DCIT 5(2)(1), MUMBAI vs. KARP IMPEX LTD, MUMBAI

2 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd आदेश / O R D E R

Per Shri Sandeep Gosain, Judicial Member:

(AY 2007-08) 3. First of all we take up revenue’s appeal in for assessment year 2007-08 as lead case. The grounds of appeal are as under:-

1. On the facts and circumstances of the case and in law the Ld. CIT(A) erred in considering the GP @ 3% on alleged bogus purchase instead of adding 9% as was done by the AO.

3. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary.

4. As per the facts of the present case, the assessee is engaged in the business of trading, processing and exporting of cut and polished diamonds. The assessee filed its return of income for AY 2007-08, 2009-10 & 2010-11 on 29.10.07, 20.09.09 and 11.10.10 declaring income of Rs. 16,70,00,919/- for AY 2007- 08, Rs. 14,70,61,990/- for AY 2009-10 and Rs. 19,29,65,680/- for AY 2010-11. The assessment was completed u/s 143(3) r.w.s. 147 on 27.03.15 for AY 2009-10 and on 17.03.16 for AYs 2009- 10 and 2010-11 determining the total income at Rs. 23,56,80,640, Rs. 15,45,65,180/- & Rs. 25,25,19,220/- respectively by making the disallowance.

5. Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of 4 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd both the parties had passed a consolidated order thereby partly allowing the appeals of the assessee and restricted the additions @ 3% of the bogus purchases. Aggrieved by the order of Ld. CIT(A), both i.e. revenue as well as assessee filed the respective appeals before us as detailed above. However, at present we are dealing appeal filed by the revenue in ITA No. 6761/Mum/16, therefore the same is being disposed of on the grounds raised herein above.

6. At the very outset, Ld. AR appearing on behalf of the assessee submitted that in for AY 2010-11, the assessee has filed an application dated 12.09.17 for raising additional grounds by taking a plea that the assessee had raised the issue of bogus purchases before the Ld. CIT(A) and Ld. CIT(A) had not made any decision with regard to the amount of Rs. 42,00,78,769 out of the total amount of bogus purchases amounting to Rs. 63,65,38,648/-. It was further submitted by Ld. AR that since the additional ground being a legal ground

8 The sole ground raised by the revenue in the present appeal i.e. Ld. CIT(A) in considering the GP @ 3% on alleged bogus purchase instead of adding 9% as was done by the AO.

4.2 I have carefully considered the facts of the case and submissions of the ld.AR. I have also gone through the decisions relied on by the Id.AR. As seen from the facts of the case the AO has reopened the assessment based on the information received from the DIT(Inv.), Mumbai on the basis of search and seizure action

7 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd conducted by the investigation wing during the course of which Bhanwarlal Jain and his appointed directors/partners have given categorical statements clearly stating the modus operandi followed by them in providing the accommodation bills. They have also admitted unequivocally before the investigation wing that they were not involved in any real trading of diamonds except giving bogus bills to those who need them for certain commission. Having observed that those parties appearing in the books of the appellant are non-existant sellers and they have not made any sales except the bogus invoices issued in the names of the companies/firms floated by them (as many as 70 concerns), the AD has brought to tax 9% of bogus purchases standing in the names of the so-called sellers u/s 69C of the Act as the explanation given by the appellant was not satisfactory to her. The argument of the appellant was that unless the AO proves positively that the material was not delivered to the assessee and the payment made through the Bank channels have been bogus or the amounts paid in the names of the suppliers have come back to the purchaser-assessee, the AO cannot make any addition uls.69C. Further, as the AD has not doubted the sales disclosed by the appellant he has to allow the purchases since there cannot be any sales without the 8 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd purchase of the material. There is some force in the argument of the ld.AR. As was rightly pointed out by the ld,AR, when the quantity details of stock is tallying with the stock register, the purchases cannot be doubted. He further argued that addition cannot be made based on the statements given by a third-party i.e. Bhanwarlal Jam and his team that too without giving the assessee an opportunity to cross-examine them. The only possibility is that the appellant might have inflated its purchases by taking into account the invoices in the names of the bogus suppliers. The presumption is that the material might have been purchased from grey market at a lower rate and made good the entries with bogus bills to reduce the profits. Under similar circumstances the Hon'ble High Court of Gujrat in the case of Simit P Seth, 2013 (356 hR 451 )1tan occasion to deliver its judgment by confirming the decision of the ITAT which has estimated the disallowance at 12.5% of the disputed bogus purchases to meet the ends of justice. The head-note of the decision is reproduced as under- "Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of Profits [Bogus purchases] - Assessment year 2006-07 - Assessee was engaged in business of trading in 9 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd steel on wholesale basis - Assessing Officer having found that some of alleged suppliers of steel to assessee had not supplied steel to assessee but had only provided sale bills, held that purchases made from said parties were bogus - He, accordingly, added entire amount of purchases to gross profit of assessee - Commissioner (Appeals) having found that assessee had indeed made purchases, though not from named parties but other parties from grey market, sustained addition to extent of 30 per cent of purchase cost as probable profit of assessee - Tribunal however, sustained addition to extent of 12.5 per cent - Whether since purchases were not bogus but were made from parties other than those mentioned in books of account, only profit element embedded in such purchases could be added to assessee's income - Held, yes - Whether hence, order of Tribunal needed no interference - Held, yes [Pares 6, 7 & 9] [In favour of assessee]' (emphasis supplied).

