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Income Tax Appellate Tribunal, JAIPUR BENCHES,”A” JAIPUR
Before: DR. S. SEETHALAKSHMI, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ITA No. 387/JP/2018
vkns'k@ ORDER PER: RATHOD KAMLESH JAYANTBHAI, AM
This appeal by the assessee is directed against the order dated 15.03.2018 of the learned Commissioner of Income Tax, Appeals-I, Jaipur [ here in after ld. CIT(A) ] for the assessment year 2014-15 which in turn arises from the order passed by the Income Tax Shri Ankush Gokhroo vs. ITO Officer, Ward-1(5), Jaipur passed under Section 143(3) of the Income tax Act, 1961 (in short 'the Act') dated 28.12.2016.
The assessee has raised the following grounds:-
“1. Under the facts and circumstances of the case the learned CIT(A) has erred in confirming the addition of Rs. 17,31,09,008/- u/s 68 of the Income Tax Act, 1961 by confirming the action of the Learned Assessing Officer. 2. Under the facts and circumstances of the case the Learned CIT(A) has erred in confirming the addition of Rs. 42,904/- on account of interest income without any basis. 3. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing.”
2. The assessee is an individual and engaged in the business of trading of diamond and color stones through his proprietorship concern M/s. Gokhroo Gems. The assessee has started trading of diamond from the year under consideration. The assessee filed his return of income on 30.11.2014 declaring total income of Rs. 4,85,230/-. The case was selected for Complete Scrutiny through CASS. Accordingly, notice u/s. 143(2) of the Act was issued on 03.09.2015. The AO proposed to examine the large increase of sundry creditors during the year and noted that the assessee claimed sundry creditors on 31.03.2014 as under:- Shri Ankush Gokhroo vs. ITO S.No. Name of the party Outstanding balance as on 31.03.2014 M/s Mona Impex, 203, 2nd Floor, 1. Rs. 8,48,01,956/- Parshwa Building, Thodasheri, Mahidharpura, Surat.
M/s Ridhhi Sidhhi Gems, Rs. 3,01,61,279 6/1765, first Floor, Lal Darwaza, Gundisheri, Surat.
3. M/s Prathmesh Traders, Rs. 5,81,45,773/- 5/3717, 2nd Floor, Front Side, Office No. 1, Haripura, Rampura Main Road, Surat. Total Rs. 17,31,09,008/- To ascertain the genuineness and creditworthiness of the sundry creditors/purchases claimed by the assessee, the AO issued noticed U/s 133(6) of the Act to the above-mentioned creditors at the addresses furnished by the assessee but the said notices returned back as unserved. When this fact was confronted with the assessee it was explained that due to Diwali Festival the creditors were not available at the given address. The AO again issued notice U/s 133(6) of the Act to the creditors on 18.11.2016 but the same were returned back unserved for second time. Consequently, the AO has issued a show caused notice dated 25.11.2016 to the assessee requesting to submit the details. The assessee furnished new address of the creditors but the assessment was time barring in the month of December therefore, the AO asked the assessee to produce the sundry creditors along with relevant 3 Shri Ankush Gokhroo vs. ITO documents. Further, the AO observed from the details furnished by the assessee that the assessee did not repay his outstanding dues to the creditors through banking channel but the same were settled through the sale of same goods to sundry creditors. The AO raises doubt about the claim as assessee purchased “cut and polished diamonds” for the financial year 2014-15 on the other hand, he sold the same thing i.e. ‘diamond’ to sundry creditors in financial year 2014-15 settling his all dues of the sundry creditors. Accordingly, the AO held that the assessee has failed to establish the existence of the sundry creditors and the genuineness of the transactions and consequently the claim of sundry creditors of Rs. 17,31,09,008/- was treated as bogus liability leading to the addition on account of unexplained the credits. The assessee challenged the action of the AO before the ld. CIT(A) but could not succeed.
