ITO WARD 4(3)(1), MUMBAI vs. SIDDHESHWAR IMPEX PVT LTD , MUMBAI

IN THE INCOME-TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI BEFORE SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER & SMT. RENU JAUHRI, ACCOUNTANT MEMBER ITA No. 153/MUM/2024 (A.Y. 2011-12) ITO, Ward 4(3)(1) v/s. Siddheshwar Impex Pvt. Room No. 648, 6th Floor, बनाम Ltd. Aayakar Bhavan, 4A, 2nd Floor, Bombay M.K. Road, Hospital Building, 134 Mumbai-400020 Medows Street 134, Medows Street, Mumbai-400002 स्थायी लेखा सं./जीआइआर सं./PAN/GIR No: AANCS2173E Appellant/अपीलार्थी .. Respondent/प्रतिवादी

Appellant by : Shri Nagnath Pasale Respondent by : None Date of Hearing 14.06.2024 Date of Pronouncement 26.08.2024 आदेश / O R D E R PER RENU JAUHRI [A.M.] :- This appeal is filed by the revenue against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai-9 /National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 24.11.2023 passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for Assessment Year [A.Y.] 2011-12.

ITA No. 153/Mum/2024 A.Y. 2011-12 Sidheshwar Impex Pvt. Ltd. “1. Whether on facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in directing the AO to make GP addition without appreciating the fact that in the investigation carried out by the Directorate of Investigation of Gujarat & Mumbai, it was found that M/s Delight Diam Private Limited and M/s Rajat Diamonds are paper entities?" 2. Whether on facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in directing the AO to make GP addition without appreciating the fact that Hon'ble Gujarat High Court in the case of M/s N K protein Ltd has given direction for 100% disallowance of bogus purchase and the SLP filed by the assessee has been dismissed by the Hon'ble Supreme Court?” 3. Brief facts of the case are that the return declaring income of Rs. 64,299/- was filed by the assessee company on 30.09.2011. Subsequently, on receipt of information regarding suspicious transactions, the case was reopened u/s 147 of the Act. The assessee company is engaged in the business of trading/export/import of diamond and jewellery. After inquiries in respect of purchases made from M/s. Delight Diam Pvt. Ltd. & M/s Rajat Diamond of Rs. 40,56,526/- [17,55,656+23,00,870], the AO held that these are bogus and proceeded to make addition of the entire amount of Rs. 40,56,526/- u/s 69C of the Act. Ld. CIT(A) restricted the disallowance of the Gross Profit (GP) Rate to be 4. applied on the bogus purchases with the following observations. “5.3.6. Thus, the jurisdictional HC considering other judgements including that of the N.K. Industries (quoted supra) which was quoted by AO as Apex court decision in case of N.K. Proteins, had concluded that the gross profit ratio on purchases at the same rate of other genuine purchases has to be brought to tax. The position was reiterated in case of Principal Commissioner of Income-tax v. Nitin Ramdeoji Lohia 145 taxmann.com 546 (2022) wherein the Hon'ble HC remanded the matter back to the Tribunal to consider the issue of determining the gross profit ratio on the purchases found to be non-genuine. The court stated thus: Page 2 of 6

ITA No. 153/Mum/2024 A.Y. 2011-12 Sidheshwar Impex Pvt. Ltd. "We are in agreement with the view expressed by the CIT (Appeals) that, if the purchases are bogus, it would be impossible for the assessee to complete the business transaction and that if the purchase is bogus, the corresponding sale also must be bogus or else the transaction would be impossible to complete and as a necessary corollary, unless the corresponding sale is held to be bogus, the purchase also cannot be held to be bogus, rather it would be a case of purchase from bogus entities/parties. That view has been upheld by the Tribunal in principal while dismissing the appeal of the Revenue. In view of the above, we are of the opinion that the questions of law proposed as (a), (b), and (c) in the appeal cannot be said to be substantial questions of law. Insofar as the question of law framed as (d) is concerned, we find that the Tribunal has not addressed the issue of adopting the gross profit rate of 5% on the alleged Hawala purchase of Rs. 2.45 crores as against the rate of 0.69% declared by the assessee, despite the fact that the CIT (Appeals) had specifically gone into that question in its order dated 18th August, 2015 and had directed the A.O. to make 5% addition in the gross profit ratio, while deleting the balance addition." 5.3.7. These decisions are applicable to the current case as the facts and circumstances are similar because here too, only the part of purchases was questioned by the AO. The jurisdictional High Court has taken the gross profit ratio on purchases at the same rate of other genuine purchases accepted by the department. The Honourable HC has consistently held onto this logic. In the very latest judgement in case of PCIT v. S.V.Jiwani 449 ITR 583 (2022), 290 Taxman 178(2022), the Court held thus: "It also held that the A.O. had not disputed the turnover of the contract work executed by the assessee and that unless the assessee procured the materials and goods, if not from the declared sources but from some other sources, it would not be possible on the part of the assessee to execute work awarded by MCGM. The Tribunal, therefore, held that the entire purchase made by the assessee could not be added back as income, but only profit element embedded therein, be treated as income of the assessee. 5.3.8. Further, in a later judgement than of N.K. Industries, the High Court of Gujarat in case of PCIT v. Surya Impex [2023] 148 taxmann.com 154 (Gujarat) also held that "11. Having found that the Assessing Officer has chosen not to reject the books of accounts of the assessee and had made the estimated additions of the pieces of the purchases. Both, the CIT Page 3 of 6

