MANOJ BEGANI,KOLKATA vs. ACIT, CIRCLE-44, KOLKATA, KOLKATA

Ground no. 5 in all the appeals are against the action of the Ld. CIT(A) in upholding the addition of Rs.27,28,000/- being bogus purchase of diamonds from M/s. Vitrag Jewels (hereinafter referred to as ‘M/s. Vitrag’) for AY 2008-09. Likewise, in AY 2010-11, the Ld. CIT(A) has confirmed the addition of Rs.32,41,440/- being bogus purchase of diamonds from M/s. Kangan Jewels Pvt. Ltd. (hereinafter referred to as ‘M/s. Kangan’). Likewise, for AY 2011-12, the Ld. CIT(A) has confirmed the addition of Rs.38,99,463/- being bogus purchase of diamonds from M/s. Kangan. Similarly, for AY 2012-13, the Ld. CIT(A) confirmed the addition of Rs.35,39,363/- being bogus purchase of diamonds from M/s. Kangan. Likewise, for AY 2014-15, the Ld. CIT(A) confirmed the addition of Rs.37,50,000/- being bogus purchase of diamonds from M/s. Arihant Exports (hereinafter referred to as “M/s. Arihant”). Since the order passed by the Ld. CIT(A) is identically worded and the basis for addition in all the assessment years are the same except variance in figures, we take the lead case that of AY 2008-09 and the decision for that year will be followed in all other assessment years.

Briefly stated facts are that the AO noted that the assessee had filed his return of income for AY 2008-09 on 10.01.2008 declaring total income of Rs.8,05,440/- which was revised on 17.11.2008 to an income of Rs.8,19,800/- and the case was processed u/s. 143(1) of the Act on 14.11.2010. Later, the AO reopened the case for AY 2008-09, u/s. 147 of the Act after issuing notice u/s. 148 of the Act on 23.03.2015. The AO noticed that the assessee was engaged in the business of manufacturing of jewellery and trading of metal, precious/semi precious stones under the name of his proprietary concern M/s. Manoj Begani. According to the AO, on verification it was found that the assessee has made bogus transaction with M/s. Vitrag amounting to Rs.27,28,000/- and for that reason the case was reopened. The AO noted that vide notice u/s. 142(1) of the Act dated 03.06.2015, the case was fixed for hearing on 11.06.2015. However, no hearing could take place because of an adjournment application moved by the assessee, so he refixed the case on 18.06.2015 and since the assessee sought adjournment again, the matter was refixed for hearing on 26.04.2015. Thereafter, the AO asked the assessee to produce the Principal Officer of M/s. Vitrag along with the books of accounts to verify the genuineness of the transaction made with the assessee. Thereafter, the AO noted that the assessee did not made compliance till the date of passing of the assessment order and since the assessee failed to produce the Principal Officer of M/s. Vitrag along with books of account, the AO concluded that assessee had excessively debited in the P&L Account, the amount of bogus purchase amounting to Rs.27,28,000/- from M/s. Vitrag and since the assessee has not been able to prove satisfactorily that the purchases made are not bogus purchases, the entire amount of Rs.27,28,000/- was added back to the total income of the assessee. Aggrieved by the aforesaid order of the AO, assessee preferred an appeal before the Ld. CIT(A), who was pleased to confirm the same. Here we note that though the reassessment order was only of two (2) pages, the Ld. CIT(A) has decided the matter by an impugned order running to sixty four (64) pages.

We have heard rival submissions and gone through the facts and circumstances of the case. We note that the AO has disallowed the entire purchase from M/s. Vitrag on the basis that the assessee failed to produce the Principal Officer of M/s. Vitrag along with the books of account, so, he could not verify the genuineness of the transaction. On that basis, the AO disallowed the entire purchase made from M/s. Vitrag. In the appellate proceedings and on perusal of the appellate order it reveals that the Ld. CIT(A) has brought on record elaborately the background facts which prompted the AO to reopen the assessment of the assessee for all the assessment years before us. For better and easy understanding, in all the assessment years before us, the additions made were based on the allegation of bogus purchases of diamonds as stated by the accommodation entry providers which are given by a chart below:

Sl. No. AY Section Addition Name of the parties 1. 2008-09 147 2,780,000 Vitrag Jewels 2. 2010-11 147 3,241,440 Kangan Jewels P. Ltd. 3. 2011-12 147 3,899,463 Kangan Jewels P. Ltd. 4. 2012-13 147 3,539,363 Kangan Jewels P. Ltd. 5. 2014-15 147 3,750,000 Arihant Exports 17,210,266 We would like to discuss the background of all the cases for better understanding of the cases before us. From a perusal of the aforesaid chart, we note that for the relevant assessment year which is under consideration in the lead case, is in respect to purchases from M/s. Vitrag (AY 2008-09). In respect to M/s. Vitrag (AY 2008-09) and M/s. Arihant i.e. with respect to AY 2014-2015, we note that both the concerns are controlled by Rajendra Jain group which we discern from perusal of pages 31 and 32 of the Ld. CIT(A)’s order. In respect to M/s. Kangan it belongs to Dharmichand Group (AY 2010-11 to 2012- 13) in which Shri Dharmichand Jain is the key person. We note that reopening the assessments and thereafter additions were made on the assessee for all these assessment years before us was based on the statement of Shri Rajendra Jain who controlled M/s. Vitrag (AY 2008-09) and M/s. Arihant (AY 2014-15) has been relied upon. Likewise, in respect of AYs 2010-11 to 2012-13 the statement of Shri Dharmichand Jain was relied upon in respect to bogus purchases from M/s. Kangan. We note that the Ld. CIT(A) has heavily relied on the statement of Shri Rajendra Jain for making the disallowance of the purchases claimed by the assessee from M/s. Vitrag (AY 2008-09) and in respect to M/s. Arihant (2014-15) whose statement is reproduced from pages 31 to 38 which was recorded during search and seizure on 03.10.2013 in their premises; and in page 39 of the Ld. CIT(A)’s order, he gives the gist of Shri Dharmichand Jain’s statement in respect of M/s. Kangan for AYs 2010-11 to 2012-13 and observes that the modus operandi adopted by all these three groups are similar, therefore, we are going to discuss in detail about the statement recorded of Shri Rajendra Jain which is relevant for AY 2008-09 and 2014-15, which will decide all the cases before us.