Before us, the ld. AR of the assessee has submitted that the addition of trade creditors cannot be made U/s 68 of the Act and further the assessee has settled the liability in the subsequent year by making the sale to the creditors. The AO has not disallowed the claim of the purchase for the year under consideration and also not disturbed the figure of turnover of the assessee in the subsequent year. Therefore, 4 Shri Ankush Gokhroo vs. ITO when the AO has accepted the purchase for the year under consideration and sale of the next year then the purchase made on credit and settlement of the account by making the sale to the creditors established the genuineness of the claim. He has further contended that the assessee furnished confirmation and PAN of the trade creditors in question therefore, existence of the creditors/identity have been established by the assessee. Further, the assessee has also furnished the return of income showing the fact that the sundry creditors were doing the business activity of trading in the diamonds and other previous stones. The bills and vouchers were produced by the assessee to establish the genuineness of the transaction. On the one hand, the AO treated the credit purchases as bogus but at the same time the corresponding sale of these purchases has not been doubted and has been accepted as it is. Again, the AO has treated these trade creditors as cash credits and has made addition U/s 68 of the Income Act which is against the settled preposition of law. The ld. AR has submitted that Section 68 of the Act is applicable only on introduction of an amount in the books of account and is not applicable for trade entries. Thus, the stand of the Assessing Officer is contradictory by treating the purchase as bogus/ unverifiable and at the same time not doubting the sale. Shri Ankush Gokhroo vs. ITO Therefore, the addition is unlawful, illegal and not justified as the same has been made with a confused state of mind. The assessee has submitted income tax return, bank account, copies of purchase bills and confirmations with the complete addresses of these creditors. Thus, the assessee has discharged its onus to prove the identity and creditworthiness of creditors as well as genuineness of the transactions.
He has relied upon the following decisions:-
• Sambhav Gems Ltd. Vs. ACIT (2006) XXXVT.W.254 (ITAT, Jaipur). • Parasmal Jain vs. DCIT in ITAT), Jaipur. • Prkash Chand Vijay in ITA No. 26/JP/2005. (ITAT), Jaipur • Sagar Mal Dagta & Co. Vs. ITO (2004) XXXII Tax World 40 (ITAT, Jaipur). • M/s Om Metals & Minerals Ltd. vs. JCIT (2004) XXXII T.W. 54 (ITAT, Jaipur). • Shiv Trading Co. Vs. ITO, 30 Tax World, 117(Jaipur). • Raunaq Finance Co. vs. JCIT 141 Taxman 72 (Raj.) • DCIT vs. Brahmaputra Steel (P). Ltd. 76, ITI 44 (Guj). • DCIT vs. Adinath Industries 252 ITR 476 (Guj.).
3.1 Alternatively, the ld. AR has submitted that the addition made U/s 68 of the Act on account of trade addition is unlawful, illegal and not justified but in any case only a profit element in respect of unverifiable 6 Shri Ankush Gokhroo vs. ITO purchase can be added instead of making the entire amount of trade creditors as income.
3.2 The learned authorized representative [here in after referred to as Ld. AR ] of the assessee submitted his detailed submission in respect of their grounds of the appeal. The extract of the submission made is as under:
“The ld. AR would argue that section 68 is applicable to cash credit only and not to the trade credit. It would be appropriate to reproduce the provisions of section 68 as under: "68. Cash credits.— Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." Thus, in section 68, any sum is found credited has been used and not the sum of money is found to be credited. It may be mentioned that in the case of CIT Vs Sophia Finance Ltd. [1993] 70 Taxman 69 (Delhi), it has been observed by the Hon'ble Delhi High Court that: "As we read section 68 it appears that whenever a sum is found credited in the books of account of the assessee then, irrespective of the colour or the nature of the sum received which is sought to be given by the assessee, the ITO has the jurisdiction to enquire from the assessee the nature and source of the said amount." "The use of the words 'any sum found credited in the books' in section 68 indicates that the said section is very widely worded and an ITO is not precluded from making an enquiry as to the true nature and source thereof even if the same is credited as receipt of share application money." 