ITO 19(2)(4), MUMBAI vs. NAITIK GEMS, MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER:

1. On the facts and circumstances of the case and in law, Whether, Ld. CIT(A) was correct in deleting the addition on the total purchase amount of Rs. 84,00,000/- from M/s Little Diam”.

2. On the facts and circumstances of the case and in law, Whether, Ld. CIT(A) was correct in sustaining only 4% of the total purchase amountof Rs. 84,00,000/- from M/s Little Diam as profit element embedded in such purchases.

3. The appellant prays that the order of the Leaned CIT(A) on the above grounds be set aside and that of the AO be restored.

2. Brief facts of the case are that the assessee is a partnership firm engaged in the business of export and trading of Diamonds, filed his return of income M/s Naitik Gems for relevant AY on 01.11.2007 declaring total income of Rs. 3,56,960/-. The assessment was processed under section 143(1) of the Act. Subsequently, the assessment was re-opened under section 147 of the Act. Notice under section 148 dated 27.03.2014 was issued and served upon the assessee. The notice under section 148 was served after recording the reasons for re- opening. The reasons of re-opening of assessment were based on the information that a search and seizure action was conducted on 03.10.2013 by Investigation Wing of Income-tax Department, Mumbai in group concern of Shri Bhanwarlal Jain. During the said search operation, it was found that Shri Bhanwarlal Jain and family were providing accommodation entries without supply of goods. It was further revealed that assessee is one of such beneficiary who has availed accommodation entries from M/s Little Diam for Rs. 84,00,000/-. Thus, on the basis of information and the evidence gathered, the AO form an opinion that return of income filed by assessee has escaped from assessment. The assessment was completed under section 143(3) r.w.s. 147 on 27.03.2015. The AO while passing the assessment order made the addition on account of non-genuine purchases of Rs. 84,00,000/-. On appeal before the ld. CIT(A), the addition was sustained @ 4% of total purchases shown by assessee from M/s Little Diam. Thus, aggrieved by the order of ld. CIT(A), the Revenue has filed the present appeal before us.

ITA No. 6718/M/2016- M/s Naitik Gems

8.3 ……I have found that in the appellant's case, Ld. AO has not made any independent verifications nor he has attempted to issue notice u/s. 133(6)/131 of the Act, but the fact remains that there was an overwhelming evidence in the form of sworn statements recorded from the alleged suppliers given before the Investigation Wing, Mumbai that M/s Little Diam is only a dummy concern and the actual management & control is with Shri Bhanwarlal Jain & his family members. Shri Bhanwarlal Jain also admitted that they are only giving accommodation entries to several parties and the appellant is one among them. Though the appellant in the submissions stated that Sri Lunkarn P. Kothari retracted the statement given by him during the search action, it is a fact that the statement initially given was u/s 132(4) of the Act during the course of search proceedings and the post search investigation confirmed the statement. Further the appellant failed to furnish any concrete evidence in support of such retraction statement.

8.4 After weighing the evidence pro and con, I am of the opinion that onus is always on the appellant to prove as to how the material purchased was firstly obtained when the supplier himself admitted that he never did the business and is a mere name lender for the business concerns of Shri Bhanwarlal Jain, who has admitted that only accommodation entries were given and no actual sale to the parties. In view of the same, I am of the opinion that the purchase is not made from the party but from the grey market by paying cash and as the bills are not available for such transactions, the appellant is forced to obtain the bill from third parties, who after receipt of cheques return the cash after deducting its commission. A person who procures the material from the grey market and exports the same and recelves the sale proceeds through proper banking channels, to complete the chain of transaction i.e. to book the purchases against the sale proceeds received, obtain the bills from entry providers, -like Shri Bhanwarlal Jain entities in the present case-issues cheque to them and receives the amount back in cash. In this background cheques were issued to Bhanwarlal group entity, M/s Little Diam and the appellant has no other option but to take bills from the entry provider, as they needs to complete the trading activity in respect of the diamonds sold in the books of accounts. From these findings it can thus be safely assumed that the appellant has grossly failed in its duty to mitigate the burden cast upon it in so far as proving the genuineness of the transaction, from the said party is concerned.