The Ld. CIT(A) at page 34 of his order has given the modus operandi and has given a pictorial description which according to him has been prepared by the officers of Investigation Wing after detailed discussion and understanding from Shri Rajendra Jain which is essential for better understanding the nuisance of the whole transaction. The chart is reproduced as under:

Thereafter, the Ld. CIT(A) reproduces the Question and Answer from Shri Rajendra Jain wherein he explained the pictorial representation, which is important to understanding the case is reproduced from question no. 16 and answer as under: “Q.16. Please refer to the detailed pictorial representation made by you in answer to question number 15 and explain the detail of each and every block of the pictorial representation diagram. Ans. Sir, In the pictorial diagram submitted by me, I explained the modus of various parties/persons/concerns involved at various blocks. The details of these block are explained as under.- A. This block A represents various concerns of domestic market, from which we take purchase bills of polished diamonds without actual delivery of diamonds, These bills are taken for a long credit period and usually they are not settled with the cheques but by the sale bills of rough diamond given by us to them. In usual circumstances the bills of polished diamond is only settled by the bills of the diamonds, however sometimes these bills are also settled by movement of cheques from one party to another. The purchase shown in our books from these domestic concern have a long credit period, as reflected in our books. These entries are merely paper transactions which are used for showing high turnover by the beneficiary domestic concerns. B. This block B represent the foreign concerns from whom we import diamonds. These concerns are mostly based in Belgium and name of few such concerns are as under:- a. HRP Diam, Belgium b. Gem blue, Belgium c. Vee Diam, Belgium d. Swintu Diarn, Belgium Here, I would like to clarify that we are just importing the bills of diamonds from such foreign parties and the underlying stock of diamonds is taken by the real importers who do not figure out at any place in the books of accounts maintained by us as well as the foreign exporter. Only in the eye of foreign banker we are the genuine importer of the diamond otherwise all the three parties involved in the transaction knows the reality. To sum up the real importers of the diamond from these foreign concern are the concerns mentioned in Block D however, the bill are issued in the name of concerns mentioned in the Block C. In our Block C books of accounts the diamonds imported from foreign concern mentioned in Block B gets reflected, but we don't received the physical diamonds and the same diamonds are used by the concerns mentioned in Block D. We do not have any direct contact with the foreign concerns, though we have the legal liability. We have only some e-mail communications with the foreign parties and that too at the instance of parties/concerns mentioned in Block D. C. These are the various concerns operated and controlled by myself and Sri Surendra Jain, in answer to Question No.13 I have already explained in details about these concerns. In these concerns the import of rough diamonds are shown and only the accounting entries are made without real trading of diamonds. The bill issued by the foreign concerns, for the rough diamonds, are Issued in the name of these concerns (Block C). However, the concerns do not use the imported diamonds and the physical delivery is made to the concerns mentioned in the Block D. All the concerns mentioned in Block C are operated, controlled and managed by myself and Shri Surendra Jain. Therefore, we two are the persons responsible for day-to-day activities of the concerns. The sharing of profit/loss is between myself and Shri Surendra Jain only, whereas others are working on our instance and directions for which they are paid salary/remuneration which further get compensated by the business income arising out of this operation in their respective concerns. D. The concerns mentioned in Block D are the concerns actually importing the diamonds without using their name and address, they utilize our service as name lender. The payments to the foreign parties against the diamonds imported are also monitored by the concerns mentioned in Block D. Therefore, the parties mentioned in Block D sometimes arranges the cheque payment by getting the sales bill issued by us to those concerns (Block E) interested in taking bogus purchase bills, for regularizing their books of accounts. Further, I would like to clarify that I don't know the actual reason for importing the rough diamonds in the name of concerns managed and controlled by us (Block C) .

