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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI B.R.BASKARAN, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present set of cross appeals filed by the assessee and the revenue are directed against the order passed by the CIT(A)-30, Mumbai, dated 10.08.2016, which in itself arises from the assessment order passed by the A.O under Sec. 143(3) of the Income tax ‘Act’, 1961, (for short ‘Act’), dated 27.03.2015. We shall first take up the appeal of the assessee, wherein the latter assailing the order of the CIT(A) had raised before us the following grounds of appeal:-
“(1) The learned CIT(A) erred in confirming additions of Rs. 53,54,962/- computed @ 3% on purchases of Rs. 17,84,98,737/- from parties allegedly providing additions of Rs. 1,28,85,566/- computed @ 8% of such purchases as done by the learned A.O. The balance additions of Rs.53,54,962/- confirmed by the learned CIT(A) be deleted and assessed income he reduced accordingly. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above ground of appeal at any time before or at the time of hearing, of the appeal, so as to enable to learned Commissioner (Appeals) to decide the appeals according to law. The appellant craves leave to add, amend or alter the grounds of appeal at or before the time of hearing. (2) The learned CIT(A) erred in dismissing ground of Appeal related to initial Penalty proceedings.
Briefly stated, the facts of the case are that the assessee firm which is engaged in the business of trading in diamonds had filed its return of income for A.Y. 2012-13 on 28.09.2012, declaring total income of Rs.3,34,38,570/-. The return of income filed by the assessee was processed as such u/s 143(1) of the ‘Act’. The case of the assessee was thereafter taken up for scrutiny assessment u/s 143(2).
P a g e | 3 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT 3. That during the course of the assessment proceedings the A.O was in receipt of information from the DGIT (Inv.), Mumbai that as per the facts which had emerged during the course of Search and survey action conducted in the case of Shri Bhanwarlal Jain Group on 03.10.2013, it was revealed that the said group admittedly was engaged in providing accommodation entries through certain dummy concerns. The information received by the A.O revealed that the assessee had during the year under consideration taken accommodation entries of purchases from certain dummy concerns which were being managed by Shri Bhanwarlal Jain Group, as under:-
Sr. No. Name of the hawala party Bill amount 1. MOHIT ENTERPRISES 37663845 2. MAYUR EXPORTS 48731825 3. PRIME STAR 74673899 Total 161069569 The A.O acting on the aforesaid information called upon the assessee to substantiate the genuineness and veracity of the purchases which were claimed to have been made from the aforesaid parties. The assessee in its reply submitted before the A.O that it had made genuine purchases from the aforesaid concerns, which had duly been recorded in the books of account. The assessee further in order to fortify the veracity of the purchase transactions, stressed on the fact that the payment of the purchase consideration was made to the aforementioned parties through cheques. However, the A.O did not find favour with the aforesaid submissions of the assessee and observed that barring the entries in the stock register, payment through cheques and custom appraisal report in respect of export P a g e | 4 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT sales, no other document such as delivery challans etc, which could irrefutably prove the genuineness of the purchase transactions was placed on record by the assessee during the course of the assessment proceedings. The A.O on the basis of his aforesaid observations concluded that the assessee had made purchases of the goods under consideration, though not from the aforementioned hawala parties, but from the open/grey market, either directly or through brokers. The A.O on the basis of his aforesaid observations, holding a conviction that the assessee must had benefited by purchasing the goods at a lower price from the open/grey market, therefore, rejected the purchases booked by the assessee on the basis of the invoices issued by the aforementioned hawala parties. The A.O after deliberating on the facts of the case concluded that no genuine purchases were made by the assessee from the aforementioned parties, and observed as under:- a. That the physical delivery of the goods were obtained from the party based in grey market and to give it colour of being a genuine purchase, the bogus bill/accommodation bill was obtained from the supplier. b. Though the purchases alleged as genuine are shown to have been made by making payment thereof by an account payee cheques, the cheques have been deposited in bank accounts ostensibly in the name of the apparent sellers. c. The assessee could not produce any delivery challan to prove that the delivery of these goods have been actually received by them from these alleged suppliers. d. The Director/Partner/proprietor of above party has no knowledge of diamond business. e. The Director/ Partner/ proprietor of above party had only receipt of salary, mostly in cash. At times the salary is disbursed to them on need basis, as and when required. It has been observed that the profit of the concerns in which such employees are shown as directors, partners or proprietors are maintained more or less equivalent to their annual salary. In the regular books of the said concern, the profit is shown to be appropriated by the concerned P a g e | 5 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT director/partner/proprietor; however the same is actually appropriated by Bhanwarlal Jain & Family. These employees merely get salary for lending their names to various concerns and for doing miscellaneous office work, looking after banking transactions and data entry of the accounts etc. In some cases, wives of these employees are shown to be receiving salary from certain concerns without rendering any services. f. The concerns in which these employees are shown as directors/partners/proprietors are operating from the premises which are in the name of Bhanwarlal Jain & family. g. The concern is shown to be engaged in import of diamonds. However when the name sake directors/partners/proprietors were specifically asked to explain how they contacted the parties from whom the imports have been made in the respective concerns, he was unable to comment on the same. He admitted of not having any personal contact with any of the importers either through phone or email. He also admitted of not having visited any foreign country for the purpose of business. h. The assessee was also asked to produce the above suppliers for verification but he failed to produce them before the undersigned. When expenditure (Purchase) is claimed to have been incurred, the initial burden will be on the assessee to prove the genuineness of the purchase. In case the parties have shifted, the assessee is expected to know their current address as the onus is on the assessee (legal heir) to prove that the purchases were genuine. Reliance is placed on judgment of the Gujarat High Court reported in CIT Vs Chandra Vilas Hotel (1987) 164 ITR 102 (Guj.). This onus has not been discharged by the assessee.