8.5 In this regard it is also pertinent to mention that while dealing with the concept of burden of proof, onus of proving the claim is always on the person who makes such claim. While dealing with the issue of deciding the burden of proof, Hon'ble Supreme Court in the cases of CIT Vs. Durgaprasad More 82 ITR 540 and Sumati Oayal Vs. CIT 214 ITR 801 has held that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real and that Taxing Authorities are entitled to look into surrounding circumstances to· find out the reality 5 ITA No. 6718/M/2016- M/s Naitik Gems and the matter has to be considered by applying the test of human probabilities. The Hon'ble court also held that, it is no doubt, true that in all cases in which a receipt is sought to be taxed as income, the burden lies on the department to prove that it is within the taxing provision and if a receipts in the nature of income, the burden to prove that it is' not taxable because it falls within exemption provided by the Act, lies upon the assessee. In the case Durgaprasad More (Supra), the Hon'ble Court went on to add that a party who relies on a recital in a Deed has to establish the truth of this recital, otherwise it will be very easy to make self serving statements in documents either executed or taken by a party who relied on those recitals. If all that an assessee who wants to evade tax has to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. The Hon'ble Court further held that the Taxing Authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look in to the surrounding circumstances to find out the reality of the recitals made in those documents.

8.6 Reliance is also placed on the judgement of Hon'ble Supreme Court in the case of Sri Meenakshi Mills Ltd 63 ITR 609 where it was held that the I.T. Authorities are entitled to pierce the veil of Corporate Entity and to look into reality of transaction. In the case of McDowell & Co. 154 ITR 148(SC) it was stated that implications of tax avoidance are manifold. First, there is substantial loss of much needed public revenue. Next, there is serious disturbance caused to the economy of the country due to piling of mountains of black money, causing inflation. Thus, there is "the large hidden loss" to the community, by some of the members in the country being involved in the perpetual war waged between the tax payer and his expert team of advisors, and accountants on the one side and the tax gatherer and his perhaps not so successful advisors on the other side.

8.7 The onus to prove that apparent, is not the real one, is on the party who claims it to be so, as held by the Hon'ble Supreme Court in the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 and CIT v. Durga Prasad More (supra). It is also a settled legal proposition that if no evidence is given by the party on whom the burden is cast, the issue must be found against him. However, in the instant case, the appellant has miserably failed to lead evidence.

8.8 The Hon'ble Supreme Court, in the case of Chuharmal v. CIT [1988] 172 ITR 250/38 Taxman 190 highlighted the fact that the principle of evidence law are not to be ignored by the authorities, but at the same time, human probability has to be the guiding principle, since the AO is not fettered, by technical rules of evidence, as held by the Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775. The Hon'ble Supreme Court, in the case of Chuharmal (supra) held that what was meant by saying that Evidence Act did not apply to the 6 ITA No. 6718/M/2016- M/s Naitik Gems proceedings under Income-tax Act, 1961, was that the rigours of Rules of evidence, contained in the Evidence Act was not applicable; but that did not mean that when the taxing authorities were desirous of invoking the principles of Evidence Act, in proceedings before them, they were prevented from doing so. It was further held by the Hon'ble Apex Court that all that Section 110 of the Evidence Act, 1872 did, was to embody a salutary principle of common law jurisprudence viz, where a person was found in possession of anything, the onus of proving that he was not its owner, was on that person. Thus, this principle could be attracted to a set of circumstances that satisfies its conditions and was applicable to taxing proceedings.

8.9 The appellant contends that the AO did not make any independent inquiries on his own. However in this case the investigation wing of the Income Tax Department conducted several inquiries in the post search investigation after the search action in the Bhanwarlal group cases and intimated to the assessment wing with clear cut findings that accommodation entries were provided to several parties by the group and the appellant is one among the beneficiaries from such accommodation entries.

8.10 In this case, quantitative details and stock register were maintained, and moreover, Ld. AO, not doubted the genuineness of sales, however added the total amount of purchases of Rs. 84,00,000/- made from M/s Little Diam, a concern of Shri Bhanwarlal Jain, by recording a finding that the appellant made the purchases were non-genuine and not verifiable. Without disturbing the sales adding the entire amount of purchase, as income is not correct that too when major portion of the sales are export sales and the proceeds are received from the banking channels. In this situation, the issue would boil down to finding out what is the correct element of profit embedded in bogus purchases which the appellant would have made from some unknown entity. In this regard, it is apt to refer to certain decisions dealing the similar type of issue. The decision of Gujarat High Court in the case of Bholanath Poly Fab Pvt. Ltd. 355 ITR 290 (Guj) where the Hon'ble Court was battling with the finding of Hon'ble ITAT that purchases were made from bogus parties since notice issued by the AO to these parties were allegedly received 'returned/unserved' and the assessee was unable to produce any confirmation from these parties. The Tribunal had held that though purchases were made from bogus parties, nevertheless, the purchases themselves were not bogus as the entire quantity of opening stock, purchases and sales were tallying and hence, only the profit margin embedded in such amount would be subjected to tax. The Hon'ble Gujarat High Court taking cognizance of the fact held that whether purchases themselves were bogus or whether parties from whom such purchases were made were bogus, is essentially. a question of fact and the Tribunal having examined the evidence on record, concluded that the assessee did produce cloth and sell finished goods, the entire amount covered under such 7 ITA No. 6718/M/2016- M/s Naitik Gems purchase would not be subjected to tax and only the profit element embedded therein was to be taxed. While coming to the above conclusion, the Hon'ble High Court also relied on the decision in the case of Sanjay Oil Cake Ind. 316 ITR 274 (Guj).

8.11 In Sanjay Oilcake Industries v. Commissioner of Income-tax [2009] 316 ITR 274 (Guj), it was held as under:

"12. Thus, it is apparent that both the Commissioner (Appeals) and the Tribunal have concurrently accepted the finding of the Assessing Officer that the apparent sellers who had issued sale bills were not traceable. That goods were received from the parties other than the persons who had issued bills for such goods. Though the purchases are shown to have been made by making payment thereof by account payee cheques/ the cheques have been deposited in hank accounts ostensibly in the name of the apparent seuers. thereafter the entire amounts have been withdrawn by bearer cheques and there is no trace or identity of the person withdrawing the amount from the bank accounts. In the light of the aforesaid nature of evidence it is not possible to record a different conclusion/ different from the one recorded by the Commissioner (Appeals) and the Tribunal concurrently holding that the apparent sellers were not genuine/ or were acting as conduit between the assessee-firm and the actual sellers of the raw materials. Both the Commissioner (Appeals) and the Tribunal have, therefore, come to the conclusion that in such circumstances, the likelihood of the purchase price being inflated cannot be ruled out and there is no material to dislodge such finding. The issue is not whether the purchase price reflected in the books of account matches the purchase price stated to have been paid to other persons. The issue is whether the purchase price paid by the assessee is reflected as receipts by the recipients. The assessee has, by set of 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 have been actually received by the apparent sellers. Hence/ the estimate made by the two appellate authorities does not warrant interference. Even otherwise, whether the estimate should be at a particular sum or at a different sum/ can never be an issue of law.”