After reproducing certain more questions and answers in the impugned order the Ld. CIT(A) was of the opinion that he was convinced that the modus operandi adopted by all the three groups are similar, we note that another group’s name is also figuring in i.e. of one Sanjay Choudhury group and the statement of one Sanjoy Chowdhury was also recorded which figures at page 39 of Ld. CIT(A)’s order (which has nothing to do with our assessee so it need not be discussed). We note that the Ld. CIT(A) has made his deductions based on the statement given by Shri Rajendra Jain who controlled M/s. Vitrag (2008-09) and M/s. Arihant (2014-15) and the Ld. CIT(A) after analysing the statement and pictorial description of the Modus operandi (supra) has made the following observations: “During the course of appellate proceeding the appellant submitted the bills issued by so called suppliers. Perusal of bills issued by M/s. VlTRAG Jewellers Ltd shows that it is printed on letter head. It does not have any receipt number on the invoice which is issued in letter form. The appellant invested its unaccounted money out of books in order to purchase diamond from grey market in cash which has been regularised through taking bogus books from the aforesaid persons. It is Undispelled that the appellant invested its unaccounted money out of books in order to purchase diamond from grey market in cash which has been regularise through taking bogus bills from the aforesaid persons. As it has been stated by Rajendra Jain in his answer to question No.15. As it has been stated by Rajendra Jain in his answer to question No.15. The relevant portion of statement is reproduced as under:- Shri Rejendra Jain in his statement had categorically mentioned that "concerns purchasing diamonds in cash from grey market and taking bogus purchase bills to regularize the purchase in books, are the concerns that require bogus purchase bill for diamonds, however, their concerns have bogus stock of diamond in their books of account which are shown to be purchased from foreign concerns. The diamonds shown to be purchased/imported from foreign concerns are shown to be sold to these concerns who take purchase bills from their concerns without actual delivery of diamonds. The payments made through cheques or RTGS by these concerns get utilised for the payments in foreign currency to the foreign concerns. Against the payment made by these concerns through cheques or RTGS, the cash component is settled by the key persons, who import diamond without bill, directly or indirectly by taking services of Angadia. It was also admitted by Shri Rajendra Jain in his statement that they were engaged in the business of bill shopping through all the concerns due to which they didn't have any physical stock of diamond at any place at any point of time." The AO in his assessment order has concluded that "from the statements of the key persons of this group, which were recorded on oath at the time of Search & Seizure operation u/s. 132 of the I.T. Act, it is crystal clear that this group was not carrying out any actual business of any kind, but merely running the paper concerns for providing accommodation entries to the Interested parties. The assessee also got accommodation entry from M/s. VITRAG Jewellers Ltd. which was a paper concerns of this group engaged in the activity of providing paper transactions for the purpose of purchase bills, accommodation entries etc. Hence, there was no purchase of diamond from M/s. VITRAG Jewellers Ltd rather assessee had diamond worth Rs.27,28,000/- from some unknown parties whom payments have been made from unexplained cash. So far as payments through cheques to M/s. VITRAG Jewellers Ltd by the assessee are concerned, the same have been settled in cash subsequently as per the statements of these persons. Therefore, this amount of Rs.27,28,000/- is treated as income from undisclosed sources of the assessee for the year under consideration which has been used for purchase of diamonds in cash from some unknown parties." The appellant nowhere has tried to prove the effective delivery of diamond from Sri Rajendra Jain rather M/s. VITRAG Jewellers Ltd. The aforesaid query raised by the AO has not been replied. The case laws cited by the appellant states about the taxability of gross profits in case of bogus purchases. But in non of the cases unrecorded cash deployed outside of books for purchase of diamond from grey market, and regularising through cheque/ledger in which such cash was not disclosed at all, has been dealt with. In this case it is clear that the aforesaid concern M/s. VITRAG Jewellers Ltd has not actually purchased any material nor sold any material, only bills were issued which shows that the appellant has purchased diamond from grey market in cash, the aforesaid cash deployed was out of books, which has been subsequently recorded in the books of account by taking bogus purchase bills and banking channels. Thus, the capital in cash deployed by the appellant at the time of such purchase was out of books and no argument has been offered by the appellant on this issue. In case of Income Tax Officer, Ward-6(3), New Delhi vs. M/s. Meghuna Towers Pvt. Ltd. and Vice-Versa Dated-August 4, 2016 ITAT DELHI, held that "assessee is one among many persons who may have attempted to benefit from the alleged racketeering. When Investigation Wing of Income Tax Department has busted the racket of bogus accommodation entries; and when the alleged entry operators have admitted on oath that they ran this racket; and when name of the assessee is discovered as one of the beneficiaries of the alleged racket; and when amounts are actually found in the books of assessee to be credited in the name of alleged entry operators; burden was on the assessee to prove that it was not a beneficiary of the racket" In this case the appellant failed to prove that his transaction was affected through physical delivery and no attempt was made to produce the parties from where the purchases has been made. Keeping In view that cash component deployed out of books in order to purchase of diamond from grey market and subsequently bringing it into his books of account by the way of procuring bogus bills and paying through Cheques, the cash deployed remains out of books and from taxation. Hence, the addition made by the AO is hereby upheld and the ground of appeal is dismissed.”

We note that AO exercised his power to reopen the assessment for AY 2008-09 on the following reasons recorded by him:

We note that other than aforesaid reason, no other statements of Shri Rajendra Jain or another were furnished to the assessee, despite they asking for it, which the Ld. CIT(A) at page 60 justified the omission of AO by stating that “the relevant material relating to appellant were already included in the reasons so recorded by the AO.” Though we note it was made in the context of assessee’s ground raised for non-supply of documents/information from DIT(Inv) to AO which has in turn triggered the “reasons to believe” as contemplated in Sec. 147 of the Act. Though the AO need not supply the entire investigation report of DIT(Inv), the statement of Shri Rajendra Jain and another, which was relied on by the Ld. CIT(A) in the impugned order, ought to have been given to the assessee and he should not have been kept the assessee in the dark while assessment was framed against him. The AO has added the entire purchase consideration from M/s. Arihant on the sole basis that the assessee failed to produce the sellers of diamond i.e. M/s. Arihant. We are very well aware that assessment proceedings are purely administrative and that the AO can make private enquiries even behind the back of the assessee, as they are all administrative enquiries. However they assume a quasi judicial character only after the issue of notices for assessment. This is not because AO is not a Court as held by the Hon’ble Supreme Court in Dhakeswari Cotton Mills 26 ITR 775(SC). AO is vested with the same power as that of court as limited by Sec. 131 of the Act as held by Hon’ble Supreme Court in Mahindra & Mahindra AIR 1979 (SC) 798. Wide though his (AO) powers, AO must act in consonance with rules of Natural Justice. One such rule is that he shall not use any material against the assessee without giving him an opportunity to meet it. In short, the AO cannot assess by keeping the assessee in the dark as to materials against him. In the instant case, the AO kept the assessee in the dark about the statement of Shri Rajendra Jain & another while saddling the additions. However, we note that Ld. CIT(A) who has co-terminus powers as that of AO, has reproduced the statement of Shri Rajendra Jain and Shri Dharmichand Jain ( of Box ‘C’) concerns in the impugned order. As said earlier, in the instant case, the basis of re-assessment was only on the statement of Shri Rajendra Jain and Shri Dharmichand Jain. There was nothing else to support it. Next vital question is whether their statements be accepted as true? The value or weight to be attached to it fell within the exclusive jurisdiction of Revenue and Tribunal. With this back drop let us examine the statement of Shri Rajendra Jain and Shri Dharmichand Jain.

Let us have a look at the pictorial representation reproduced by the Ld. CIT(A) at page 34 which has been reproduced by us after para 6, supra and also go through the statement given by Shri Rajendra Jain explaining the modus operandi adopted by him. We note that his statement is riddled with inherent contradictions which we will highlight later. According to Shri Rajendra Jain, he controlled M/s. Vitrag and M/s. Arihant which are found placed in Box ‘C’ and the assessee is placed in Box ‘E’. As per Shri Rajendra Jain, M/s. Vitrag and M/s. Arihant booked the order with the foreign diamond exporter concerns at Belgium (which is shown in Box ‘B’) namely from (a) HRP Diam Belgium, (b) Gem blue Belgium, (c) Vee Diam Belgium and (d) Swintu Diam Belgium and that these concerns supplied diamonds on credit to Shri Rajendra Jain’s concerns which are M/s. Vitrag and M/s. Arihant. (This fact can be inferred from Shri Rajendra Jain’s statement at page 6 & 7 (supra) wherein he states as under: Here, I would like to clarify that we are just importing the bills of diamonds from such foreign parties and the underlying stock of diamonds is taken by the real importers who do not figure out at any place in the books of accounts maintained by us as well as the foreign exporter. Only in the eye of foreign banker we are the genuine importer of the diamond otherwise all the three parties involved in the transaction knows the reality. To sum up the real importers of the diamond from these foreign concern are the concerns mentioned in Block D however, the bill are issued in the name of concerns mentioned in the Block C. In our Block C books of accounts the diamonds imported from foreign concern mentioned in Block B gets reflected, but we don't received the physical diamonds and the same diamonds are used by the concerns mentioned in Block D. We do not have any direct contact with the foreign concerns, though we have the legal liability. We have only some e-mail communications with the foreign parties and that too at the instance of parties/concerns mentioned in Block D. C. These are the various concerns operated and controlled by myself and Sri Surendra Jain, in answer to Question No.13 I have already explained in details about these concerns. In these concerns the import of rough diamonds are shown and only the accounting entries are made without real trading of diamonds. The bill issued by the foreign concerns, for the rough diamonds, are Issued in the name of these concerns (Block C). However, the concerns do not use the imported diamonds and the physical delivery is made to the concerns mentioned in the Block D. All the concerns mentioned in Block C are operated, controlled and managed by myself and Shri Surendra Jain. Therefore, we two are the persons responsible for day-to-day activities of the concerns. The sharing of profit/loss is between myself and Shri Surendra Jain only, whereas others are working on our instance and directions for which they are paid salary/remuneration which further get compensated by the business income arising out of this operation in their respective concerns. D. The concerns mentioned in Block D are the concerns actually importing the diamonds without using their name and address, they utilize our service as name lender. The payments to the foreign parties against the diamonds imported are also monitored by the concerns mentioned in Block D. Therefore, the parties mentioned in Block D sometimes arranges the cheque payment by getting the sales bill issued by us to those concerns (Block E) interested in taking bogus purchase bills, for regularizing their books of accounts. Further, I would like to clarify that I don't know the actual reason for importing the rough diamonds in the name of concerns managed and controlled by us (Block C) . E. The concerns in Block E are the concerns that require bogus purchase bills for diamonds; however our concerns have bogus stock of diamonds in our books of accounts, which are shown to be purchased / imported from foreign concerns. Therefore, the diamonds shown to be purchased/imported from foreign concerns thus are against shown to be sold to the independent concerns mentioned in Block E. These concerns in Block E take purchase bills from our concerns (Block C) without actual delivery of diamonds. The payments made through cheques or RTGS by these concerns (Block E) gets utilized for the payments in foreign currency to the foreign concerns mentioned in black B, as per the terms designed and under intimation to the key person controlling the concerns of Block D. Against the payment made by concerns of Block E through cheques or RTGS, the cash component is generally settled by the key persons controlling the concerns of Block D, directly or indirectly by taking services of Angadia.

