INCOME TAX OFFICER, WARD - 2(3)(6), SURAT vs. SHRI ABHISHEK NAVNITKUMAR DOSHI, SURAT

21 & 38/SRT/2022/AY.2012-13 Abhishek Navnitkumar Doshi 2. Grounds of appeal raised by the Revenue (in ) are as follows: “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition made on account of bogus purchases of Rs.2,50,25,283/- to Rs.62,56,320/- (25% of Rs.2,50,25,283/-).

Brief facts qua the issue are that during the year under consideration the assessee have filled his return of income on 01.09.2012 declaring total income of Rs.20,13,260/-. As per information received from the DDIT (Inv.)-2, Mumbai,

In response to which the assessee has stated that the assessee filed confirmations of said party alongwith bank statement. Though no written reply has filed but by filing bank statement and mere confirmations of these bogus parties the assessee wanted to establish that he has done genuine business with these parties.

The assessing officer observed that there were no merits in the contention of the assessee. It is for the assessee to substantiate his purchases by producing the parties for verification, which he has failed to do. Thus, the assessee has failed to prove the onus lying upon it to prove the genuineness of the transaction. The assessee could only furnish the copies of ledger and ‘so-called’ confirmations of these parties with bank statement to prove its claim that the transactions were genuine. In this regard, first of all, it would be pertinent to mention here that a racket of issuance of bogus bills from one Shri Bhanwarlal Jain had been unearthed and established by the Department and the same has been duly admitted by Shri Bhanwarlal Jain and his accomplices. The admission is based on solid evidences which are in conformity with the corresponding entries found in the assessee's books. The chain is fully established leaving no doubt whatsoever. Shri Bhanwarlal Jain, in his statement recorded admitted that he used to only issue bogus bills of diamonds to the persons who approached him. Shri Bhanwarlal Jain also admitted in his statement recorded that whatever cheques received by him against those bills were deposited in his respective concerns of the bank account and after clearing equivalent amount of cash withdrawn and also after deducting his commission from the cash withdrawn, the remaining amount of cash was paid back to the persons. Here in the case of the assessee, it had allegedly purchases of diamonds to the tune of 21 & 38/SRT/2022/AY.2012-13 Abhishek Navnitkumar Doshi Rs.2,50,25,283/- from abovesaid concerns, which is controlled by Shri Bhanwarlal Jain. In this back drop of the case, the assessee has taken the plea that its purchases from the above parties were genuine as had made payment through account payee cheques. In this regard, it would be necessary to note that this argument of the assessee cannot be taken into believe since in various case laws it has been held that "mere payment by account payee cheque is not sacrosanct nor can it make & non-genuine transaction genuine [Precision Finance Pvt. Ltd. vs. CIT - 208 ITR 465 (Cal.)]".

The assessing officer noted that burden of proof as to any particular fact lies on that person who wishes the court to believe in its existence. In this context, reference is invited to the ratio laid down in Section 106 of the Indian Evidence Act whereby the onus of proving the correctness of the entry, the truth of which is called in question by Assessing Officer shifts on to the assessee. If the assessee fails to discharge this onus, the AO is left free to draw his own interference from the inability of the assessee to explain what was within his knowledge and from the other circumstances of the case. Here, it is also pertinent to mention that proceedings under the Income-tax Act are not judicial proceedings in the sense in which the phrase “judicial proceedings” is ordinarily reduced. Therefore, the AO is not feted or bound by technical rules about the evidence as contained in the Indian Evidence Act. The assessment can be made on the basis of inference on evidence which in criminal or civil justice may be insufficient. In this context, reference is invited to Hon'ble Supreme Court's decision in the case of D. Dhoormal (AIR 1974 Supreme Court 859) the Department is not required to prove its case with mathematical, a demonstrable degree for in all human affairs, absolute certainty is a myth and as proof all exactness is a fake. The absolute proof being unattainable the law accepts for it probability as a substitute in this work-a-day world the law does not require the department to prove the impossible. All that it requires is the establishment of such a degree of probability that a prudent man may form on the basis of existence of fact. Moreover, as per section 114 of Indian Evidence Act, the court may presume the existence of any fact which it thinks likely to have happened

