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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
These cross appeals are arising out of the common order of Commissioner of Income Tax (Appeals)-50, Mumbai, [in short CIT(A)] in I TA N o. 3 75 2 & 4 6 5 1/M um / 2 0 17 Aar ti J ew e ll er s Pv t. Ltd. (20 0 7 -0 8) appeal No. CIT(A)-50/IT-77/2015-16 dated 30-03-2017. The Assessment was framed by the Deputy Commissioner of Income Tax, Central Circle- 8(3), Mumbai (in short DCIT) for the assessment year 2007-08 vide order dated 31-03-2015 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only common issue raised by assessee and Revenue in these cross appeals is as regards to the order of CIT(A), restricting the addition at ₹ 2,96,65,590/- by applying peak credit to the alleged bogus purchase of ₹ 7,10,73,950/-, which was added by the AO by adopting the peak credit at ₹ 5,46,03,927/-. For this assessee has raised following two grounds: -
“1. On the facts and circumstances of the case as well as in law, the learned CIT(A) has erred in confirming the addition of ₹ 2,96,65,590/- on account of alleged bogus purchase, on the basis of peak theory considering 45 days credit period, without considering the facts and circumstances of the case.
2. On the facts and circumstances of the case as well as in law, the learned CIT(A) has erred in confirming the disallowance of purchase to the extent of ₹ 2,96,65,590/- which is 41% of total alleged accommodation purchase of ₹ 7,10,73,950/-.”
Revenue has also raised following two grounds: -
“1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in I TA N o. 3 75 2 & 4 6 5 1/M um / 2 0 17 Aar ti J ew e ll er s Pv t. Ltd. (20 0 7 -0 8) deleting the addition of ₹ 2,49,38,337/- without appreciating the facts of the case and ignoring the fact that the working of peak credit was a made part of seized material found and seized during the course of the search.”
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition by ignoring the fact that AO was justified to hold that the assessee has taken an accommodation bill for the purchases, and therefore an equivalent amount of cash was paid which in excess of ₹ 20,000/- per day in grey market, and being these purchases made part of the regular books of accounts [by way of accommodation purchase bills] are thereby, hit by provisions of section 40A(3) of the Income Tax Act.”
Briefly stated facts are that the assessee is engaged in manufacturing and trading in jewellery and precious stones. The assessee filed its returned of income on 28-09-2007, declare total income of ₹ 1,75,74,751/-. Original assessment was completed by the AO under section 143(3) on 30-11-2009 assessing declared income. Subsequently, the AO received information from DGIT investigation, Mumbai vide letter dated 18-03-2014, who in turn has received information from Sales Tax Department of Maharashtra that there are certain brokers, who are providing accommodation bills/ entries without selling anything. Assessee is one of the beneficiaries and he has obtained bogus bills from the following parties: -
Name of the party Amount (₹)
I TA N o. 3 75 2 & 4 6 5 1/M um / 2 0 17 Aar ti J ew e ll er s Pv t. Ltd. (20 0 7 -0 8) Harshit Impex 1,33,66,010/- Krishna Diamonds 1,16,61,626/- Mihir Diamonds 49,17,250/- Sanyam Diamonds 1,12,73,450/- Shri Ram Diamonds 2,78,79,244/- Simran Gems 19,76,370/- Total 7,10,73,950/-
According to information of DGIT investigation Mumbai, the assessee has inflated its purchase by obtaining these bogus bills and accordingly, the AO reopened the assessment by issuing notice under section 148 of the Act. The AO after considering the statement recorded under section 132(4) of the Act of Shri Biren Vaidya on 22-02-2014, recorded during the course of search, wherein Shri Biren Vadiya admitted issuing these bogus bills. Accordingly, the AO computed the peak credit of bogus purchases i.e. the bogus bills obtained by assessee during the FY 2006-07 relevant to AY 2007-08, and computed the addition of ₹ 5,46,03,927/- out of total bogus purchase of ₹ 7,10,73,950/-. For this the AO observed as under: -
“8. The peak value of purchases from the accommodation entry providers for FY 2006-07 is computed as Rs. 5,46,03,927/-. The same has been admitted by the assessee as being the unaccounted cash in the respective year in the hands of M/s. Aarti Jewellers Pvt. Ltd. In light of the detailed findings of the Search action and also the admission of the key persons of the assessee company during the course of Search, the sum of Rs. 5,46,03,927/- is added to the total income of the assessee on account of bogus purchase bills for AY 2007-08. Penalty proceedings are initiated separately for filing
I TA N o. 3 75 2 & 4 6 5 1/M um / 2 0 17 Aar ti J ew e ll er s Pv t. Ltd. (20 0 7 -0 8) inaccurate particulars of income and concealment of income.”
Aggrieved assessee preferred the appeal before CIT(A), who restricted the addition of peak credit at ₹ 2,09,65,590/- by observing in Para 6.1 as under: -
“6.1 I have considered the contentions of the AO and that of the appellant. The claim of the appellant that it enjoyed credit limit, between 45 days to 180 days was considered. Because of the very nature of the transaction, it is not possible for the appellant to produce any evidence in respect of the actual credit limit availed in respect of various purchases. Taking that aspect into consideration, I consider that it would be reasonable to presume that the appellant had a credit limit of 45 days in respect of the purchases for which payments were made in cash Though in his letter dated 21.03.2017, the AO claimed that the payments for the purchase of the goods were made at the time of purchase itself without any credit period, he has not brought any evidence on record in support of his claim. Therefore, I find the cash flow statement prepared by the appellant assuming credit period of 45 days acceptable. The peak of the unaccounted money used for purchases of diamonds assuming credit limit of 45 days works out to Rs. 2,96,65,590/- (the AO
I TA N o. 3 75 2 & 4 6 5 1/M um / 2 0 17 Aar ti J ew e ll er s Pv t. Ltd. (20 0 7 -0 8) did not point out any error in the working of the peak credit in his report).”