As per the answer to Q. No. 26 reproduced by the Ld. CIT(A) in his order which is reproduced below which becomes clear how the business is run: “Q. 26 Please explain the modus operandi of your business. Sir, the diamonds are imported from outside India in the name of my company/proprietorship/HUF, but the actual order is placed by some other person. Further when the consignment comes in India either at Mumbai or Surat, the actual delivery of consignment either comes to my office of I authorize the persons who has placed the order in garb of company/proprietorship/HUF. If the consignment comes in my office. I handover the packed consignment to the actual importer who has made the order. Sometimes I have authorization or representation letter to the importer who actually order, in regard of my company/proprietorship/HUF to collect the consignment on my behalf from courier agencies like Lemuir Express and B V Chinai and Co. (I) Pvt. Ltd. As the imports have been made on my company/proprietorship/HUF, so against these import purchases, I give bogus sales entries to other trades/exporters/processors who are showing their business of diamond. Further regarding local purchase/sales of trading diamond in my company/proprietorship/HUF, I only provide accommodation entries for purchase/sales.”

When we read the aforesaid statement it is clear that when the consignment of diamonds reached either in Mumbai or in Surat, the actual delivery of the consignment comes first to Shri Rajendra Jain’s office, from where the authorized person who has placed the actual order in the name of his company come to his office and collect the booked consignment on behalf of actual importer who are shown in Box ‘D’, where we note/see the names of nine persons are given. So, according to the modus operandi as explained by Rajendra Jain, the assessee must have purchased the diamonds from the persons named in Box ‘D’ with the unaccounted money they have from the persons named in Box ‘D’ which is the grey market from where the assessee got diamonds. However, it is curious to note that the assessee issued the cheques in the name of the concerns controlled by Shri Rajendra Jain (M/s. Vitrag and M/s. Arihant) which in turn would give the bills and was only playing the role of an accommodation entry/bill to the assessee. We do not understand the logic behind such a circuitous route as suggested by Shri Rajendra Jain for the simple reason that admittedly, the concerns M/s. Vitrag and M/s. Arihant which falls in Box ‘C’ legally books diamonds from foreign diamond exporter concerns in Box ‘B’ which in turn ships diamonds on credit to concerns in Box ‘C’ of Shri Rajendra Jain; and what we fails to understand and defies logic is the alleged next part played by the assessee i.e. the assessee which falls in Box ‘E’ gives cheque/RTGS to concerns of Rajendra Jain in Box ‘C’ which is in turn transferred by Shri Rajendra Jain’s concerns in (M/s. Vitrag and M/s. Arihant) to the foreign concerns in Box ‘B’ from whom they (Box ‘C’ concerns) have legally booked and imported and received the diamond. From a perusal of the answer given by Shri Rajendra Jain to Q No. 16 which is reproduced above, we note from the answer of Shri Rajendra Jain which he gives as paragraph E to Q. No. 16 it is clearly stated by Shri Rajendra Jain that “the payments made through cheques/RTGS by these concerns box E(assessee) gets utilized for the payments in foreign currency to the foreign concerns mentioned in box B as per the terms designed and on the intimation to the key persons controlling the concern of Box ‘D’. Against the payments made by concerns of Box ‘E’ (assessee) through cheques/RTGS, the cash component is generally settled by the key persons controlling the concerns of Box ‘D’, directly or indirectly by taking services of Angadia.” From the aforesaid statement it is crystal clear that the assessee gives cheque/RTGS to the concerns of Shri Rajendra Jain (M/s. Vitrag and M/s. Arihant) which are in turn utilized for payments in foreign currency to the foreign concerns mentioned in Box ‘B’ (foreign diamond suppliers) and that cash component in respect to the cheques/RTGS from assessee, is generally settled by the key persons controlling the concerns of Box ‘D’ directly or indirectly by taking services of Angadia. From the aforesaid statement of Shri Rajendra Jain read along with the assessee’s stand all throughout that in the business of diamonds, the Angadias used to visits his shops/show- rooms and bring the diamonds along with them and when the assessee selects diamond from them directly, the payment towards the diamonds so purchased would be remitted by cheques/RTGS on the account shown in the invoice/bill raised by the concerns like in this case M/s. Vitrag/M/s. Arihant/M/s. Kangan. The assessee had brought on record the bills/invoices for the diamond purchased and that the bills were settled by cheque/RTGS to the concerns named in Box ‘C’ and the following documents were produced before the authorities below to substantiate that they have done a clean business. These are the documents produced by the assessee before the authorities below which is evident also from the Ld. CIT(A)’s order at page 16 which is reproduced as under: “(a) Invoices raised by Vitrag Jewels for 339 carats of cut & polished diamonds for Rs.27,28,000 (page 3-4) (b) Purchase day book showing purchase of diamond & other goods worth Rs.1,64,57,538 as reflected in the audited accounts including purchases made from Vitrag Jewels of Rs.27,28,000 (Page 7-8) (c) Ledger accounts of Vitrag Jewels for FY 07-08 & 08-09 (Page-14) (d) Copy of bank statement showing payments to Vitrag Jewels (Page 5-6) (e) Statement showing complete accounting of disputed purchase (Page 14) (f) Sales made out of the disputed purchase & payments recd. (Page 19-29) (g) Purchase & creditors figure (including amount payable to Vitrag Jewels as on 31.03.2008) as reflected in the audited a/c (page 10, 12) (h) Sales Tax return & VAT audit report reflecting the sales as shown in the audited accounts (page 30-43).”