ITA No. 153/Mum/2024 A.Y. 2011-12 Sidheshwar Impex Pvt. Ltd. (Appeals) and the Tribunal, have concurrently and rightly held to make the additions, which the CIT (Appeals) had done @ 12.5% of the impugned purchases, which have been reduced and restricted to 6%. It will not be out of place to make a mention that the Assessing Officer's inquiry was based on the report of the Investigation Wing, Mumbai, the copy of the statement of Shri Bhanwarlal Jain and others had been asked for by the assessee, which also had not been provided nor was he allowed a cross- examination. This, of course, could have been a reason for the Authority concerned to restore the matter back to the Assessing Officer, however, noticing the elaborate evidence consisting the details of purchase, PAN, etc., coupled with the Assessing Officer and the CIT (Appeals) dealing with the case of Shri Bhanwarlal Jain and others involved therein, if addition directed of 6% of the disputed purchases by noting that the profit margin in the said industry is 5% to 7% without even going by the estimation of the possible profit margin in the industry, suffice to note that in all cases relating to Shri Bhanwarlal Jain, both, the Assessing Officer and the CIT (Appeals), Mumbai, have chosen to make addition @3% to 5% of the bogus purchases. That view of the matter, no purpose is going to be served in interference. There are concurrent findings with sound reasons. 12. This Court in Tax Appeal No. 200 of 2003 in case of Mayank Diamonds (P.) Ltd. (supra) was required to decide the estimation of the gross profit @ 12.5% against the gross profit of 1.03% shown by the assessee. The Court allowed the gross profit rate of 5% holding that 12.5% is drastically higher. In N.K. Industries (P.) Ltd. (supra), where the Court had considered the addition of entire amount on the ground that the fictitious purchases is a factually different than what was already held at Mayank Diamonds (P.) Ltd. (supra). In the other cases of Shri Bhanwarlal Jain also, addition rates are 3% to 5% where no further challenge possibly is there or it has not been processed further. This Court finds that no question of law, much less any substantial question of law arises for consideration of this Court." 5.3.9. Thus, adding back purchases without questioning the sales is not correct. And following the jurisdictional HC decisions, the AO has to bring to tax as additional income, the gross profit on the bogus purchases of Rs. 40,56,526/-. The rate of gross profit to be applied on these bogus purchases is to be determined as the same gross profit ratio of income returned to the genuine purchases in line with the jurisdictional HC decision.”

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ITA No. 153/Mum/2024 A.Y. 2011-12 Sidheshwar Impex Pvt. Ltd. 5. We have heard the rival submissions. We find no infirmity in the order of the Ld. CIT(A) in which he has directed to restrict the addition to the extent of gross profit at the rate to be applied as the GP rate declared on the genuine purchases. Accordingly, the appeal of the revenue is dismissed and the AO is directed to recompute the addition to be by applying GP rate made in accordance with the directions of the Ld. CIT(A) 6. In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 26.08.2024.

Sd/- Sd/- NARENDER KUMAR CHOUDHRY RENU JAUHRI (न्यातयक सदस्य/JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)

Place: म ुंबई/Mumbai दिनाुंक /Date 26.08.2024 अननकेत स ुंह राजपूत/ स्टेनो आदेश की प्रतितलति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file.

सत्यावपि प्रवि //True Copy// आदेशानुसार/ BY ORDER,

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ITA No. 153/Mum/2024 A.Y. 2011-12 Sidheshwar Impex Pvt. Ltd. उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीलीय अतिकरण/ ITAT, Bench, Mumbai.

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