ITO, WARD-2(3)(8), SURAT vs. MUKESH BABULAL PARLECHA, SURAT

225 & 226, 266 & 267/SRT/2019/AYs.2013-14 to 2014-15 Mukesh Babulal Parlecha 2. Since, these appeals pertains to same assessee, for different assessment years, and common and identical issues are involved, therefore these appeals have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as the facts narrated in AY.2013-14, have been taken into consideration for deciding the above appeals en masse.

Brief facts qua the issue are that assessee filed his return of income for A.Y.2013-14 declaring total income at Rs.6,53,460/- on 01.10.2013. The Assessing Officer noticed that assessee has made transactions with the entities of Gautam Jain Group. The Assessing Officer was in possession of information that a search and seizure action has been carried out by the investigation Wing, Mumbai on the Gautam Jain Group which was indulged in providing of accommodation entries in the form of unsecured loans, bogus purchases/sales to the interested parties. Therefore, Assessing Officer made addition at the rate of 100% of bogus purchases to the tune of Rs.6,68,91,952/-.

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

The Ld. Counsel for the assessee submitted before us that gross profit ratio and net profit ratio should not be applied to sustain the addition rather return on investment ratio (ROI) should be applied. The Ld. Counsel pointed out that assessee has opening capital of Rs.5,68,513/- and closing capital at Rs.4,07,815/- whereas net profit shown by the assessee is at Rs.5,75,839/- which gives ROI at the rate of 117.96%. The nature of business of the assessee is finance, that is, primary object of the assessee is to finance and in this finance business, the return on investment should be considered and not the percentage of bogus purchases. The Ld. Counsel presented before the Bench the theory of DuPont Analysis and its importance in finance business. In this regard, the Ld. Counsel has submitted the written submissions, which are reproduced below: “May It Please To Your Honour 1. The appeals filed by the assessee and revenue are directed against the order of Ld. CIT(A) passed in case of assessee on 08.02.2019 for A.Y. 2013-14 and 2014-15. The assessee is in appeal against the order of Ld. CIT(A) for 5% sustained out of the total additions made in the assessment order. The 225 & 226, 266 & 267/SRT/2019/AYs.2013-14 to 2014-15 Mukesh Babulal Parlecha department is in appeal against the deletion of 95% of the additions made in the assessment order in the case of the assessee.

In this case, the Assessing Officer has made an addition amounting to Rs. 6,68,91,952/- and Rs. 1,90,61,000/- for A.Y. 2013-14 and A.Y. 2014-15 respectively on account of alleged bogus purchase. The Ld. CIT(A) has restricted the addition to 5% of the alleged purchases and addition of Rs. 33,44,598/- and Rs. 9,53,050/- for AY 2013-14 and AY 2014-15 respectively were sustained relying on various judicial pronouncements.

The assessee would like to highlight the following points to distinguish the case of the assessee against comparable case laws and in support of his argument that no addition ought to have been made in this case: a. The average capital of the proprietorship firm and the net profit on such sale is tabulated below. There are no unsecured loans in both the years. It gives an ROI which is reasonably high and hence no adverse view is called for. Particulars AY 2013-14 AY 2014-15 Opening Capital 5,68,513 4,07,815 Closing Capital 4,07,815 10,27,593 Average Capital 4,88,164 7,17,704 Net profit 5,75,839 7,34,387 ROI (NP / Average Capital) (%) 117.96% 102.32% b. The purchases have entered the stock register and if the impugned purchases are excluded then the closing stock results into negative balance which is not possible. c. It is pertinent to mention that the purchase invoices are paid by account payee cheques and there is no evidence that the amount paid to the creditors is returned back to the assessee in any form.

Reliance is placed on the decision of Mumbai Tribunal in the case of M/s Mohammad Haji Adam & Co. vs. ITO vide ITA no. [4154 & 4155/ Mum/ 2010] dated 28.10.2015 wherein it was held that – “Accordingly, we direct the AO to calculate the GP on the undisputed purchase vis-à-vis GP in respect of purchase made from these parties and, if the AO finds that the GP disclosed in respect of purchases from these three parties is lower than the GP disclosed in respect of other undisputed purchase, addition should be made to that extent only. We direct accordingly. “

On the other hand, Learned Departmental Representative (Ld. DR) for the Revenue submitted that assessee has taken bogus purchase bills to inflate expenses and thus reduced net taxable profits, therefore addition should be made at the rate of 100% of bogus purchase and return on investment ratio (ROI) should not be applied, as the transaction made by assessee is bogus.

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 issue under consideration, is squarely covered by the judgment of the Co-ordinate Bench of this Tribunal in the case of Pankaj K. Chaudhary (in for AY. 2007-08), order dated 27.09.2021, wherein it was held 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.

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.

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 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)

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 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.

Ground No. 2 in assessee’s appeal and the grounds of appeal

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

Before parting, we would like to make it clear that Ld. Counsel has submitted the written submissions wherein he argued that return on investment ratio may be applied as he stated that the assessee’s main business is to finance, therefore its net

In the result, appeals filed by the assessees (ITA Nos. 225 & 226/SRT/2019 for AY.2013-14 to 2014-15) are dismissed and appeals filed by the Revenues (ITA Nos. 266 & 267/SRT/2019 for AY.2013-14 to 2014-15) are partly allowed.