ITO, WARD 2(3)(8), SURAT vs. RAKESH KAILASHCHAND JAIN, SURAT

आदेश / O R D E R PER BENCH: This is a bunch of six appeals filed by the Assessee and Revenue, pertaining to the Assessment Years (AYs) 2013-14 to 2015-16, are directed against the separate orders passed by the Learned Commissioner of Income Tax (Appeals)-1, Surat [in short “the ld. CIT(A)”] which in turn arise out of separate assessment orders passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain 2. Since, the issue involved in all these appeals, are common and identical, therefore, these appeals have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain established from the search and seizure action that the alleged concerns of Shri Rajendra Jain Group are all paper companies / proprietorships and with no real business activities, operating solely with the purpose of facilitation of fraudulent financial transactions which includes providing accommodation entries in the form of unsecured loans to the interest parties, issuing of bogus sale / purchase bills to various parties etc. During the course of search action, it was revealed that the said group is exclusively engaged in the business of issuing non genuine purchase bills and also unsecured loan accommodation entries to various parties. It is thus established from the search and seizure action that the alleged concerns of Shri Rajendra Jain Group are all paper companies / proprietorships and with no real business activities, operating solely with the purpose of facilitation of fraudulent financial transactions which includes providing accommodation entries in the form of unsecured loans to the interest parties, issuing of bogus sale / purchase bills to various parties etc. During the course of search and seizure action in the case of Shri Rajendra Jain Group of cases on 03.10.2013 by the DGIT (Inv.), Mumbai, it was found that there are name-sake dummy directors / partners / proprietors /brokers, etc. These concerns were being actually managed by Shri Rajendra Jain Group & others. These group concerns were believed to be concerns actively involved in providing non-genuine purchase bills and also unsecured loan accommodation entries to various interested parties. As a result of the search and seizure action, it was conclusively proved that these diamond concerns are only on paper base with no real business activities. Findings of the search action on Shri Rajendra Jain reveals that Shri Rajendra Jain and associates manage, control and operate numerous concerns in the name of various persons who are shown as name-sake directors, partners and proprietors through which they provide accommodation entries of loans and advances, purchase and sale & unsecured loans to various parties / beneficiaries. The name-sake / dummy Directors / proprietors / Partner of all these concerns admitted on oath that they were merely employees of Shri Rajendra Jain, looking after miscellaneous office work like depositing cheques in banks, handling over parcels to clients, making data entry. All the concerns

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain are shown to be engaged in import of diamonds. However, when these name- sake directors / Partners/ Proprietors were specifically asked to explain as to how they contacted the parties from whom the imports have been made in the respective concerns, they were unable to comment on the same. They all admitted not having any personal contact with any of the importers either through phone or email. Shri Rajendra Jain, in his statement recorded under sec. 132(4) of the I.T. Act, 1961, Shri Rajendra Jain has admitted that he manages and controls the business affairs of all the concerns in which the persons who were his employees are also shown as directors, partners and proprietors. List of group concerns operated and managed by Shri Rajendra Jain was obtained from him. It must be mentioned at the outset, that all these group concerns were shown to be in the business of import and export of diamonds. All of them have license which make them eligible for importing diamonds. Further, data collected from customs department had revealed that all the said group concerns have genuinely been importing diamonds for last "many years. The imported diamonds were also getting cleared by the CHAs. It prima facie gives an impression that all the group benami concerns were indeed in the business of import of diamond and its subsequent exports (which is a miniscule amount) and local sale. However, many evidences were found during the course of search which proved that these concerns were not into any genuine business. Such findings are enumerated. The above finding of the investigation Wing as summarized above clearly established the bogus nature of the transactions entered into by the Shri Rajendra Jain Group. The investigation Wing has carried out thorough Investigation and established beyond doubt that the transactions are bogus. The assessee has shown to have made transactions with the following concerns associated with Shri Rajendra Jain during the F.Y.2012-13 to F.Y. 2014-15, which are as under Sl. Name of the entry provider A.Y.2013-14 A.Y.2014-15 A.Y.2015-16 No 1 Dharam Impex 77,91,813/- 9,94,000/- -- 2. Kangan Jewels Pvt. Ltd. 45,17,47,666/- 3,91,71,6451- 7,43,20,222/- 3. Maniprabha Impex Pvt. Ltd. 41,97,27,766/- 3,69,10,261/- -- Total 87,92,67,245/- 7,70,75,906/- 7,43,20,222/-

