ITO, WARD-2(3)(8), SURAT vs. M/S. SPARSH IMPEX, SURAT

आदेश / O R D E R PER DR. A. L. SAINI, ACCOUNTANT MEMBER: Captioned cross-appeals filed by the Assessee and Revenue pertaining to assessment year (AY) i.e. 2014-15, are directed against the common order passed by the Learned Commissioner of Income Tax(Appeals)-1, Surat, [‘CIT(A)’ for short] dated 11.12.2019, which in turn arise out of common assessment order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’), dated 28.12.2016.

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. (i) On the facts and circumstances of the case and in Law, the Ld. CIT(A) has erred in amending assessment order of the AO holding net unverifiable purchases from the impugned parties to the extent of Rs.22,98,65,125/- only whereas the assessee was engaged in bogus purchase from six concerns controlled by the entry providers to the extent of Rs.27,93,74,602/-. (ii) On the facts and circumstances of the case and in Law, the Ld. CIT(A) has failed to appreciate the fact that the entire purchase from alleged concerns to the extent of Rs.27,93,74,602/- were bogus and was only to suppress the profit of the beneficiaries which is substantiated by the statement on oath given by the entry provider. (iii). Without prejudice to Grounds No.(i) & (ii) on the facts and circumstances of the assessee and in Law, the Ld. CIT(A), Surat ought to have confirmed the addition at least on the amended facts, to the extent of Rs.22,98,65,125/- which is the bogus purchase from impugned parties, determined by him. (iv) Without prejudice to Grounds No.(i),(ii) & (iii) the Ld. CIT(A) in the facts and circumstances of the case, erred in restricting the addition to 5% of bogus purchase to the extent of Rs.22,98,65,125/- instead of Rs.27,93,602/-. (v) On the facts and circumstances of the case and in law, the appellant craves its right to add, alter, amend, deleted, any of the ground or grounds of appeal.”

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. Sr.No Name of entry provider Amt in (Rs) 1 Sun Diam 3553956/- 2 Avi Exports 400373/- 3 Kriya Impex Pvt. Ltd 171331819/- 4 Arihant Exports 6681655/- 5 Kalash Enterprises 63894539/- 6 Karnavat Impex Pvt Ltd. 33512260/- Total 27,93,74,602/-

During the search proceedings in the case of Shri Rajendra Jain Group statement on oath were recorded of Shri Rajendra Jain and in his statement he admitted that above mentioned concerns are run and operated by him and the concerns are paper concerns with no actual business of any kind in diamond trading. The purchases of diamonds from above mentioned concerns were found to be non-genuine, therefore a show cause notice dated 02.12.2016 was issued to the assessee- firm “as to why the bogus purchases of Rs.27,93,74,602/- should not be added to total income for the A.Y 2014-15. In response to the show cause notice, the assessee firm has replied vide letter dated 22.12.2016. After considering the submission of assessee, the assessing officer has observed (finding were given in para 7.5 to 7.7 of the assessment order), as follows:

(i) 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. 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.

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. (ii) Thus, in the books of account of the assessee, the purchases to the extent made from the above said parties remained unverifiable and hence undersigned arrive at a conclusion that the purchase shown by the assessee in the books of account are initiated and bogus purchase are debited to trading account to suppress the true profits to be disclosed to the Department. (iii) The onus was upon the assessee to establish the genuineness of purchases made by the assessee

4.Thus, from the above analysis of the facts, it is crystal clear that purchases made by the assessee from the above parties and claimed as expenses in its profit and loss account are not genuine. In view of the above discussion and the defects pointed out the books of account of the assessee were rejected u/s 145(3) of the Act. In the backdrop of the facts and circumstances, the assessing officer made addition to the tune of Rs.27,93,74,602/-.

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. matrix involving the same accommodation entry providers th9e entire disallowance made by Ld. AO was deleted (Sanghvi Export International Ltd. ITA No.3305, 3375/Mum/2017 dt.21.08.2018, Kareamchandra Rubber Industries ITA No.6599/Del/2014 12.02.2018 M/s Vaman International Pvt. ITA 1040 & 1041/M/2017 dtd 27.09.2017, Fancy Wear ITA No.1596/M/2016 dtd. 20.09.2017, Suraj Jewells Co. ITA No.1581/Kol/2016/ dtd.05.05.2017). The AR also furnished copies of order of CIT(A) Valsad in the case of (1) Sahjanand Export CIT(A)/VLS/236/016-17 dtd. 24.08.2017, (2) Rushabh International No. CIT(A)/VLS/102/2016-17 dtd. 14.02.2018, which in the disallowances is restricted to 2% of impugned purchases. However, since I have already taken a view of disallowing 5% of purchases and since it is confirmed by Hon'ble jurisdictional ITAT, Surat Bench as discussed in para above; the above decisions of ITAT Mumbai / Kolkata are not followed. 9. In view of above discussion the disallowance is restricted to 5% of unverified purchases. A.Y Unverified purchases Disallowance confirmed 2014-15 Rs.22,98,65,125/- Rs.1,14,93,256/-

9.We have heard both the parties and perused the materials available on record. We note that issue under consideration is squarely covered by the decision of the Co-ordinate Bench of this Tribunal in case of Pankaj K. Choudhary & others, in ITA No.1152/AHD/2017, order dated 27.09.2021. This Tribunal has taken a constant view and made disallowance @ 6% of bogus purchases, therefore, grounds of appeal raised by Revenue are covered by the Decision of the Co-