We note that the AO disregarded all these documentary evidence and insisted the assessee to produce the Principal Officer of M/s. Vitrag and since the assessee failed to produce them, he made the disallowance of the entire diamond purchased by the assessee through cheques/RTGS. The assessee has produced the VAT return and VAT audit report also, which is placed at pages 73 to 86 of the paper book. The assessee has also produced the sales bill related to diamonds sold out by the assessee which was made out of the very same purchases disallowed by the AO which is found place from pages 56 to 59 of the paper book. We note that the AO has not disturbed the sales shown by the assessee in respect of the diamond purchased from M/s. Vitrag and M/s. Arihant and M/s. Kangan (AY 2010-11 to 2012-13). When the sales of the very same diamonds have been accepted by AO/CIT(A) without a murmur, the purchases could not have been disallowed without cogent material. In this case, for whatever reason best known for him, Shri Rajendra Jain who controls M/s. Vitrag and M/s. Arihant have made the statements wherein he explains in detail the modus of the whole operation, which defies logic and can be termed absurd on the face of it, and when the fact remains that he and his concerns were legally importing jewels/diamonds directly from foreign suppliers named in Box ‘B’ and that he admits of receiving the cheques/RTGS from assessee in Box ‘E’; and when the fact remains that Shri Rajendra Jain’s concern M/s. Vitrag and M/s. Arihant utilised the cheques/RTGS given by the assessee (for the diamond purchased by him) and in turn is remitted in foreign exchange towards the bills raised by the foreign exporters (Box ‘B’), in no way show that the assessee had made any purchase outside the books or from the grey market. We are unable to understand as to the role of the nine persons (whose names are appearing in Box ‘D’). The modus operandi as suggested by Shri Rajendra Jain does not fit into the logic or rational reasoning of a common prudent person. However, the uncontroverted fact remains that Shri Rajendra Jain and his concerns are legally importing the diamonds directly from foreign concerns stated in Box B on credit (we explained earlier), so it is not understood as to what is the role of persons named in Box ‘D’. Shri Rajendra Jain’s answer to question no. 26 that he and his concerns placed the orders with the foreign concerns named in Box ‘B’ and collects the diamond in his office/show room. Let us pause for a minute and let us discard the role of persons named in Box ‘D’ for argument sake and then see the whole transaction. The diamonds are legally imported from foreign concerns named in Box B, by concerns in Box C which are delivered to persons in Box ‘E’ i.e. assessee and cheques/RTGS are issued in the name of the concerns controlled by Shri Rajendra Jain in Box C i.e. M/s. Vitrag and M/s. Arihant which in turn they utilised the cheques/RTGS given by the assessee to remit the foreign exchange to the foreign concerns in Box ‘B’. So, from all these facts discussed above, the only probability is that the role of nine persons named in Box ‘D’ can only be that of Angadias and not as that what Shri Rajendra Jain has attributed them to do. No other role can be played by these people unless and otherwise the department is able to bring any evidence to show that after the issue of cheques/RTGS to Shri Rajendra Jain’s concerns M/s. Vitrag and M/s. Arihant, the money component i.e. the unaccounted money of the assessee has been given back to the assessee, whereas it is clearly stated by Shri Rajendra Jain to Q No. 18 that cash component is generally settled by the key person controlling the concern in Box ‘D’ directly or indirectly by cheques/RTGS services of Angadia. So, therefore, the entire disallowance of the purchase/expenditure is based on surmises and conjectures; and the assessee by furnishing the documents (supra) has discharged the burden of proof casted upon it to show that the entire purchase was done bonafidely and not with the unaccounted money of the assessee.

Even if for argument sake and remote possibility is there to what Rajendra Jain said is taken as true, then the modus would be that nine persons named in Box ‘D’ used to collect the diamonds from Box ‘C’ concerns and sells it to persons like assessee in Box “E” and collects the unaccounted money of theirs (Box ‘E’ assessee), then we wonder as to what actions the department/AO has taken against these nine parties, who according to Shri Rajendra Jain, are the actual importers and who collects the diamonds once it reaches them (Box ‘C’) and thereafter, the diamonds are collected by nine persons in Box ‘D’ from Box ‘C’ and then sold to assessee in Box ‘E’ and collects unaccounted money. So, whether the department has taken action against them or what action was taken against them (Box ‘D’) or whether their (nine persons named in Box ‘D’) was summoned/raided/searched or statement recorded which implicates the assessee and corroborate Shri Rajendra Jain’s statement. Nothing is discernible or there is any whisper about these nine persons in Box ‘D’ who are supposed to be the real players behind concerns in Box ‘C’ even in respect to import of diamonds. Moreover, Shri Rajendra Jain nowhere has said that cheque/RTGS given by assessee to his concerns, were later returned back in cash or material to assessee or concerns in Box ‘E’, on the other hand, he said the cheque/RTGS is converted into foreign exchange for squaring up with foreign concerns in Box ‘B’. However, we take note of a statement wherein, Shri Rajendra Jain has said that the cash element in cheque/RTGS given by assessee (Box ‘E’) is given to persons named in Box ‘D’ . If that is believed, then also the role of nine persons in Box ‘D’ is very important, to complete the puzzle, because chain breaks there. Unless the nine persons in Box ‘D’ are examined and material collected from them, which show that they have collected the cash component from Box ‘C’ concern and given back to assessee (Box ‘E’) , then only the chain will be complete. So without the statement of person in Box ‘D’ the whole statement of Shri Rajendra Jain and other person cannot be believed. Even if we believe that persons named in Box “D” (9 persons) collected the unaccounted money/cash from assessee, while selling the diamond, then whether their (Box ‘D’ persons) statements against assessee was recorded. If so, whether the assessee was given a copy of that statement or did any of the nine persons in Box ‘D’ implicate the assessee. Even if persons named in Box ‘D’ statement were recorded, whether their statements were given to assessee and whether those persons were allowed to be cross examined by the assessee and without doing so, the material or statement collected on 03.10.2013, admittedly behind the back of assessee cannot be used against the assessee, without giving opportunity to cross examine as held by Hon’ble Supreme Court in the case of Andaman Timber Industries Vs. Commissioner of Central Excise 62 Taxman.com 3. In the said case of Andaman Timber Industries (supra) the Hon’ble SC has held that the failure to give the assessee the right to cross-examine witnesses whose statements are relied upon results in breach of Natural Justice and it is a serious flaw which renders the order a Nullity. Without doing all the exercises as aforestated, how the so called unaccounted money supposed to be handed over by the assessee to 9 persons named in Box “D” can be added in the hands of assessee merely on the statement of persons named in Box ‘C’ which is riddled with contradictions and which cannot stand logic or reasons.

In our view in the light of the fact that sales were supported by invoices from M/s. Arihant, M/s. Vitrag and M/s. Kangan and the monies were paid by account payee cheques/RTGS, the least the revenue should have done was to grant an opportunity to the assessee to meet the case against him by providing the material sought to be used against the assessee in arriving before passing the order of reassessment. This not having been done, the denial of such opportunity goes to the root of the matter and strikes at the very foundation of the reassessment and, therefore, renders the orders passed by the AO and the Ld. CIT(A) vulnerable. In our view the assessee was bound to be provided with the material used against him apart from being permitted to cross examine the deponents. We note that the AO kept the assessee in the dark as to the statement of Shri Rajendra Jain and Shri Dharmichand Jain which was recorded on 03.10.2013 at their premises at Surat/Mumbai, admittedly, behind the back of the assessee. Only the Ld. CIT(A) has included their statement in his order. However, we note that he has not even summoned them before him; and should have taken a statement directly from Shri Rajendra Jain and Shri Dharmichand Jain and examined them; and if they implicate the assessee in any manner, then he should have provided an opportunity to assessee to cross examine those deponents, failure to do so, make the order fragile in the eyes of law. We note that the AO issued notice u/s. 133(6) of the Act to M/s. Vitrag and they had replied to the same as brought out by the assessee in page 17 of the impugned order, which fact has not been controverted by Ld. CIT(A). Thereafter, the AO gave the responsibility to the assessee to bring the suppliers of diamonds before him and for not doing so the assessee was saddled with the addition. We note that in such circumstances, the AO ought to have exercised his powers u/s. 131 of the Act and should have summoned them before him. We note that the assessee has given the full details of the 339 ct. of diamond purchased from M/s. Vitrag during the year 2007-08 and has given the address as under:

The full details of the party has been given from page 18 to 21 of Ld. CIT(A)’s order wherein all the details regarding the sale and purchase have been given and reproduced. We note that the assessee had submitted audited books of account and the AO could not figure out any deficiency thereof. The AO disregarded the documents submitted during the reassessment which includes details of purchase, sale and profits, suppliers’ bills and bills raised by customers, bank statement showing payment to suppliers and receipt from customers, stock reconciliation statement etc. The AO neither denies the sales which was made from the stock generated from the alleged bogus purchase of Rs.27,28,000/- nor pointed out any quantitative discrepancy in the stock figure. The AO did not issue summons on the suppliers u/s. 131 of the act nor did he do any enquiry with the suppliers jurisdictional AO though PAN details were available. The AO did not do any enquiry with the sales tax authorities though VAT/CST no. was available. The AO did not enquire with the banker (HDFC) though the entire payment/receipt was routed through banking channels. So, therefore, this is a case of clear cut non enquiry at all and the addition was based on surmises and conjectures.

In order to ascertain the veracity of the statement of Shri Rajendra Jain, the department ought to have confronted, the assessee with the statement of Shri Rajendra Jain and Dharmichand Jain and given an opportunity to the assessee to cross examine them which has made the statement of all these legally fragile as held by Hon’ble Supreme Court in Andaman Timber Industries (supra). As stated earlier, and even if we believe Shri Rajendra Jain’s statement in totality, in order to complete the chain of events then the statements of nine persons in Box ‘D’ or corroborative relevant material is vital to pinn down the assessee. However, as stated earlier in our order at para 14, page 15 the assessee has discharged the onus casted upon it to prove that he purchased the diamonds from M/s. Arihant, M/s. Vitrag nd M/s. Kangan. So the addition made by the AO/CIT(A) cannot be sustained, therefore, it is directed to be deleted.