The A.O on the basis of his aforesaid observations concluded that the assessee had purchased the goods under consideration, though not from the aforementioned hawala parties, but had purchased the same from the open/grey market. The A.O after deliberating at length on the modus operandi involved in the business of proving accommodation entries, therein concluded that the assessee by purchasing the goods from the open/grey market, and thereafter procuring the bogus bills from the aforementioned parties, thus, could safely be held to have inflated the purchases. Thus, on the basis of his P a g e | 6 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT aforesaid observations the A.O restricted the addition in the hands of the assessee to the extent of the profit which the assessee must have earned by purchasing the diamonds from the open/grey market, rather then from the regular dealers. The A.O adverting to the quantification of the profit, therein concluded that the same could fairly be taken at 8% of the aggregate value of the purchases which were claimed by the assessee to have been made from the aforesaid dummy concerns of Bhanwarlal Jain Group. The A.O in order to support his estimation of the profit element, took support of the Benign assessment procedure (BAP) which was applicable to the diamond merchants who were showing a profit margin of 8% of their turnover. Thus, on the basis of his aforesaid observations, the A.O made a total addition of Rs. 1,28,85,566/- (Rs.16,10,69,569/- x 8%) towards profit which the assessee would had generated from making the purchases of the goods under consideration from the open/grey market.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) observed that the A.O while making the addition in the hands of the assessee had merely acted on the information so received by him, and had neither made any independent verification, nor was there any attempt on his part to issue notices u/s 133(6)/131 of the ‘Act’ to the aforementioned parties. However, the CIT(A) observed that there was overwhelming evidence in the form of sworn statements of the aforesaid parties which were recorded by the Investigating wing of the department, wherein they had admitted that they were only name sake proprietors/partners/directors of the concerns and were providing accommodation entries at the dictates and directions of Shri Bhanwarlal Jain and his family members. That in the backdrop of the aforesaid facts, the CIT(A) found himself to be P a g e | 7 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT in agreement with the view of the A.O that the assessee had made the purchases of the goods under consideration, though not from the aforementioned hawala parties, but from the open/grey market. The CIT(A) agreed with the view taken by the A.O that the assessee had merely obtained bogus bills from the aforesaid parties, while for the purchase of the goods were made from unidentified parties operating in the open/grey market. The CIT(A) was not impressed by the contention of the assessee that the payments to the respective parties had been made vide cheques, being of the view that the same would not conclusively prove the genuineness and veracity of the purchase transactions. That as regards the contention of the assessee that the cross examination of the aforementioned parties had not been afforded to him, the CIT(A) observed that right to cross examination was not automatic, but the same would be incumbent only in a situation where the assessee was able to prima facie demonstrate that the onus cast on him to establish his version of affairs on the basis of primary evidence, viz. delivery challans etc., had been proved by him beyond any scope of doubt. The CIT(A) in support of his aforesaid view relied on the order of the ITAT, Mumbai in the case of GTC industries Ltd. Vs. ACIT (1998) 65 ITD 380 (Bom). The CIT(A) also did not find favour with the contention of the assessee that the A.O while dubbing the purchase transactions had failed to make any independent inquiries on his own. It was observed by the CIT(A) that the A.O after receiving the information from the office of the DGIT (Inv.), Mumbai, had conducted several inquiries before characterising the purchases claimed by the assessee to have been made from the aforementioned parties as bogus. The CIT(A) further observed that merely because the documentation part in respect of the aforesaid purchase transactions was found to be in order, the same would not conclusively prove the genuineness of the purchase transactions claimed by the assessee to P a g e | 8 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT have been made from the aforementioned parties. The CIT(A) deliberating on the facts of the case, observed, that in the backdrop of the fact that the supplier parties had themselves admitted that they were not carrying on any genuine business, but were merely name lenders acting as per the dictates of Shri Bhanwarlal Jain, therefore, a very heavy onus was cast