The CIT(A) also considered the contention of the AO raised in his remand report that the payments against the purchases are liable to be disallowed under section 40A(3) of the Act. According to CIT(A), the AO made addition on unexplained cash and not on account of disallowance of purchase and hence, he has not made any disallowance vide Para 6.2 as under: -
“As regards the contention of the AO made in his report dated that the payments against the purchases are liable to be disallowed u/s 40A(3), I find that the addition disputed by the appellant was made on account of unexplained cash and not on account of disallowance of purchases. The AO has, after elaborate discussion in the order accepted the fact that the purchases were actually made. I also find that there is no entry to show to how many parties the payments were made. Further, the AO has not pointed out specific any payment which is hit by the provisions of section 40A(3). Therefore, the contention of the AC) made in his report dated 30.03.2017 that the payments are to be disallowed u/s 40A(3) is not supported by any evidence.
Aggrieved, against the order of CIT(A), the Revenue has challenged restriction of the peak addition as well as not made any addition under section 40A(3) of the Act. On the other hand, the assessee has challenged the peak addition retained by CIT(A).
I TA N o. 3 75 2 & 4 6 5 1/M um / 2 0 17 Aar ti J ew e ll er s Pv t. Ltd. (20 0 7 -0 8) 7. Before us, the learned Counsel for the assessee first of all stated that there cannot be any addition on peak credit for the reason that the entire payments are by account payee cheque to these parties. He referred to pages 14 to 51 of assessee’s paper book, wherein, complete details of payment to these parties is made by account payee cheque and recorded in the books of account. We have gone through these details and when confronted to the learned Senior Departmental Representative, she requested for setting aside to the issue to the file of the AO for verification purposes. On counter reply the learned Counsel for the assessee stated that these entire details were produced before the AO as well as before CIT(A). The assessee referred to the details submitted before AO and AO himself reproduced the same in its order and the relevant of the same reads as under: -
“Ledger copy of the aforesaid parties along with copies of bills and copy of bank statement highlighting the payments to the parties as also the entire correlation of the sales and the above purchase (which consist of purchases of Diamonds) has already been furnished to your goodself.”
Finally, the learned Counsel for the assessee stated that Shri Biren Vaidya admitted during the course of search that these are bogus bills but ultimately the assessee has made purchase and sales are never doubted by the AO or CIT(A). It means that in case these are bogus purchase only percentage of profit can be applied. The learned Counsel for the assessee stated that the profit rate in the diamond business is 3 to 5% and accordingly, it is requested that a reasonable profit can be estimated. He also made argument that once, the payment is by cheque and sales are not doubted by the AO, the provisions of Section 40A(3) of the Act cannot be applied. On the other hand, the learned Senior Departmental Representative, heavily relied on the assessment order.
I TA N o. 3 75 2 & 4 6 5 1/M um / 2 0 17 Aar ti J ew e ll er s Pv t. Ltd. (20 0 7 -0 8) She also argued that a peak should be estimated but she could not elaborate how peak can be added if, the payment is made by cheque and the entries are accounted for. In view of these arguments, the learned Senior Departmental Representative, only requested for sustaining the order of the Assessing Officer.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee had obtained bogus bills from various hawala parties but payments are made by account payee cheques and recorded in the books of account. It means that the payments are accounted for and not unaccounted. The assessee to avail the benefit of VAT and to obtain other benefits like lower market price of goods purchased material from grey market and obtained these bogus bills. This fact has not denied by either Revenue or Assessee. In such facts, the provisions of section 40(A)(3) of the Act cannot be invoked because the payments are accounted for and material is purchased which is accounted for and sales are not doubted by the Revenue. The only alternative left with is to assess the profit rate on the bogus bill obtained by assessee and purchases are made from grey market. In such circumstances, we estimate the profit rate at 5% of the bogus bills of purchase, as estimated in similar circumstances by co-ordinate Bench in the case of ITO vs. Priti Gold (India) Private Ltd. in for AY 2009-10 vide order dated 23/08/2007. In the similar circumstances, in the group cases, the settlement commission has accepted the application of profit rate on the bogus purchases as declared by assessee in SA No. MH/MUCC- 4/018/2015-6/IT dated 24-05-2017. The settlement commission has accepted voluntary offer of additional income of ₹ 75 lakhs by assessee Aarti Jewellers Pvt. Ltd. in equal proportion of ₹ 12.50 lakhs each for A.Yrs. 2009-10 to 2014-15 as there was bogus purchase bills amounting to ₹ 17.58 crores in AY 2009-10, 7.95 crore in AY 2010-11, 16.82 crore in I TA N o. 3 75 2 & 4 6 5 1/M um / 2 0 17 Aar ti J ew e ll er s Pv t. Ltd. (20 0 7 -0 8) AY 2011-12, 16.49 crore in AY 2012-13 and ₹ 3.94 crore in AY 2013-14. As all the authorities are consistently accepting these bogus purchases as bogus bills only and assessee has made purchases from grey market which are sold out, the only alternative left is for application of profit rate. Accordingly, we direct the AO to apply only profit rate of 5% of the bogus purchases of ₹ 7,10,73,950/- and assessed the income accordingly. We allow this appeal of assessee partly and appeal of Revenue is dismissed.
In the result, the appeal of assessee partly allowed and that of 10. the Revenue is dismissed.
Order pronounced in the open court on 16-11-2017.