Before we part, we thought of stating the reason as to how we are of the opinion that the entire transaction/modus operandi as suggested by Shri Rajendra Jain is absurd/non- believable are for the following reasons: According to the pictorial chart prepared by the Investigation Wing and thereafter as explained by Shri Rajendra Jain the following transaction takes place in the following order. Ist step. The nine persons in Box ‘D’ places the order with Shri Rajendra Jain’s a) concerns which are shown in Box ‘C’. b) IInd step. Thereafter, Shri Rajendra Jain’s concerns in Box ‘C’ booked the order with foreign suppliers named in Box ‘B’.

The aforesaid is the modus operandi as suggested by Shri Rajendra Jain, which we do not accept because it is illogical and absurd on the face of it. It is like touching the nose not directly but by bringing the hand from behind the neck and touching it. If the aforesaid modus operandi is what is happening on the ground, then the nine persons named in Box ‘D’ makes money without touching anything because the entire foreign suppliers are supplying the diamonds on credit to persons named in Box ‘C’ (i.e. like Shri Rajendra Jain’s concerns.). According to above modus operandi, the persons named in Box ‘D’ collects the diamonds from Shri Rajendra Jain’s concern in Box ‘C’( It needs to be kept in mind that Shri Rajendra Jain’s concern legally books the order from foreign suppliers shown in Box ‘B’and is shipped to them directly i.e concerns named in Box C) and persons in Box D after collecting diamond from Box C as stated before, gives it to persons named in Box ‘E’ (i.e. people like the assessee) and collect the unaccounted money for (sale of diamonds). Thereafter, in order to regularise the transaction the persons named in Box ‘E’ (like assessee) in order to get the fake bill gives the cheque/RTGS to Shri Rajendra Jain’s concern in Box ‘C’ who in turn converts the cheques/RTGS to foreign exchange and square it up with the foreign supplier and thereafter, the cash component in the cheques/RTGS is given to the persons named in Box ‘D’. So in the result, the persons named in Box ‘D’ makes money twice (i) by selling the diamonds to assessee and collects the unaccounted money from them and (ii) then when the assessee gives by cheque/RTGS to Shri Rajendra Jain’s concern in Box ‘C’ (i.e. for fake bill), then the cash components of the cheque is given to persons (second time) named in Box ‘D’, which proposition/modus operandi cannot happen at all because the Box ‘D’ persons have collected already unaccounted money which will definitely be containing the cost of diamond plus their profit, then again how the persons in Box ‘C’ will give the cash component embedded in cheques/RTGS. This is nothing but an absurdity. What is intriguing and defies logic is that, the diamonds once legally imported and received by concerns in Box ‘C’ directly from foreign supplier named in Box ‘B’, then when the assessee in Box ‘E’ is admittedly giving cheques/RTGS to persons in Box ‘C’, why can’t they buy directly diamonds from concerns named in Box ‘C’ only, why go for persons named in Box ‘D’, whose role in our humble opinion doesn’t fits in at all. That is why the explanation of assessee which is the practice followed by Diamond merchants like assessee need to be seen. According to assessee, the diamonds are brought by ‘Angadias’ to their respective show rooms for sale and once assessee selects and purchase the diamonds, cheques/RTGS are issued in the name of concerns issuing invoice/bills, which in this case is concerns legally importing diamonds named in Box C which fits into the modus as explained by assessee is plausible and after taking out the contradictions facts are corroborated by the statement of Shri Rajendra Jain. In the facts and circumstances the role of persons named in Box D can be that of Angadias or persons controlling them.

From the aforesaid pictorial chart the activities of persons/concerns in each Box is as stated and the numerical numbers are step by step activities in serial number of concerns in Box ‘C ’ Rajendra Jain’s concerns place first the order (1) with foreign Belgium concerns for diamonds. The Box ‘B’ concerns, (2) takes the order and ships the diamond to Box ‘C’, then (3) the concern in Box ‘C’ collects the diamond sent by Box ‘B’, then (4) the diamonds are sent to concerns like assessee in Box ‘E’ and the (5) the concerns in Box ‘E’ purchases the diamonds and the (6) issues the cheques/RTGS in the name of the concerns shown in the invoice of sale i.e. concerns named in Box ‘C’. Thereafter (7) step, the Box ‘C’ concerns after receiving the cheque/RTGS from Box ‘E’ concerns (assessee), deposit it in their bank account. Thereafter (8) step concern in Box ‘C’ converts the amount deposited in their accounts into foreign exchange and transfer it to Box ‘B’. (9th) step, the Belgium concern in Box ‘B’ gets the sale consideration of diamonds sold to Box ‘C’ concern. When the aforesaid transaction is seen in the light of the statement of assessee that in the diamond business, the Angadias bring the diamond to their show room and the assessee selects some diamonds from them, which are invoiced in the name of concerns in Box ‘C’ and the cheques/RTGS are deposited in their bank accounts (Box ‘C’) concerns means the assessee cannot be said to be doing business as suggested by concerns in Box ‘C’.

From the aforesaid entire transaction the only inference in respect to the role of persons named in Box ‘D’ can only be that of carriers of diamond to people like assessee. This inference from the aforesaid analysis can only be changed by bringing cogent evidence or at least by bringing on record the statements of the nine persons named in Box ‘D’ to the effect that they corroborate the version given by Shri Rajendra Jain as correct.

For the reasons stated in para 19 supra, and other reasons cited above, we are of the considered opinion that the additions saddled on the assessee for AYs. 2008-09, 2010-11, 2011-12, 2012-13 and 2014-15 should be deleted and we order accordingly.

In the result, all the appeals of assessee are partly allowed.