upon the assessee to dislodge the aforesaid alleged state of affairs as was claimed by the said parties, and therein prove the genuineness and veracity of the purchase transactions on the basis of irrefutable documentary evidence. The CIT(A) observed that as the assessee had failed to prove the authenticity of the purchase transactions, therefore, it could safely be concluded that the assessee had made purchases of the goods under consideration from the open/grey market. The CIT(A) considering the fact that the sales of the assessee had not been doubted by the A.O, therefore, concluded that the addition in the hands of the assessee was liable to be restricted only to the extent of the profit that the assessee must have earned from purchasing of the goods under consideration from the open/grey market. However, the CIT(A) did not find favour with the quantification of the profit element by the A.O @ 8% of the aggregate value of the purchases which were claimed by the assessee to have been made from the aforementioned parties. The CIT(A) taking support of the judgment of the Hon’ble High Court of Gujrat in the case of CIT Vs. Simit P. Sheth (2013) 38 taxmann.com 385 (Guj), therein concluded that the estimation of the profit element was to be worked out by considering the benefit that was derived by the assessee by saving on taxes, and the additional profit that it would have generated from making the purchases from the open/grey market. The CIT(A) being of the view that as VAT involved in the business of manufacturing and trading of diamonds was 1%, while for in places like Surat the same was fully exempt, therefore, the estimation of the P a g e | 9 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT profit element involved in making of the purchases of diamonds from the open/grey market could not be worked out by applying an exorbitant rate of 8%. The CIT(A) taking cognizance of the BAP scheme, therein observed that the task force group for diamond industry constituted by the Government of India, Ministry of Commerce and Industry, after considering the BAP scheme had recommended presumptive tax for the same, viz. @ 2% for trading activity and @ 3% for manufacturing activity or @ 2.5% across the board. The CIT(A) further observed that the operating profit in the case of diamond trading for computation of Arms Length Price (for short ‘ALP’) by the Transfer pricing wing was consistently in the range of 1.75% to 3%. The CIT(A) also gathered that A.O’s in similar cases involving bogus purchase from Bhanwarlal Group concerns were consistently estimating the profit involved in making of such purchases @ 3% of the value of the purchase consideration. The CIT(A) on a conjoint perusal of the aforementioned facts concluded that as the profit element in the business of manufacturing and trading of diamonds remained in the range of 2 to 3%, while for the saving of VAT would be around 1%, therefore, the profit element embedded in making of such bogus purchases by the assessee from the aforementioned hawala parties belonging to the Bhanwarlal group concerns could fairly be estimated @ 3% of the total purchases of Rs.17,84,98,737/-. The CIT(A) on the basis of his aforesaid observations restricted the addition/disallowance in the hands of the assessee at Rs.53,54,962/-.
That both the assessee and the revenue being aggrieved with the order of the CIT(A) had carried the matter by way of cross-appeals before us. The ld. Authorized Representative (for short A.R) for the assessee at the very outset took us through the facts of the case. The P a g e | 10 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT ld. A.R submitted that the A.O had estimated the profit element embedded in the purchases which were claimed by the assessee to have been made from the aforementioned parties @ 8% of the aggregate value of purchases made from the aforementioned parties, which thereafter was scaled down by the CIT(A) to 3%. The ld. A.R took us through the observations recorded by the CIT(A) at Page 16- Para 6.15 of his order. It was submitted by the ld. A.R that now when the CIT(A) had taken cognizance of the fact that the task force group for diamond industry constituted by the Government of India, Ministry of Commerce and Industry had after considering the BAP scheme, recommended presumptive tax for net profit @ 2% for trading activity and @ 3% for manufacturing activity or @ 2.5% across the board, therefore, the addition in all fairness was liable to be restricted to 2.5% of the aggregate value of the purchases which were claimed by the assessee to have been made from the aforesaid parties. Per contra, the ld. Departmental Representatives (for short D.R) submitted that the A.O had rightly estimated the profit element involved in making of purchases by the assessee from the open/grey market @ 8%, and the CIT(A) had erred in restricting the same to 3%. It was thus submitted by the ld. D.R that the order of the CIT(A) may be set aside and that of the A.O be restored.