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain In view of the above findings that the assessee received accommodation entries from the Shri Rajendra Jain Group, a show cause notice was issued. The assessee has furnished the reply but not found to be forceful and convincing by Assessing Officer. The material available on record have been carefully perused and considered. From the above discussions, the following facts emerge: (i) The Income Tax Department has conducted search & seizure action in the case of Group concerns of Shri Rajendra Jain and conclusively proved that these parties are engaged in the business of providing accommodation entries only, as can be clearly seen from the discussions in the above paragraphs. The parties are issuing bills without delivering any goods and services. (ii) Evidently, the assessee had adopted a modus operandi to reduce its true profits by inflating its expenses including purchase expenses by taking accommodation entries from such parties. (iii) Thus, in the books of accounts of the assessee, the purchases to the extent made from the above said parties remained unverifiable and hence undersigned arrived at a conclusion that the purchases shown by the assessee in the books of accounts are initiated and bogus purchases are debited to trading account to suppress the true profits to be disclosed to the Department. (iv) The onus was upon the assessee to establish the genuineness of purchases made by the assessee.

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain accommodation entry. Hence, the accommodation entry received from totaling to the tune of Rs.87,92,67,245/- for A.Y.2013-14, Rs.7,70,75,906/- for A.Y.2014-15 & Rs.7,43,20,222/- for A.Y. 2015-16 was treated as bogus purchases and added to the total income of the assessee.

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain purchases. Since, all the purchases are bogus, therefore, additions made by the Assessing Officer should be upheld.

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain 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;  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). 14. 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. 15. On account of additions of bogus purchases, the ld.AR submits that in the original assessment, the assessee filed its complete details of purchases to prove the genuineness of expenses. The AO accepted the same in the assessment order passed under section 143(3) on 10.03.2009. During re-assessment, the assessee again furnished complete details about the genuineness of purchases. The assessee filed confirmation purchases invoices, accounts of the parties, bank statement of assessee showing transaction to the banking channel. The AO has not made any comment on the documentary evidence furnished by assessee. The AO solely relied upon the statement of third party and the report of Investigation Wing. The report of wing and the statement of Bhanwarlal Jain were not provided to the assessee. The AO has not disputed the sales of assessee. No sale is possible in absence of purchase. The books of accounts were not rejected. The AO made the disallowance of entire purchases. The assessing officer not provided cross examination of the alleged hawala dealers. The disallowances sustained by the Ld. CIT(A) @ 12.5% of the impugned purchases, is on higher side and deserve to be deleted in total. The ld.AR of the assessee submits that entire purchases shown by assessee are genuine. In without prejudice and alternative submissions, the Ld. AR for the assessee submits that in alternative submission, the disallowance may be sustained on

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain reasonable basis. To support his various submission, the ld.AR for the assessee is relied upon case laws: 1 M/s Andaman Timber industries VsCommissioner of Central Excise, CIVIL APPEAL NO. 4228 OF 2006 (Supreme Court) 2 CIT vs. Indrajit Singh Suri [2013] 33 taxmann.com 281 (Gujarat) 3 Albers Diamonds Pvt. Ltd. Vs ITO 1(1)(1), Surat I.T.A. No.776 &1180/AHD/2017 4 The PCIT-5 vs. M/s. Shodiman Investments Pvt. Ltd. TTANO. 1297 OF 2015 (Bombay High Court) 5 ShilpiJewellers Pvt. Ltd. vs. Union of India &Ors. WRIT PETITION NO. 3540 OF 2018 (Bombay High Court) 6 CIT in Vs. Mohmed Juned Dadani 355 ITR 172 (Gujarat) 7 Micro Inks Pvt. Ltd. Vs. ACIT [2017] 79 taxmann.com 153 (Gujarat) 8 Shakti Karnawat Vs. ITO - 2(3)(8), Surat ITA 1504/Ahd/2017 and 1381 /Ahd/2017 9 Asian Paints Ltd. Vs. DCIT, [2008] 296 ITR 90 (Bombay) 10 PCIT, Surat 1 Vs. Tejua Rohit kumar Kapadia [2018] 94 taxmann.com 325 (SC) 11 The PCIT-17 vs. M/s Mohommad Haji Adam & Co. ITA NO. 1004 OF 2016(Bombay High Court) 12 Pankaj Kanwarlal Jain HUF Vs. ITO 2(3)(8) Surat ITA.No.269/SRT/2017 16. In the rejoinder submissions the ld. CIT-DR for the revenue submits that that rigour of the rules of evidence contained in the Evidence Act is not applicable before the tax authorities. It was submitted that the ratio of various case laws relied by the ld. AR for the assessee is not applicable on the facts of the present cases. 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. 17. We have considered the submissions of the parties and have gone through the order of the lower authorities. We have also deliberated on each and every case laws relied by both the parties. We have also examined the financial statement of all the assessee(s) consisting of computation of income and audit report. We have also gone through the documentary evidences furnished in all cases. Ground No.1 in assessee’s appeal relates to the validity of reopening. The ld AR for the assessee vehemently argued that the AO reopened the case of the assessee on the basis of third party information, and without making any preliminary investigation, which was vague about the alleged accommodation entry by Bhanwarlal Jain Group. And that there was no specific information about the accommodation entry availed by the assessee. There is no live link between the reasons recorded qua the assessee. We find that the assessee has raised objection against the validity of the reopening before the AO. The objections of the assessee was duly disposed by AO in his order dated