Therefore, the assessing officer concluded that assessee has failed to discharge its onus to prove that it had purchased diamonds. In view of the facts discussed above, it is very clear that the assessee had not actually made purchases of diamonds from the above mentioned concern but merely obtained bills from this concern to inflate its purchases by paying commission as stated by Shri Bhanwarlal M. Jain, in their statements recorded. Accordingly, an addition of Rs.2,50,25,283/- was made by the assessing officer and added to the total income of the assessee.

Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has partly allowed the appeal of the assessee, observing as follows: “…….It is well known that if purchases are made from open market without insisting for the genuine bills, the suppliers may be willing to sell those products at a much lower rate as compared to the rate which they may charge in case the dealer has to give a genuine sale invoice in respect of that sale and supply the goods. There may be various factors due to which there is bound to be a substantial difference between the purchase price of unaccounted material and rate of purchase of accounted for goods. There may be a saving on account of sales-tax and other taxes and duties which may be leviable in respect of manufacture or sale of goods in question. The suppliers or the manufacturers make a substantial saving in the income-tax in respect of income from sale of unaccounted goods produced and sold by them. This may also be one of the factors due to which the seller may be willing to charge lower rates for unaccounted goods as compared to accounted for goods. Keeping all these factors in mind, the Hon'ble ITAT Ahmedabad in the case of Vijay Proteins Ltd. Vs. ACIT (supra) held that 25% of the purchase price accounted for in the Page | 6 21 & 38/SRT/2022/AY.2012-13 Abhishek Navnitkumar Doshi books of accounts through such bogus purchases should be disallowed out of the amount of total bogus purchases. This judgment of the Hon'ble ITAT Ahmedabad was challenged before the Hon'ble Gujarat High Court in TAX APPEAL. NO. 243 of 2002 by the assessee. The Hon'ble Gujarat High Court vide judgment dated 09-12-2014, case reported in [2015] 58 taxmann.com 44 (Gujarat)[09-12-2014], affirmed the view of the Hon'ble ITAT by observing as under:- “12. We have heard learned counsel for both the sides. Having appreciated the material on record, the Tribunal recorded a finding that the transactions in respect of oil cakes shown as purchases by the assessee from 33 parties were not genuine transactions and that all those 33 parties were bogus parties. The Sale Invoices claimed to have been issued by them were also found to be fictitious and the bank account in the name of M/s. Pooja Traders was found to have been opened and operated mainly with a view to accommodate these fictitious transactions carried out by the assessee in respect of oil cakes shown as purchases from such bogus suppliers. The above findings were recorded on the basis of the material on record of the Tribunal.

It is a matter of fact that the goods were not received from the parties from whom it is shown to have been purchased but, such material was received from a different source which is exclusively within the knowledge of the assessee and none else. Therefore, it is evident that the assessee had inflated the expenditure in question by showing higher amount of purchase price through the fictitious 21 & 38/SRT/2022/AY.2012-13 Abhishek Navnitkumar Doshi invoices in the names of 33 bogus suppliers. Considering the overall factual scenario, the Tribunal was justified in disallowing 25% of the purchase price.” 5.10. In the light of above discussion, it is concluded that the appellant did not purchase the goods from the aforesaid parties. At the same time, he did purchase the goods from some other persons (may be agents or persons well known to the appellant). However, the AO's action of adding the total purchase value cannot be sustained following the various judicial precedents rendered in respect of cases having similar facts and circumstances. Since, the receipt of the material in question is not in doubt but the material has been received from sources best known to the appellant, therefore, proportionate disallowance has to be made in these circumstances in the light of the decision of Vijay Proteins Ltd, Vs. ACIT (supra) so as to adequately cover the amount of unexplained peak credit in respect of bogus purchases. Keeping in view the facts and circumstances of the case and various judicial precedents on the issue involved, I direct the AO to restrict the disallowance to 25% of the total purchase value of Rs.2,50,25,283/-. The appellant gets partial relief on this account. The ground no. 2 raised by the appellant regarding this issue is partly allowed.