4.2.1. In the instant case, the AO has made independent enquiry by issuing notices u/s 133(6) of the Act to the suppliers. Even though the notices were served and replies were received from the said parties, 10 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd the AO was not satisfied since the information lacks the details sought by her. With regard to the information received from DIT(Inv.), Mumbai the summary of the communication was already passed on to the appellant while communicating reasons for reopening. The AO could not have passed on a copy of such statement given by the key persons of Bhanwarlal Jain group since it is a comprehensive statement detailing the names of several bogus concerns floated by them (as many as 70 concerns) and the modus operandi of their activities, including that of the concerns in whose names accommodation bills were given to the appellant company , mentioned elsewhere in this order, and appearing in their books of account. Even though Bhanwarlal Jain group has not mentioned the name of the appellant in their statements, they have given the names of various concerns in whose names the invoices were given and some of those names are duly appearing in the books of the appellant. Therefore, the link between the bogus concerns floated by the entry operators on the one hand and the appellant company who accounted the purchases in the names of some such bogus concerns on the other, is established. Further, the argument of the Id.AR that the addition was made based on the statement given by a third- party is not acceptable for the simple reason that the 11 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd fact of providing accommodation entries was admitted by the very authors of the so-called bogus companies/firms. The story of retraction is also not acceptable to the revenue since the entry operators could not substantiate with evidence that the statements were taken from them by exerting force, threat or coercion. Even though the AO could not prove substantively that the amounts given to the sellers in cheque form have come back to the appellant in cash form, the activities of accommodation entries in the trading community is not unheard of. Further, the disturbing facts revealed by Bhanwarlal Jam group during the course of search and seizure proceedings conducted by the investigation wing of the income tax department itself, cannot be lost sight of. Furthermore, one should not be carried away by the myth that any amount rooting through bank channels would definitely establish the genuineness of the transaction as held by the Honorable Bombay High Court in the case of Naresh K Pahuja (2015) 54 taxmann.com 258. It was held in this case that "mere rooting of a gift through a banking channel would not by itself establish that gift was genuine". Similar views were also expressed by ITAT Jaipur in the case of Kachwala Gems, inITA No. 1341JP/2002 dated 10/12/2003 which was confirmed by the Honorable Supreme Court in the 12 ITA Nos. 6761, 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd same case reported in 288 ITR 10 (SC). Even though there are catena of cases, including some of them delivered by the jurisdictional [TAT, which have decided the issue in favour of the assessee, they are not uniform in all the cases as they were decided as per the facts and circumstances of that particular case before them. I am of the considered opinion that the theory laid down by the Hon'ble Gujrat High Court in the case of Simit P Seth (supra.) should be applied in the instant case. The decision rendered by Gujarat High Court in the above case is on the basis of VAT benefit the appellant might have saved by taking'accommodation entries. While deciding this case the Honorable High Court has drawn strength from its earlier decision in the case of Vijay Proteins P Ltd., 58 ITAT 428. In Simit P Seth's case the Honorable High Court has ordered the disallowance at 12.5% since the VAT rates are higher (10%) in the type of goods dealt by Simit P Seth, iron &steel, (where the average GP is 2.5%). In the case of diamond business, which the appellant is dealing, the VAT charges are only 1% and the customs duty, when imported, is about 2%. Keeping in view the above tax rates, the intention of the assessee to save from the transaction should be viewed only to the extent of saving from the above taxes/levies by indulging in taking accomodaton 13 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd entries. It is also pertinent to mention here the relevance of the Board's Instruction No-2/2008 dated February 22, 2008 wherein it has laid down a guideline in the form of Benign Assessment Procedure for assessee's engaged in diamond manufacturing and/or trading, wherein it has stated that- A. The procedure will apply to assessee is engaged in the business of manufacturing and/or trading of diamonds.