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain 09.02.2015. The assessee raised ground of appeal before ld CIT(A) while assailing the order of AO on reopening. The ld CIT(A) while considering the ground of appeal against the reopening held that the AO has received report from investigation wing Mumbai, which indicate that the assessee is beneficiary of the accommodation entry operators. The accommodation entry provider admitted before investigation wing that he has given such entry to various persons; based on such report the AO has reason to believe that the income of the assessee has escaped assessment and thus the action of AO in reopening is justified. 18. We find that the Hon’ble Jurisdictional High Court in Peass Industrial Engineers (P) Ltd Vs DCIT (supra) while considering the validity of similar notice of reopening, which was also issued on the basis of information of investigation wing that they have searched a person who is engaged in providing accommodation entries, held that where after scrutiny assessment the assessing officer received information from the investigation wing that well known entry operators of the country provided bogus entries to various beneficiaries, and assessee was one of such beneficiary, assessing officer was justified in re-opening assessment. Further similar view was taken by Hon’ble Jurisdictional High Court in Pushpak Bullion (P) Ltd Vs DCIT (supra). Therefore, respectfully following the order of Hon’ble High Court, we find that the assessing officer validly assumed the jurisdiction for making re-opening under section 147 on the basis of information of investigation wing Mumbai. So far as other submissions of the ld AR for the assessee that there is no live link of the reasons recorded, we find that the Hon’ble Jurisdictional High Court in Peass Industrial Engineers (P) Ltd clearly held that when assessing officer received information from the investigation wing that two well known entry operators of the country provided bogus entries to various beneficiaries, and assessee was one of such beneficiary, assessing officer was justified. Hence, the ground No. 1 in assessee’s appeal is dismissed. 19. 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

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain 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. 20. Now adverting to the facts of the present case, the ld.CIT(A) held that in some other similar cases; though he had sustain 5% of Gross Profit Rate, considering the fact that where Gross Profit shown by those assessee’s are more than 5%. However, in the present case, the assessee has merely shown Gross Profit Rate only at 0.78% of turnover, accordingly, the ld. CIT(A) was of the view that disallowance of 12.5% of impugned purchases/bogus purchases would be reasonable to meet the end of justice. 21. 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 raised by revenue are dismissed. 22. In the result the appeal of revenue is dismissed and the appeal of the assessee is partly allowed.” 12. We note that the issue is squarely covered by the decision of the Co- ordinate Bench of Surat in the case of Pankaj K. Choudhary (supra) and there is no change in facts and law, therefore respectfully following the binding

ITA.449 to 451 & 462 to 464/SRT/2019/AYs.2013-14 to 2015-16 Rakesh Kailashchand Jain precedent, we direct the Assessing Officer to sustain the addition at the rate of 6% of bogus purchases. Hence, we dismiss the appeal of the assessees and we allow the appeals of the Revenues partly.

Registry is directed to place one copy of this order in all appeals folder / case file(s).

Order is pronounced on 21/10/2022 by placing the result on the Notice Board.

Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat �दनांक/ Date: 21/10/2022 SAMANTA Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat