 21,500/- grams of gold worth Rs. 6, 69, 34,945/- .
The AO herein received information from ITO 8(2) (1), Mumbai that no return had been filed by M/s. Shashwat Jewellery Pvt. Ltd. and further they had also not complied with the notice u/s. 142(1) of the Act. It was also observed by the AO, 8(2) (1), Mumbai that Shashwat Jewellery Pvt. Ltd. had transferred Rs. 50, 00,000/- to the Assessee through Banking Channel. Thereafter, another Show cause notice u/s. 142(1) dated 03.12.2019 was issued to the Assessee Company to show why the claimed purchases expenses amounting to Rs. 6, 76, 07,844/- should not be disallowed. The Assessee Company submitted its reply vide letter dated 06.12.2019 wherein it stated that it had submitted all the required documents relating to transactions with M/s. Shashwat Jewellery Pvt. Ltd. to the AO and thus stated that nothing was left unexplained. Thus, the Assessee submitted that the claim of purchases of Rs. 6, 76, 07,844/- should not be disallowed on the ground that M/s. Shashwat Jewellery Pvt. Ltd. has not replied to the notice issued by the AO. Consequently, the Assessee Company had submitted the purchase bills of M/s. Shashwat Jewellery Pvt. Ltd. to prove the genuineness of the purchases of the Gold bars weighing 21,751 grams amounting to Rs. 6, 76, 07,844/-.
The AO in his order reproduced the statements recorded under oath of Mr. Sunil Raghunath Sawant and Mr. Amirkhan Annubhai Chahuhan, the two directors of M/s. Shashwat Jewellery Pvt. Ltd. Both of them denied any knowledge about the workings of M/s. Shashwat Jewellery Pvt. Ltd. and further, they both stated that they had become directors in lieu of money and signed whatever document that needed to be signed. The AO from the statements of the aforementioned directors deduced that M/s. Shashwat Jewellery Pvt. Ltd was not doing any business. Despite the fact that M/s. Shashwat Jewellery Pvt. Ltd was having a turnover of Rs. 777.22 crore in F.Y. 2015-16 there still existed questions about the existence of such company. The same was independently corroborated by ITO 8(2) (1), Mumbai who had conducted independent enquiries while assessing the case of M/s. Shashwat Jewellery Pvt. Ltd.
The AO also held that while adjudicating upon the genuineness of the transaction, strict rules of evidence do not apply to Income Tax proceedings and thus the preponderance of probabilities needs to be proved and not in beyond reasonable doubt. Reliance was placed by the AO on the decision of the Hon’ble Supreme Court in the case of C. Vasantlal and Co. v. CIT, (1962) 45 ITR 206. The AO therefore held, that the purchases made by the Assessee from M/s. Shashwat Jewellery Pvt. Ltd. are not genuine and that the Assessee Company obtained bogus bills for non-existing purchases amounting to Rs. 6, 76, 07,844/- for A.Y. 2017-18 and thereby reduced its taxable income and thus disallowed the said amount and added it back to the income of the Assessee.
The Assessee being aggrieved by the order of the AO dated 23.12.2019 preferred an appeal before the Ld. CIT (A). The Ld. CIT (A) observed that the AO erred by treating only the Assessee’s purchases as bogus. The AO did not doubt the genuineness of the sales made by the Assessee and thus, the AO could not have doubted the purchases of the assessee either. The Ld. CIT(A) placed reliance on the decisions of the ITAT in the case of ITO vs. Dinal Diamonds [ITA 6102/Mum/2017] and restricted the disallowance to 2% of the alleged bogus purchases as against the disallowance of the entire alleged bogus purchase of Rs. 66,76,07,844/- made by the A.O.
Thus, the only question before us is whether the entirety of the bogus purchases of the Assessee should be disallowed or whether the disallowances should be restricted to 2% of the bogus purchases. In light of the facts of the case, we observe that firstly, the Assessee has failed to show that the purchases made by it from M/s. Shashwat Jewellery Pvt. Ltd. are genuine. The onus to prove the genuineness of the purchases is on the assessee the same has been held by the Hon’ble Rajasthan High Court inCIT v. Bright Future Gems, (2017) 392 ITR 580: 2016 SCC Online Raj 10766 and Indian Woollen Carpet Factory v. Income-Tax Appellate Tribunal, (2003) 260 ITR 658: 2002 SCC Online Raj 801: (2002) 178 CTR 420 the relevant paragraphs of the judgments are produced herein below-:
In CIT v. Bright Future Gems, (2017) 392 ITR 580: 2016 SCC Online Raj
10766 the Hon’ble Rajasthan High Court held-:
4. …" It is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. In our view, on the facts of this case, the Tribunal did not take into account all these ingredients which have to be satisfied by the assessee. Mere furnishing of the particulars is not enough. The enquiry of the Income-tax Officer revealed that either the assessee was not traceable or there was no such file and, accordingly, the first ingredient as to the identity of the creditors had not been established. If the identity of the creditors had not been established, consequently the question of establishment of the genuineness of the transactions or the creditworthiness of the creditors did not and could not arise. The Tribunal did not apply its mind to the facts of this particular case and proceeded on the footing that since the transactions were through the bank account, accordingly, it is to be presumed that the transactions were genuine. It was not for the Income-tax Officer to find out by making investigation from the bank accounts unless the assessee proves the identity of the creditors and their creditworthiness. Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine. In that view of the matter, the question before us is answered in the negative and in favour of the Revenue." In Indian Woollen Carpet Factory v. Income-Tax Appellate Tribunal, (2003) 260 ITR 658: 2002 SCC Online Raj. 801: (2002) 178 CTR 420 the Hon’ble Rajasthan High Court held-: 6. In appeal before the Tribunal, the Tribunal found that many opportunities were given to the assessee, twice the assessment order was set aside, thereafter, assessments were made one after the other, but in spite of that the assessee failed to prove the genuineness of the transactions or the credits. Therefore, the Tribunal confirmed the addition invoking the provisions of section 68 holding that once the credit entry has been made in the books of account in the names of various parties and if the genuineness of these cash credits could not be proved, the Assessing Officer was justified in making the addition of Rs. 1, 12,500/-.
The Tribunal has taken the view when the payment has not been made to those parties and for that amount credit entry has been made in favour of those parties that is cash credit as commonly known in the income-tax, when credit entry has been made in favour of the persons, there is nothing wrong in it. Even otherwise the assessee had failed to discharge the onus to prove the genuineness of the transactions. Mere mentioning of section 68 does not affect the addition made when the transaction is found bogus. In our view on these facts it cannot be said that the finding of the Tribunal is perverse and when the finding of the Tribunal is not perverse, we cannot interfere in the finding of the Tribunal.
10. Secondly it is abundantly clear by the evidence placed on record which includes the statement of its two directors, i.e. M/s. Shashwat Jewellery Pvt. Ltd. was not a genuine entity which was engaged in bona fide business activity. To adjudicate such a scenario reference is made to the decision of the Hon’ble Gujarat High Court inN. K. Industries Ltd. v. CIT, (2017) 8 ITR-OL 336: 2016 SCC Online Guj.10209: (2017) 292 CTR 354 wherein the following was held-: 6. The Tribunal in the case of Vijay Proteins Ltd. v. CIT has observed that it would be just and proper to direct the Assessing Officer to restrict the addition in respect of the undisclosed income relating to the purchases to 25 per cent of the total purchases. The said decision was confirmed by this court as well. On consideration of the matter, we find that the facts of the present case are identical to those of Indian Woollen Carpet Factory (supra) or Vijay Proteins Ltd. In the present case the Tribunal has categorically observed that the assessee had shown bogus purchases amounting to Rs. 2, 92, 93,288/- and taxing only 25 per cent of these bogus claim goes against the principles of sections 68 and 69C of the Income-tax Act. The entire purchases shown on the basis of fictitious invoices have been debited in the trading account since the transaction has been found to be bogus. The Tribunal having once come to a categorical finding that the amount of Rs. 2, 92, 93,288/- represented alleged purchases from bogus suppliers it was not incumbent on it to restrict the disallowance to only Rs. 73, 23,322/-.
The principles laid down in N. K. Industries Ltd. v. CIT, (2017) 8 ITR-OL 336 : 2016 SCC Online Guj 10209 : (2017) 292 CTR 354 have been upheld by the Hon'ble Rajasthan High court has on the issue of bogus purchases in the case of Commissioner of Income Tax, Jaipur-II, Jaipur. Vs. M/s. Aditya Gems, Jaipur (Income Tax Appeal No .234/2008) wherein the following was held-:
“3. 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 and 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.
We remit back the case to the Assessing Officer for deciding afresh on the factual matrix. The authority will accept the law but the transaction whether it is genuine or not will be verified by the Assessing Officer on the basis of the aforesaid three judgments. The issues are answered accordingly. The appeal is accordingly disposed of.”
Thus, in light of the above judicial pronouncements it is patently clear that to adjudicate the present matter there must be clarity about the factual matrix pertaining to the genuineness of the Assessee’s sales and thus the same needs to be adjudicated by the AO and since no specific finding has been given thereon, we restore the matter to the AO to deciding a fresh on the factual matrix on the basis of the principles laid down in N. K. Industries Ltd. v. CIT, (2017) 8 ITR-OL 336 : 2016 SCC Online Guj 10209 : (2017) 292 CTR 354. In these circumstances and facts on record we deem it fit to examine the facts of the case and bring the same on record, being final fact finding authority considering the ratio laid down by the various Hon’ble High Courts and further confirmed by the Hon’ble Apex Court in the case of Commissioner of Income Tax, Jaipur-II, Vs. M/s. Aditya Gems, Jaipur (Income Tax Appeal No .234/2008) and the Hon’ble Gujarat Court and later confirmed by the Hon’ble Supreme Court in the case of N. K. Industries Ltd. v. CIT, (2017) 8 ITR-OL 336: 2016 SCC Online Guj 10209: (2017) 292 CTR 354 and N K Proteins Ltd. v. Dy. CIT [2017] 84 taxmann.com 195/250 Taxman 22 (SC) respectively.
13. Before we conclude the matter following observations made by us going through the paper book of the assessee and various orders of the authorities below as under:
The assessee has Rs. 21,13,32,598/- as its own funds, and 76,33,75,627/- as various borrowals from market (Total amount invested in the business is Rs. 21,13,32,598/- + Rs. 76,33,75,627/-= Rs. 97,47,08,225/-); It is observed vide schedule 14 of Profit & Loss Account vide page No. 17 , the assessee shown purchase for the year ending 31.03.2016 and 31.03.2017 at Rs. 26,32,07,996/- (Figures are identical for both the F.Y.s), which is not possible and the assessee needs to explain the same;
Against the capital deployed of Rs. 97.47 Cr., the assessee shown gross revenue of Rs. 26,70,28,935/- In turn capital employed/turnover ratio comes negative, i.e. almost 28%, whereas the same should have been at least 400%. It reflects that business model of the assessee is based on unaccounted cash sales and consequent impact on the profits of the assessee; Ledger account of M/s. Shashwat Jewellery Pvt. Ltd. In the books of the assessee for the F.Y. 2015-16, shown sales of Rs. 7,16,07,402/- and the same transaction carried out by the assessee in vice-versa form for the F.Y. under consideration by reverse sale amounting to Rs. 6,66,07,844/- and balance amount received through cheque of Rs. 40 Lacs between the period 24.06.2016 to 29.06.2016. This transaction itself is suspicious in nature, i.e. in the previous year the assessee is selling goods to M/s. Shashwat Jewellery Pvt. and in next F.Y. receiving the goods back in the form of purchase; The same modus operandi the assessee adopted while transacting with M/s. Tanvi Gold Pvt. Ltd. The assessee sold goods worth Rs. 6, 84, 92,160/- and received payments of Rs. 1, 83, 36,631/- and purchases from the same amounting to Rs. 5, 01, 55,529/-. In both the transactions, i.e. with M/s. Shashwat Jewellery Pvt. Ltd. And M/s. Tanvi Gold Pvt. Ltd. despite of the fact that costly, heavy and risky article is involved there is no document filed by the assessee to substantiate the delivery made/taken;
The purchase under consideration is not a normal article like cloth, plastic, toys, electronic goods etc. Rather it’s a costly, heavy and risky item in terms of keeping, moving and to deal with. The Ld. CIT(A) applied G.P. Rate on suspicious purchases on the belief that, when the sales has been accepted by the AO, there has to be purchase to cover the same, but he ignored the fact that the article in which the assessee is dealing is not general in nature, where G.P. rate can be applied. Although, applying G.P. Rate on such transactions is an established practice duly approved by the Hon’ble Jurisdictional High Court and coordinate benches also. But, each case has its own facts for examination and ratio to be applied.
On the given set of facts as enumerated (supra) we deem it fit to discuss the provisions of section 37 of the Act as under:
Section - 37, Income-tax Act, 1961 - FA, 2023 General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1.]—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub- section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.] Explanation 3.—for the removal of doubts, it is hereby clarified that the expression "expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law" under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred by an assessee,— (i) for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or (ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or (iii) To compound an offence under any law for the time being in force, in India or outside India.] (2)[***] (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.]
In the trade of gold either the assessee has to purchase the same from Banks, Import Route or established vendor. In this case the fact is not under challenge that the vendor of the assessee is not established and in the guise of that G.P. Rate has been applied by the Ld. CIT (A) (Which is not under challenge by the assessee itself), confirms the facts of the case that the assessee is not able to establish the identity and genuineness of the vendor upto the satisfaction of law as declared by the various courts time to time. When, the fact on record is not under challenge that the assessee has not purchased from Banks, Import and established source of purchase. The last option in this trade to purchase the article is certainly some illegal way to buy the same and then convert the same through bogus purchase bills. But this modus operandi hits the provisions of section 37 of the Act reproduced (supra) as Explanation 1.]—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.]
15. In view of the above observation and discussions, we deem it fit to restore the matter back to the file of the Ld. CIT (A) with following directions:
Ask the assessee to produce and authenticate the transaction of purchase under dispute with relevant proofs of delivery of the same and keeping in view the explanation 1 of the section 37(1) of the Act; Analyse the nature of transactions with M/s. Tanvi Gold Pvt. Ltd. and M/s. Shashwat Jewellery Pvt. and give a specific finding on the matter w.r.t. genuineness or otherwise; Above activity is to be carried out after giving the assessee a proper opportunity of being heard and the assessee is directed to come forward with relevant documents to substantiate the transactions carried out during the year under consideration;
It is further clarified and directed that if the assessee is not able to substantiate its transactions satisfactorily same is to be disallowed applying the provisions of sections 37(1) of the Act read with Explanation 1 of the Same. In the light of above, the grounds raised by the Revenue are allowed for statistical purposes.
In the result, the appeal of the revenue is allowed for statistical purposes.
Order pronounced in the open court on 1st day of October, 2024.