B. If an assessee has shown a sum equal to or higher than 6% of its total turnover from such business as his income under the head profits and gains of business or profession for a particular assessment year, the assessing officer shall accept the trading results.

C. The assessee shall be required to maintain separate books of accounts of such business.

However, the Board has made it very clear in the above instructions that this instruction will not apply in the case of an assessee where the assessment is being made pursuant to- i) search and seizure action under section 132, or ii) requisition made under section 132A or iv) where 50% or more of the income from such business is claimed as deduction under Chapter -III or under Chapter -VIA vi) where there is information regarding escapement of income.

The Board has further made clear that this instruction is applicable only for assessments made during F.Y. 2008-09.

4.2.2 From the factual matrix, it is seen that even though the appellant has disclosed GP more than 6% for all the above three year under discussion, the Board's above instruction is not applicable straightaway. Since' the issue of accommodation entries is a reality, to arrest such rampant malpractices, a restraint is always inevitable as we cannot encourage such malpractice of obtaining accommodation entries to avoid the impact of levies and defrauding revenue as the AO is in possession of certain valid information in the form oath statements even though he could not prove conclusively against the appellant. We can find such a restraint advised by the Hon'ble Gujarat High Court in the case of Simit P Seth (supra) without which avoiding payment of levies 15 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd and defrauding revenue will continue unabated. However, in the present case the decision of Simit P Seth is not applicable in a cast-iron straight-jacket way except the theory of restraint laid down by them since the nature of business in the case before them was different from the present case. Keeping in view the above instruction of the Board on the one hand and the saving gained by the assessee by involving in accommodation entries to the extent of levies on the other, I find it appropriate to take 3% of the reported bogus purchases for adding u/s 69C over and above the regular profits disclosed by the appellant instead of adding 9% as was done by the AO (1.5 times of 6%). The AO is directed accordingly. In view of this the ground is partly allowed.