7 Shri Ankush Gokhroo vs. ITO Further, it would be argued by the Id. AR that the heading of section 68 is 'cash credit' and therefore, these provisions are applicable to cash credits only and not to trade credits. It may be mentioned that In the case of Frick India Ltd vs Union of India And Others 1990 AIR 689, 1989 SCR Supl. (2) 570, while dealing with interpretation of heading in a statute, it has been observed by the Hon'ble Apex Court that: "It is well-settled that the headings prefixed to sections or entries cannot control the plain words of the provision; they cannot also be referred to for the purpose of construing the provision when the words used in the provision are clear and unambiguous; nor can they be used for cutting down the plain meaning of the words in the provision. Only, in the case of ambiguity or doubt the heading or sub-heading may be referred to as an aid in construing the provision but even in such a case it could not be used for cutting down the wide application of the clear words used in the provision." In the case of Bhinka And Others vs Charan Singh 1959 AIR 960, 1959 SCR Supl. (2) 798, it has been observed by the Hon'ble Apex Court that: "Maxwell On Interpretation of Statutes ", 10th Edn., gives the scope of the user of such a heading in the interpretation of a section thus, at p. 50 : "The headings prefixed to sections or sets of sections in some modern statutes are regarded as preambles to those sections. They cannot control the plain words of the statute but they may explain ambiguous words." If there is any doubt in the interpretation of the words in the section, the heading certainly helps us to resolve that doubt." It is also submitted that the addition made by the AO u/s 68 was also sustained by the Hon'ble High Court of Punjab & Haryana in the case of Satpal Goyal Vs CIT in vide judgement dated 23.05.2016.”
On the other hand, ld. DR has submitted that Section 68 of the act is applicable when any sum is found credited in the books of account of the assessee irrespective of the colour or the nature of the sum received which is sought to be given by the assessee. Therefore, 8 Shri Ankush Gokhroo vs. ITO the AO has jurisdiction to enquire from the assessee the nature and source of the said amount. The application of Section 68 of the Act is very wide and not restricted only to introduction of cash in the books of account but on any sum which is credited whether on account of trade creditors or cash creditors. In support of his contention, he has relied upon the decision of Hon’ble Delhi High Court in case of CIT vs. Sophia Finance Ltd. 70 taxman 69 (Delhi). The ld. DR has further contended that the headings prefixed to Sections entries cannot control the plain words of the provisions. Therefore, headings of the Section cannot be referred to for the purpose of construing the provision when the words used in the provision are clear and unambiguous. In support of his contention that the trade creditors also attracts the provisions of Section 68 of the Act he has relied upon the following decisions:-
• Uplaksh Metal Industries vs. CIT [2009] 177 Taxman 298 (Punjab & Haryana) • Smt. Rekha KrishnaRaj vs. ITO [2013] 33 taxmann.com 64 (Karnataka) • Smt. Rekha Krishnaraj vs. ITO [2017] 85 taxmann.com 256 (SC) • P.M. Abdulla vs. ITO [2015]60 taxmann.com 52 (Karnataka) • Suresh Kumar T. Jain vs. ITO [2011]128 ITD 74 (Bangalore) • Suresh Kumar T. Jain vs. ITO [2019] 101 taxmann.com 164 (Karnataka) 9
ITA No. 387/JP/2018 Shri Ankush Gokhroo vs. ITO • Satpal Goyal vs. CIT of 2016 (O&M) • CIT vs. Karnataka Planters Coffee Curing Work (P.) Ltd. [2016] 74 taxmann.com 256 (SC) • ITO vs. Lal Chand Yadav [2017] 82 taxmann.com 429 (Jaipur- Trib.) • Champalal S. Shah vs. ITO [2017] 86 taxmann.com 258 (Mumbai Trib.) • A Godwin Maria Visuvasam vs. ITO [2017] 84 taxmann.com 197 (Chennai-Trib.) • Shri Suresh Kumar T. Jain vs. ITO, Bengaluru ITA No. 160 of 2010.(Hon’ble High Court of Karnataka) • Shri Suresh Kumar T. Jain vs. ITO, Bengaluru ITA No. 667/B/2009 (Hon’ble ITAT, Bangalore)
Thus, the ld. DR heavily relied upon all the judgements and orders of the authorities below.
We have persuaded the rival submissions as well as the relevant submissions and decisions placed on record by both the parties. Having gone through the same it is evident that the assessee has shown the trade creditors to the tune of Rs. 17,36,37,142/- on account of credit purchase made from three parties namely Mona Impex, M/s Ridhi Sidhi Gems and M/s Prathmesh Traders from Surat. The AO doubted the genuineness of the trade creditors shown by the assessee in the balance sheet on account of the purchases made by the assessee. The ld. AR submitted that the Assessing Officer instead of rejecting the books results of the assessee proceeded to make addition of the entire amount of the trade creditors which are settled in the subsequent year 10 Shri Ankush Gokhroo vs. ITO by the assessee and the same is not doubted while making the assessment of the subsequent year and filed the copy of the subsequent year assessment order. The corresponding sales shown by the assessee has not been disturbed by the AO in the subsequent year for those parties. Even for the assessment year 2015-16 the AO while passing the scrutiny assessment order U/s 143(3) dated 26.12.2017 again made addition on account of trade creditors but the assessee has claimed settlement of the creditors shown in this year by way of sales of cut and polish diamonds to these trade creditors. The sale shown for settlement of the account was again not doubted by the AO for the assessment year 2015-16. We note that this is practice of the assessee to show the purchase on credit and then settled the account by showing the sales to the trade creditors too. This is normal practice in the trade business for making the purchase on credit and the same items is sold to the trade creditors to settle the account. Thus, the entire business affairs reported by the assessee is in accordance with the normal practice followed and therefore, it appears that the assessee is engaged in showing these transactions which the AO considered as only as paper entries with alleged sundry creditors without any real purchase and sales. Therefore, the book results shown by the assessee do not reveal the correct state of affairs and business results. When the AO has clearly made out a case of non genuine purchase made by the assessee then instead of making the addition U/s 68 of the Act the income of the assessee ought to have been estimated after rejecting the books of accounts and applying appropriate and reasonable rate of GP/NP. We further note that it is a regular practice of the assessee to show that the purchases on credit and then settlement of account by 11 Shri Ankush Gokhroo vs. ITO showing the sales to the same trade creditors who have supplied the goods to the assessee. Therefore, in the facts and circumstances of the case we are of the view that when the assessee’s books of account are not reflecting the correct affairs and book results are not rejected at most the income of the assessee is required to be estimated after rejecting the books of accounts. This is view taken by us is based on the decision of Hon’ble Bombay High Court in the case of PCIT Vs. Mohmmad Haji Adam & Co. in & 1012 & 2016. The relevant finding / observation on the issue of bogus purchase is extracted here in below for the sake of brevity
8 In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries Ltd. (supra) cannot be applied without reference to the facts. In fact in paragraph 8 of the same Judgment the Court held and observed as under "So far as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6% gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result of which profit comes 12 Shri Ankush Gokhroo vs. ITO to 5.66 %. Therefore, considering 5.66 % of Rs.3,70,78,125/ which comes to Rs.20,98,621.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue." 9. In these circumstances, no question of law, therefore, as to costs.
As the assessee has not placed the details of the profit of its regular business turnover via a vis the turnover of these bogus entry provider purchase and sales. The said details may be verified by the assessing officer and the AO is directed to add appropriate rate of profit in these transactions. Accordingly, we set aside this matter to the record of the AO to estimate the income of the assessee on the basis of the turnover shown by applying a proper and reasonable basis being GP/NP rate.
Accordingly Ground No. 1 is partly allowed.
Ground no. 2 is regarding the addition of Rs. 42,904/- on account of interest income. At the time of hearing, the learned counsel for the assessee has stated at bar that the assessee does not press ground no. 2 and the same may be dismissed as not pressed. The ld. DR has raised no objection if ground no. 2 of the assessee’s appeal is dismissed as not pressed. Accordingly, the ground no. 2 of the assessee’s appeal is dismissed being not pressed. Shri Ankush Gokhroo vs. ITO In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 30/06/2022.