K. RAJNIKAT & CO.,MUMBAI vs. ACIT 19(2), MUMBAI

Brief facts are, the assessee a partnership firm is engaged in manufacture and trading of gold and diamond jewellery. For the assessment year under consideration, the assessee filed its return of income on 4th September 2012, declaring total income of ` 6,84,07,857. During the assessment proceedings, the Assessing Officer found that a search and survey operation was conducted in case of Bhawarlal Jain Group on 3rd October 2013 by the DGIT (Inv.), Mumbai. In the course of search operation, it was found that all concerns belonging to the group including the directors, partners, proprietors, etc., are belonging to the native place of Bhawarlal Jain in Rajasthan and known to him. In the statement recorded during the search / survey, the concerned persons also admitted that they were made directors, partners and proprietors of various concerns at the instance of Bhawarlal Jain. However, all those group concerns were controlled by Bhawarlal Jain Group and all such directors, partners, proprietors of those concerns are merely employees of Bhawarlal Jain Group. During the post search proceedings, the Investigation Wing of the Department found that many of the concerns belonging to Bhawarlal Jain Group were providing accommodation entries and the assessee is one of the beneficiaries of such accommodation entries in 3 M/s. K. Rajnikant & Co. the financial year relevant to the assessment year 2012–13. As per the information available on record, the Assessing Officer found that in the relevant previous year the assessee had taken accommodation entries to the tune of ` 10,14,68,721 from four parties. He, therefore, called upon the assessee to prove the genuineness of purchases. As alleged by the Assessing Officer, the assessee could not prove the purchase of diamond from the concerned parties by producing delivery challans, etc. Though, the assessee submitted the day–to–day stock register and quantitative details of purchases and sales to prove that purchases and sales were genuine, however, the Assessing Officer concluded that the sales effected by the assessee demonstrate that the assessee must have purchased the diamonds from grey market on payment of cash and to give a colour of genuineness to such transactions has obtained accommodation entries from the concerned parties. The Assessing Officer observed, though, the diamond corresponding to the purchase value has entered into to the stock of the assessee which is proved from the sales effected, however, such purchases were made from grey market and not from regular dealers. Accordingly, referring to benign assessment procedure (BAP) as introduced in the budget speech of Finance Minister on 28th February 2007, he estimated the profit @ 8% of the alleged bogus purchases and made addition of an amount of ` 81,17,498. The assessee challenged the addition before the first appellate authority.

The learned Commissioner (Appeals), though, agreed with the Assessing Officer that assessee was unable to prove the fact that purchases were effected from the declared sources, however, referring to the recommendation of task force group for diamond industry constituted by Government of India, Ministry of Commerce, for calculating profit in case of diamond industry at 2% on trading activity and 3% for manufacturing activity, directed the Assessing Officer to restrict the addition to 3% of the alleged bogus purchases. Accordingly, he worked out the disallowance to ` 30,44,062.

Learned Authorised Representative submitted, the assessee has maintained regular books of account including day–to–day stock register and has proved the purchase and sale of goods by furnishing quantitative details. He submitted, the Assessing Officer without making any enquiry independently has simply relied upon the information received from the Investigation Wing and has concluded that the assessee has purchased the goods from grey market and not from the concerned parties. He submitted, without bringing any adverse material that the purchases are not genuine the Assessing Officer was not justified in disallowing 8% out of the purchases. He submitted, the assessee has shown gross profit margin of about 10% and the net profit margin of 7% before tax. He submitted, even as per the CBDT instruction no.2/2008 dated 22nd February 2008, if an 5 M/s. K. Rajnikant & Co. assessee has shown net profit of more than 6% from manufacturing and trading of diamond, no further addition should be made. Learned Authorised Representative submitted, in assessee’s own case for A.Y. 2009–10 and 2013–14, the Assessing Officer himself has estimated profit at 3% under similar circumstances. In support of his contention, the learned Authorised Representative relied upon the decision of the Tribunal, Mumbai Bench, in Polar Star v/s ACIT, ITA no.5877/Mum./ 2016 and ITA no.6724/Mum./2016, dated 5th September 2017.

Learned Departmental Representative relying upon the observations of the Assessing Officer submitted, the assessee having not been able to prove the genuineness of purchases with supporting evidence addition made by the Assessing Officer should be restored.

We have heard rival contentions and perused the material available on record. As could be seen, in pursuance to a search and survey operation conducted in the case of Bhawarlal Jain Group material came to the possession of the Assessing Officer indicating that certain concerns / entities controlled by the said Group was indulging in providing accommodation entries in respect of trading in diamond. On the aforesaid basis, the Assessing Officer called upon the assessee to prove the genuineness of purchases made of ` 10,14,68,721 from four parties and not being satisfied with the evidence submitted by the assessee disallowed 8% out of the 6 M/s. K. Rajnikant & Co. purchases made from the concerned parties. On a perusal of the impugned assessment order, we find that apart from relying upon the information available on record as a result of search and survey operation in Bhawarlal Jain Group, the Assessing Officer has not conducted any independent enquiry of his own to find out the genuineness of purchases made from the concerned parties. It is also a fact on record that the Assessing Officer admits that goods corresponding to the alleged bogus purchase made from four parties have entered the stock of the assessee and assessee has been able to co–relate such purchases with sales with quantitative details. The Assessing Officer has also admitted, though, the assessee had purchased the disputed amount of goods, however, according to him, they were not from the concerned parties but from grey market. Thus, as could be seen, there is no dispute that the assessee had made the purchases which has been doubted by the Assessing Officer as bogus. The dispute remains with regard to the source of purchases. For that reason, probably the Assessing Officer has not made addition of the entire purchases but has disallowed 8%. At the same time, in our view, the assessee has not brought any conclusive evidence on record by way of affidavit / confirmation letters from the concerned parties to prove the fact that purchases, indeed, were made from the concerned parties. The assessee has also not volunteered to produce the concerned parties before the Assessing Officer to prove the 7 M/s. K. Rajnikant & Co. genuineness of purchases made from them. Thus, in our view, the assessee has also failed to prove the fact that purchases were made from the declared source. Thus, in the aforesaid circumstances, assessee’s claim that purchases were genuine is unacceptable. Therefore, the issue which remains to be decided is the rate of profit at which the income of the assessee is to be assessed. While the Assessing Officer has applied the profit rate of 8% the learned Commissioner (Appeals) has estimated it at 3%. However, both the authorities have relied upon the BAP report. In CBDT circular no.2/2008, dated 22nd February 2008, the rate of profit in case of diamond manufacturing and trading has been fixed at 6%. However, the percentage referred to in BAP reports or CBDT circular are for transaction under normal circumstances, hence, cannot apply to unproved purchases. Thus, in our view, since, the assessee has failed to prove the genuineness of purchases from concerned parties disallowance on the alleged bogus purchases should be made at 6%. As far as the decision relied upon by the learned Authorised Representative we are of the view that since, what should be the profit rate in a particular case is a purely factual issue, the decision having been rendered in its own factual context will not apply. Accordingly, we direct the Assessing Officer to disallow 6% of the alleged bogus purchase. Ground is partly allowed.