8.12 Similarly, in yet another decision of Hon'ble Gujarat High Court in the case of CIT vs. Simit Sheth (2013) 38 Taxmann.com 385 (Guj), Hon'ble Court was seized with a similar issue where the A.O. had found that some of the alleged suppliers of steel to the assessee had not supplied any goods but had only provided sale bills and hence, purchases from the said parties were held to be bogus. The AO, in that case added the entire amount of purchases to gross profit of the assessee. Ld. CIT(A) having found that the assessee had indeed purchased though not from named parties but other parties from grey market, partially sustained the addition as probable profit of the assessee. The Tribunal however, sustained the addition to the extent of 12.5%. Taking into account the above facts, the Hon'ble Gujarat High Court held that since the purchases were not bogus, but were made from parties other than those mentioned in books of accounts, only the profit 8 ITA No. 6718/M/2016- M/s Naitik Gems element embedded in such purchases could be added to the assessee's income and as such no question of law arose in such estimation. The tribunal for arriving the profit embedded in the transactions @ 12.5% held as under: ''Having heard the submissions of both sides, we have been informed that the malpractice of bogus purchase is mainly to save 10% sales tax etc... It has also been informed that in this industry about 2.5% is the profit margin. Therefore, respectfully following the decisions of the co-ordinate bench pronounced on identical circumstances, we hereby direct that the disallowance is required to be sustained at 12.5% of the purchase from those parties. With these directions, we hereby decide the grounds of the rival parties which are partly allowed.”

8.13 Taking the logic of the above cases and the material available on record, the profit percentage to be adopted on such bogus purchase is to be decided in the present case. The appellant in the grounds as well as in the written submissions, discussed about the Benign Assessment Procedure (BAP) for the assesses who are into manufacturing and / or trading of diamonds, introduced by the GOI. BAP is applicable for those diamond merchants, who were showing a profit margin of 8% of their turnover. Although, BAP talks about the net profit margin (NP), for a petty dealer, operating without any establishment, the GP would be almost similar to NP. Hence, it was assumed that the margin in the market, for a petty dealer, would be 8%, which is the same margin that is now being adopted for purchases made in cash from the grey market and for which the bills are procured from the Bhanwarlal Jain group concerns. In the light of the above, one has to see in the present case, who is in the manufacturing and trading of diamonds, what is the profit element embedded on such purchases.

8.14 The appellant's first prayer is to delete the entire addition, which is not tenable as the appellant could not prove the genuineness of the purchase made from M/s Little Diam. Without prejudice, the appellant requested to consider the percentage mentioned in the BAP scheme of 8% and to reduce the GP already admitted on such purchase of 4.63% and to adopt the balance percentage of 3.37%. Alternatively, the appellant pleads to adopt the percentage of 4% adopted by different AOs on the similar purchases made from the dummy concerns of Shri Bhanwarlal Jain group. In the case laws discussed above, Hon'ble Courts have considered percentage of VAT, which the appellant gets as benefit by purchasing from grey market for the concerned trades and the profit margin in such trade, while adopting certain percentage as profit element embedded. In diamond trade the rate of VAT is stated to be lesser and places like Surat the same is fully exempt. Considering this facts and also the profit margin in the trade, and the percentage suggested by the task force group for diamond industry constituted by the Government of India, Ministry of Commerce & Industry, and also after ascertaining the operating profit in case of diamond trade for 9 ITA No. 6718/M/2016- M/s Naitik Gems computation of ALP by the TP wing, as well as the AOs adopting 3% to 8% on the purchases made from Bhanwarlal group concerns as the profit element embedded in the subsequent assessments finalised on the similar set of facts, I am of the considered opinion that adding the entire amount of the purchase from M/s Little Diam of Rs. 84,00,000/- by the AO, is not based on correct footing. Considering the lesser profit margin in this sector, I am in agreement with the alternative request of the appellant to adopt @ 4% on the purchase as the profit element embedded in the transaction. The same is also very close to the other plea of the appellant to adopt BAP suggested percentage and reducing the profit margin already admitted which works out to 3.37%. In view of the above I am of the considered opinion that if the addition is sustained to the extent of 4% of the purchases, towards the profit element embedded in such purchases from M/s Little Diam, a concern belonging to the Bhanwarlal Group, the same will meet the ends of justice. Accordingly, AO is directed to restrict the addition @ 40/0, on the total purchase amount of Rs. 84,00,000/- from the M/s. Little Diam as the profit element embedded in such purchases. Grounds raised on these issue is partly allowed.

5. We have noted that the ld. CIT(A) accepted the alternative plea of assessee