We have heard the ld. Departmental representative (for short ‘D.R’), perused the orders of the lower authorities and the material available on record. We have given a thoughtful consideration to the facts of the case and are of the considered view that the CIT(A) had by way of a very well reasoned order restricted the addition in the hands of the assessee to the extent of 3% of the aggregate value of the purchases which were claimed by the assessee to have been made from the aforementioned dummy concerns, viz. (i) Mohit Enterprise; (ii)
P a g e | 11 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT Mayur Exports; and (iii) Prime Star. We find that it remains as a matter of fact borne from record that the assessee had failed to substantiate the genuineness and veracity of the purchases which were claimed to have been made from the aforementioned bogus suppliers. We further find that the A.O while concluding that the assessee had not made any genuine purchases from the aforementioned parties, had arrived at such a conclusion after taking cognizance of certain material facts, viz. (i) the persons in charge of the aforesaid bogus concerns had in their statements recorded on oath by the investigation wing during the course of the Search and survey action, had admitted that they were only dummies and the concerns were as a matter of fact managed and controlled by Shri. Bhanwarlal Jain and his family members; (ii) the said concerns were only providing accommodation bills and not carrying on any genuine business transactions; and (ii) assessee had failed to substantiate the genuineness and veracity of the purchases claimed to have been made from the aforesaid parties on the basis of irrefutable documentary evidences. We have given a thoughtful consideration to the facts before us and are of the considered view that the A.O had rightly concluded that the purchases claimed by the assessee to have been made from the aforesaid dummy concerns could safely be characterized as bogus. We are of the considered view that the CIT(A) had rightly appreciated that now when the assessee had absolutely failed to lead any primary evidence to substantiate the genuineness and veracity of the purchases transactions under consideration, therefore, there remained no occasion for the A.O to have held the purchase transactions under consideration as genuine. We are further persuaded to be in agreement with the CIT(A) that now when the sales of the assessee had not been doubted and dislodged by the A.O, therefore, it could safely be gathered that the assessee had purchased P a g e | 12 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT the goods under consideration, though not from the aforementioned dummy concerns from whom bogus bills have been taken, but from certain unidentified parties operating in the open/grey market. We are further of the view that the CIT(A) had rightly appreciated that the addition in the hands of the assessee was liable to be restricted only to the extent of the profit element which was embedded in making of purchases from the open/grey market. We find that the CIT(A) though was not oblivious of the fact that in respect of bogus purchases made in a normal business, the courts had consistently estimated the profit margin involved in making of purchases from the open/grey market @ 12.5% of the value of the bogus purchases, but then, not loosing sight of the fact that unlike those cases, in the trade line of diamond business the profit margin did not exceed 3%, had thus in all fairness restricted the addition in the hands of the assessee to 3% of the aggregate value of the bogus purchases which were claimed to have been made from the aforesaid parties. We have given a thoughtful consideration to the facts of the case and are persuaded to be in agreement with the view taken by the CIT(A). We thus being of the considered view that the CIT(A) had fairly concluded that the addition in respect of the purchases which were claimed by the assessee to have been made from the aforementioned bogus concerns, viz. (i) Mohit Enterprise; (ii) Mayur Exports; and (iii) Prime Star, were liable to be restricted to 3% of the aggregate value of the purchases, therefore, find no reason to dislodge his well reasoned order. We thus, in the backdrop of our aforesaid observations, finding ourselves as being in agreement with the view taken by the CIT(A), dismiss the appeal of the assessee.
P a g e | 13 & 6726/Mum/2016 AY: 2012-13 Popatlal N. Shah Vs. ACIT ITA No.6726/Mum/2016 A.Y. 2012-13 8. We shall now take up the appeal of the revenue, wherein the latter assailing the order of the CIT(A), had therein carried the matter in appeal before us by raising the following grounds of appeal:- “1. On the facts and circumstances of the case and in law, whether, the ld. CIT(A) was correct in reducing the addition made by the A.O @ 8% on Rs.16,10,69,569/- and sustaining only an addition @ 3% profit rate on total purchases of Rs.16,10,69,569/- made from four parties.
2. The appellant prays that the order of the learned CIT(A) on the above grounds be set aside and that of the A.O be restored.
3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.
9. We find that the controversy involved in the cross appeals filed by the assessee and the revenue boils down to the issue as regards the quantification of the profit element embedded in the purchases made by the assessee from the open/grey market, as in comparison to those made from regular dealers. We find that the revenue being aggrieved with the scaling down of the said addition which was made by the A.O @ 8% of the aggregate value of the purchases claimed by the assessee to have been made from the aforesaid dummy concerns to 3% by the CIT(A), had therein carried the matter in appeal before us. That as the issue involved herein had already been deliberated at length by us while disposing of the appeal of the assessee in for the year under consideration, viz. AY: 2012-13, therefore, in terms of our aforesaid observations wherein we had upheld the order of the CIT(A) and sustained the addition @ 3% of the aggregate value of the bogus purchases made by the assessee, the appeal of the revenue is dismissed in terms of our said observations.