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. ordinate Bench of this Tribunal, vide order dated 27.09.2021, wherein the Co- ordinate Bench has held as under: “9. On merit, the ld.CIT(A) after discussing the submission of assessee held that AO has not discussed about any details of books of accounts, documents, stock register produced by assessee during the assessment. The AO neither examined nor found any defect in the document to discredit the same. The assessee has produced day to day stock register, details of purchase and sale. The purchases made during the year are sold during the year as seen from the trading account. If the impugned purchases are treated as bogus, then the stock in hand will become negative from 26.06.2006 onwards and no sale is possible in absence of purchases. The AO relied on the statement of Bhanwarlal Jain recorded by Investigation Wing against, copy of purchase bill, copy of bank statement, showing payment, day to day stock register, incoming and outgoing diamonds and daily stock tally, confirmation of the impugned parties from whom the said purchases has been made, thus, the assessee practically furnished all possible evidences in support of his claim for purchases. Moreover all the payment are made by bank account. The AO has made no comments about these documentary evidences. On the aforesaid observation, the ld.CIT(A) concluded that assessment order suffer from incomplete investigation, lack of marshalling of all relevant facts and procedural loopholes. Similarly, the ld. CIT(A) also observed that there is no denying circumstances under which statement were made by Bhanwarlal Jain and the elaborate modus-operandi unearthed by Investigation Wing, Mumbai, which has created sufficient suspicion regarding the purchase made by the assessee. The said parties are assessed with Central Circle, Mumbai where they are treated as “entry provider” and assessed accordingly. 10. The ld.CIT(A) after referring the decision of Tribunal in Bholanath Poly Fab Private Limited in ITA No.137/AHD/2009 dated 26.07.2011 wherein the addition was sustained to the extent of 12%. The ld CIT(A) by following the observation of order of Tribunal in Bholanath Poly fab Pvt. Ltd.(supra), the ld.CIT(A) held 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) after considering the overall facts, submissions of the assessee and evidences produced by assessee, concluded that the 100% disallowance of purchase is not justified. The ld.CIT(A) also considered the decision of jurisdictional High Court in Mayank Diamonds Pvt. Ltd. reported in [2014] 11 TMI 812 (Guj) (Tax Appeal No.200 of 2003 dated 07.11.2014). The ld.CIT(A) compared the fact of the present case, with the facts in case of Mayank Diamonds (supra) and noted that assessee in that case was also engaged in the trading of polished diamonds. The AO in said case made disallowance of entire bogus purchase. The ld.CIT(A) dismissed the appeal, however, the Tribunal gave partial relief to the assessee directing and sustained the addition @12%. And on further appeal before Hon'ble High Court, the disallowance was sustained at Gross Profit Rate of 5%, which is average rate of profit in industry. The ld. CIT(A) further held that in some other similar cases though he has sustain 5% of Gross Profit Rate considering the fact that where Gross Profit shown by assessee is 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, hence the disallowance was restricted to 12.5% of the impugned purchase. 11. Aggrieved by the order of ld. CIT(A), both the parties have filed cross appeals. The assessee has challenged the validity of reopening as well as sustaining the addition to the extent of 12.5% only. Likewise, the Revenue has assailed the order for sustaining addition to the extent of 12.5% only. We have noticed that there is typing mistake in the ground no. 2 of revenue’s appeal wherein the assessing officer has mentioned the additions of ‘5%’ instead of ‘12.5%’.

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex.

1 M/s Andaman Timber industries Vs Commissioner of Central Excise, CIVIL APPEAL NO. 4228 OF 2006 (Supreme Court)

2 CIT vs. Indrajit Singh Suri [2013] 33 taxmann.com 281 (Gujarat)

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. 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 Shilpi Jewellers 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. TejuaRohitkumar 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 15. An 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: 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 Page | 8

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. 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. 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 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 Page | 9

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. 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.” 9.As the issue is squarely covered by the decision of the Coordinate Bench, in the case of Pankaj Choudhary(supra), and there is no change in facts and law and the ld DR for the Revenue is unable to produce any material to controvert the aforesaid findings of the Coordinate Bench(supra), hence respectfully following the binding precedent, we allow Revenue`s appeal partly.

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. typographical error, therefore we direct the assessing officer to consider correct figure while giving appeal effect of this order.

“1. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming proceeding u/s 148 of Income Tax Act, 1961. 2. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming the assessment order passed u/s 143(3) while rejecting books of account u/s 145(3) of Act. The CIT(A) failed to consider that the AO ought to have passed the order u/s 144 as mandated by Section 145(3) of the Act. 3. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in disallowing Rs.1,14,93,256 being 5% of difference of purchase and sale from disputed parties (Rs.22,98,65,125/-) by treating the purchases as suspicious. 4. Without prejudice to the Ground No.3, the Ld. CIT(A) erred in not accepting the alternate claim of the assessee that partners of the assessee-firm is part of Rajendra Jain, commission income on sale ought to have assessed in the impugned order.” 13. At the outset, Ld. Counsel for the assessee inform the Bench that assessee does not wish to press Ground No.1 & 2, therefore, we dismiss Ground No.1 and 2, as not pressed.

ITA No.27 & 60/SRT/2020 A.Y. 14-15 M/s Sparsh Impex. 15. In the result, assessee’s appeal is dismissed.

A copy of the instant common order be placed in the respective case file(s)

Order pronounced in the open court on 25/07/2022 by placing the result on the Notice Board.

Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat/िदनांक/ Date: 25/07/2022 Dkp Outsourcing Sr.P.S. Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. Pr.CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // True Copy // Assistant Registrar/Sr. PS/PS ITAT, Surat