In the result, the appeal is partly allowed.”

Aggrieved by the order of ld. CIT(A), the Revenue is in appeal before us and as well as the assessee is in cross appeal before us.

Learned Counsel for the assessee, pleaded that assessee is doing genuine business and submitted purchase bills and vouchers and all transactions were through banking channels. The ld Counsel stated that assessee has declared gross profit ratio at the rate of 11%, hence assessee is not engaged in hawala transactions. The ld Counsel also argued that opportunity of cross examination of statement of Bhanwarlal Jain, was not provided to the assessee during the assessment stage, hence it is violation of principle of natural justice. Therefore, ld Counsel contended that based on these facts narrated above, the entire addition made by the assessing officer may be deleted.

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that the issue raised in the Revenue’s appeal and assessee’s cross appeal, is squarely covered by the judgment of co-ordinate Bench in the case of Pankaj K. Chaudhary, in dated 27.09.2021, wherein it was held that addition @ 6% of bogus purchases are quite reasonable. The findings of the co-ordinate Bench are as follows: “12. We have heard the submission of ld.CIT-DR for the Revenue and the ld. Authorised Representative (AR) of the assessee. We have also gone through the various documentary evidences furnished by assessee. The ld. CIT-DR for the Revenue supported the order of AO. The ld. CIT-DR submits that Investigation Wing, Mumbai made a search on Bhanwarlal Jain Group. During the search and after search, the Investigation Wing made a thorough investigation and concluded that Bhanwarlal Jain Group and his associates including his sons were indulging in managing about 70 benami concerns. The benami concerns were engaged in providing accommodation entries. The assessee is one of the beneficiaries of such accommodation entries. In the transaction of accommodation entries, the documentary evidences are created in such a way, so that the bogus transaction is looks like genuine transaction. In bogus transaction, the fabricated evidences are always maintained perfectly. The assessee has obtained accommodation entry only to inflate the expenses and to reduce the ultimate profit. No stocks of diamonds were found at the time of search on Bhanwarlal Jain Group. The assessee has shown a very meagre gross profit (GP) @ 0.78% and not net profit (NP) at 0.02%. The ld. CIT(A) restricted the addition to the extent of 12.5% which is on the lower side. The ld. CIT-DR for the revenue prayed that disallowance made by the AO may be upheld or in alternative submitted that it may restricted at least @ 25%, keeping in view that the NP declared by the assessee is extremely on lower side. 13. On the validity of reopening, the ld.CIT-DR for the revenue submits that the AO received credible information about the accommodation entry provided by Bhanwarlal Jain Group. The assessee is one of the beneficiaries, who had availed accommodation entries from such hawala trader. At the time of recording reasons, the mere suspicious about the accommodation entry is sufficient as held by Hon'ble jurisdictional High Court in various cases. To support his submissions, the ld.CIT-DR relied upon the decision; Page | 9 21 & 38/SRT/2022/AY.2012-13 Abhishek Navnitkumar Doshi  Pushpak Bullion (P) Ltd Vs DCIT [2017] 85 taxmann.com 84(Gujarat High Court),  Peass Industrial Engineers (P) Ltd Vs DCIT [2016] 73 taxmann.com 185 (Gujarat High Court),  ITO Vs Purushttom Dass Bangur [1997] 90 Taxman 541 (SC) and  Mayank Diamond Private Limited (2014) (11) TMI 812 (Gujarat High Court).  AGR Investment Vs Additional Commissioner 197 Taxman 177 (Delhi) and  Chuharmal Vs CIT [1998] 38 Taxman 190 (SC).

On the other hand, the ld.AR of the assessee submits that he has challenged the validity of reopening as well as restricting the addition to the extent of 12.50% of the alleged bogus purchases. The ld.AR of the assessee submits during the assessment, the AO has not made any independent investigation. The AO reopened the case of the assessee on the basis of third party information without making any preliminary investigation. The AO received vague information about providing accommodation entry by Bhanwarlal Jain Group. No specific information about the accommodation entry obtained by assessee was received by AO. There is no live link between the reasons recorded qua the assessee. Therefore, the re-opening is invalid and all subsequent action is liable to be set aside.

Ground No. 2 in assessee’s appeal and the grounds of appeal raised by the revenue are interconnected, which relates to restricting the disallowance of bogus purchases to the extent of 12.5%. The AO made of 100% of purchases shown from the hawala dealers/ entry provider namely Bhanwarlal Jain. We find that the AO while making additions of 100%, of disputed purchases solely relied on the report of the investigation wing Mumbai. No independent investigation was carried by the AO. The AO has not disputed the sale of the assessee. The AO made no comment on the evidences furnished by the assessee. We further find that ld CIT(A), while considering the submissions of the assessee accepted the lapses on the part of the AO and noted that no sale is possible in absence of purchases. The Books of the assessee was not rejected by the AO. The ld CIT(A) on further examination of the facts and various legal submissions find that Ahmedabad Tribunal in Bholanath Poly Fab Private Limited (supra) held that in the such cases the addition of bogus purchases was sustained to the extent of 12%, on the observation that the assessee may have made purchases from elsewhere and obtained the bills from impugned supplier to inflate Gross Profit Rate. The ld CIT(A) by considering the overall facts, concluded that the 100% disallowance of purchase is not justified. We also find that the ld.CIT(A) also considered the decision of jurisdictional High Court in Mayank Diamonds Pvt. Ltd. (supra) and compared the fact of the present case with the facts in Mayank Diamonds Pvt Ltd (supra) and noted that assessee in that case was also engaged in the trading of polished diamonds. The ld CIT(A) noted that in that case the AO made disallowance of entire bogus purchase and on first appeal before CIT(A) the disallowances were maintained. However, the Tribunal gave partial relief to the assessee directing to sustain the addition @12% of such bogus purchases. And on further appeal, the Hon'ble High Court sustained Gross Profit Rate @ 5% being average rate of profit in industry.

We have seen that during the financial year under consideration the assessee has shown total turnover of Rs. 66,09,62,458/-. The assessee has shown Gross Profit @ .78% and net Profit @ .02% (page 11 of paper Book). The assessee while filing the return of income has declared taxable income of Rs.1,81,840/- only. We are conscious of the facts that dispute before us is only with regard of the disputed purchases of Rs, 4.34 Crore, which was shown to have purchased from the entity managed by Bhanwarlal Jain Group. During the search action on Bhanwarlal Jain no stock of goods/ material was found to the investigation party. Bhanwarlal Jain while filing return of income has offered commission income (entry provider). Before us, the ld CIT-DR for the revenue vehemently submitted that the ratio of decision of Hon’ble Gujarat High Court in Mayank Diamond Private Limited (supra) is directly applicable on the facts of the present case. We find that in Mayank Diamonds the Hon’ble High Court restricted the additions to 5% of GP. We have seen that in Mayank Diamonds P Ltd (supra), the assessee had declared GP @ 1.03% on turnover of Rs. 1.86 Crore. The disputed transaction in the said case was Rs. 1.68 Crore. However, in the present case the assessee has declared the GP @ 0.78%. It is settled law that under Income-tax, the tax authorities are not entitled to tax the entire transaction, but only the income component of the disputed transaction, to prevent the possibility of revenue leakage. Therefore, considering overall facts and circumstances of the present case, we are of the view that disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage. In the result the ground No. 2 of appeal raised by the assessee is partly allowed and the grounds of appeal

In the result, appeal filed by the assessee (in is partly allowed, whereas the appeal filed by the Revenue (in ), is dismissed.