After having gone through the facts of the present case, judgments relied upon by both the parties as well as considering the orders passed by revenue authorities and hearing the parties at length, we find that the AO had made the additions by passing a detailed order wherein the AO had considered the statement of Bhawarlal Jain recorded on oath during the course of search proceedings on Bhawarlal Jain group. The AO has taken into 16 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd consideration the specific statement of the said Bhawarlal Jain wherein he had admitted that accommodation entries were provided to the beneficiary assessee to reduce their profit liability. As per the facts of the present case, the department had conducted certain enquiries, search and seizure operation in the group cases of Bhawarlal Jain and their group concerned and it was found that these persons have floated many companies and entities. The investigation wing of the department ascertained from the data seized during the course of search that these companies were provided bogus entries for share application money, share capital, share premium/bogus purchases, etc. in lieu of cash. We further find that AO had called for the parties from whom the purchases were made by the assessee. The assessee could not produce parties for verification and had even denied of knowing those parties. In the present case, the books were seized/impounded by the investigation wing of the department wherein the name of the assessee company also appears. As per the provision of section 292C(1)(ii) of the I.T. Act, a presumption is attached to the effect that the contents of such 17 ITA Nos. 6761, 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd books of account which are found during the course of search u/s 132 of the Act are true. Therefore the AO on the basis of evidence concluded that no genuine business was carried out by any of these concerns and hence the addition of 9% of the bogus purchases were added to the assessee. The Ld. CIT(A) in its detailed order after appreciating the facts had categorically held that the link between the bogus concerns floated by the entry operator and the assessee company who accounted the purchases is established and hence concluded that the assessee was indulged in bogus purchases. The Ld. CIT(A) while relying upon the theory laid down by the Hon’ble Gujarat High Court in the case of Simit P. Sheth (supra) restricted the additions @ 3% of the bogus purchases. After considering the facts and circumstances of the present case, we are also of the view that only because the amount has been routed through banking channel would not establish the genuineness of the transaction as held by Hon’ble Jurisidictional High Court in the case of Naresh K. Pahuja (2015) 54 taxmann.com 258. Therefore cosindering the peculiar 18 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd facts and circumstances of the present case and while relying upon the following judgments:- 1) ClT vs Bholanath Poly Fab Ltd. (2013) 355 ITR 290 (Guj). (HC), 2. CIT v Simit D, Sheth (2013) 356 ITR 451 (Guj)-(HC) and 3. CIT vs. Sanjay Oil Cake Industries (2009) 316 ITR 274 (Guj) (1C) and taking into consideration the facts of the present case, and to account for the profit element embedded in these purchase transactions to factorize profit earned by assessee against purchase of material in the grey market and undue benefit of VAT against bogus purchases, we are of the considered view that restricting the additions @ 3% of purchases by Ld. CIT(A) is unreasonable. The ends of justice would be met in case the additions are restricted @ 6 % of bogus purchases. Consequently orders passed by Ld. CIT(A) are set aside. The issue of accommodation entries is a reality, to arrest such rampant malpractices, a restraint is always inevitable as we cannot encourage such malpractice of obtaining accommodation entries to avoid the impact of levies and defrauding revenue. Since it is proved on record that assessee was indulged in bogus 19 ITA Nos. 6761, 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd purchases, therefore the assessee is not being given benefit to reduce already GP declared from GP ratio of 6%. Hence no benefit of GP is being given. Hence we direct the AO to restrict the additions to the extent of 6% of the bogus purchases for adding u/s 69C over and above the regular profits disclosed by the assessee. Accordingly this ground raised by the revenue is partly allowed.

10. In the net result, the appeal filed by the revenue stands partly allowed.

Now we take up & 6759/Mum/2016 (AYs 2009-10 & 2010-11 respectively) filed by revenue for decision:-

by the revenue in all the above appeals i.e. & 6759/Mum/2016 (AYs 2009-10 & 2010-11 respectively) filed by revenue, are identical to that of the ground raised by the revenue in ITA No. 6761/Mum/15 for AY 2007-08. Therefore, following our own decision in the aforementioned appeal in ITA No. 6761/Mum/16 for AY 2007-

20. ITA Nos. 6761, 6760 & 6759, 6652, 6653 & 6651/Mum/2016 Karp Impex Ltd 08, we apply the same findings in the present appeals which are applicable mutatis mutandi. Resultantly the above appeals filed by the revenue are also partly allowed. I.T.A. Nos. 6652, 6653 & 6651/Mum/2016 (AY 2007- 08, 2009-10 & 2010-11 respectively) filed by assessee for decision.

by the assessee in all the above appeals including additional grounds i.e. I.T.A. Nos. 6652, 6653 & 6653/Mum/2016 (AY 2007-08, 2009-10 & 2010-11 respectively) are identical to that of the ground raised by the revenue in ITA No. 6761/Mum/15 for AY 2007-

08. Therefore, following our own decision in the aforementioned appeal in ITA No. 6761/Mum/16 for AY 2007-08, we apply the same findings in the present appeals which are applicable mutatis mutandi. Resultantly the above appeals filed by the assessee are dismissed.

Order pronounced in the open court on 6th December, 2017 Sd/- Sd/- (Rajendra) (Sandeep Gosain) लेखासदस्य / Accountant Member न्याययकसदस्य / Judicial Member मुंबई Mumbai;यदनांकDated : 06.12.2017 Sr.PS. Dhananjay आदेशकीप्रनिनलनपअग्रेनर्ि/Copy of the Order forwarded to : अपीलाथी/ The Appellant 1. 2. प्रत्यथी/ The Respondent 3. आयकरआयुक्त(अपील) / The CIT(A) 4. आयकरआयुक्त/ CIT- concerned यवभागीयप्रयतयनयध, आयकरअपीलीयअयधकरण, मुंबई/ DR, ITAT, 5. Mumbai 6. गार्डफाईल / Guard File आदेशधिुसधर/ BY ORDER,