ITO, WARD-2(3)(7), SURAT vs. ASHOK SONRAJ JAIN, SURAT

Brief facts of the case are that assessee is an individual and engaged in the business of import, export, trading of diamonds. The case of the assessee for the assessment year 2007-08 was reopened on the basis of information received from Investigation Wing, Mumbai that search and seizure action was carried out in the case of Shri Praveen Kumar Jain Group on 01.10.2003 by Investigation Wing, Mumbai. In the said search and seizure action evidence was collected and the statement of various persons were recorded. From the material collected and the statement recorded during the said search and seizure action, it was found that assessee is one of the beneficiary who has shown purchases from 7 parties, which were managed by Shri Praveen Kumar Jain Group. The assessee has shown purchase of Rs. 1.64 Crores form M/s Mohit International and Rs. 1.81 Crores from M/s Kunal Gems thereby total purchase of Rs. 3.46 Crores, which was utilized to suppressed profit for the year to the extent of such purchases. The Assessing Officer after recording the reasons of reopening, issued notice under section 148 dated 26.03.2014. In 2 Ashok Sonraj Jain response, to notice under section 148 dated 26.03.2014, the assessee filed his return of income on 22.10.2014. During the assessment proceedings, the Assessing Officer was asked to furnish the details of purchases and show cause as to why the purchase of Rs. 3.46 Crores should not be treated as bogus purchases.

The assessee filed reply vide his reply dated 15.03.2015. In the reply, the assessee stated that purchase shown from Mohit International and Kunal Gems are genuine and supported by bills and payment were made through banking Channel. The reply of assessee was not accepted by Assessing Officer. The Assessing Officer held that mere furnishing payment through account payee cheques is not sacrosanct nor can it make a non-genuine transaction as genuine. There is sufficient evidence in the form of statement recorded under section 132(4) wherein proprietor of Mohit International categorically admitted that several entities including of Mohit International are not carrying any genuine business activity. They did not have any physical stock of goods. Copy of such statement was provided to the assessee. The Director, partner of entities are closely associated with Shri Praveen Kumar Jain Group, who was engaged in providing accommodation entries. The Assessing Officer disallowed entire purchases of Rs. 3.46 Crores from Mohit International and Kunal Jems.

We have heard the rival submissions of learned Commissioner of Income Tax-departmental representative (CIT-DR) for the revenue and ld. Authorized Representative (AR) for the assessee and gone through the orders of the ld. CIT-DR for the Revenue submits that search and seizure action was carried out at the business premises of Shri Praveen Kumar Jain Group by Investigation Wing, Mumbai on 01.10.2003. No physical stock of goods was found at his premises. The statement of Shri Praveen Kumar Jain Group and his associate were recorded under section 132(4) in the statement of Shri Praveen Kumar Jain Group and associate namely N. Parmar which is proprietor of M/s Mohit International disclosed that they are operated hawala trader for providing accommodation entries of sale and 4 Ashok Sonraj Jain purchase of diamonds without actual delivery of goods. The Investigation Wing gathered sufficient material about modus oprendi hawala trader namely Shri Praveen Kumar Jain Groups and associates, assessee is one of the beneficiary of bogus purchases of Rs. 3.49 Crores. The assessee was given sufficient opportunity to prove the genuineness of transaction. The assessee before Assessing Officer mere submitted that he has made a genuine purchase and payments were made through banking transaction. Mere payment through banking transaction is not sufficient as the assessee failed to show actual delivery of goods. The ld. CIT-DR prayed for holding the addition of entire purchases.

On the other hand, ld. AR of the assessee submits that purchase shown by assessee are genuine the assessee has given sufficient evidence to prove the genuineness of purchases. The Assessing Officer has not rejected the books of account of assessee. The sale of assessee is not disputed by the Assessing Officer. The sale is not possible in absence of purchase. The ld. AR of the assessee submits that disallowances made restricted by ld. CIT(A) to the extent of 5% of the said purchases of very higher side as the margin of trade of diamonds is very low. The ld. AR of the assessee submits that once sale of the assessee is accepted, no disallowance of purchase can be made.

We have also deliberated on the various case law referred and relied by ld. CIT(A) in his order. We find that assessee has shown purchases of Rs. 3.46 Crores from two parties, who were managed by Praveen Kumar Jain and his group. During the assessment, the Assessing officer on the basis of information available with him that all those parties from whom, the assessee has shown purchases are managed by Pravin Kumar Jain. The Assessing officer made addition of 100% of purchases shown from Pravin Kumar Jain Companies/entities. We find the assessee has filed bill of purchases and bank statement in order to substantiate the genuineness of purchases. The evidence furnished by assessee bills of purchases and bank statement showing the transaction through banking channel. The Assessing Officer has disregarded such documentary evidence furnished by assessee. The sales of the assessee is not disputed by assessing officer. The Assessing officer not rejected the books of account. No other observation on books of assessee was made. It is settled law that no sale is possible in absence of purchase. We find that before, ld. CIT(A) the assessee filed in very detailed and exhaustive submissions. The ld. CIT(A), instead of discussion the fact of the case of assessee 6 Ashok Sonraj Jain restricted the addition on the basis of his decision in case of Gagnani Impex in Appeal No. CAS-3/512/2015-16 dated 24.11.2016. The ld.CIT(A) by referring the various decision, restricted the addition to the extent of 5% of the disputed purchase.

We find that the assessee has shown GP of .88%. The assessee has shown total turnover of 11.76 Crore and declared income of Rs. 10.44 Lakhs only. The Hon’ble Gujrat High Court in a number of decision including in case of Samit P. Seth (supra) and Bholanath Poly Fab (supra) held that only the profit embedded in the dispute purchase is to be disallowed and not the substantially portion of the purchases. The profit element in such disputed purchase is to be disallowed to avoid the possibility of revenue leakage. We find that Assessing Officer identified the disputed purchase to the extent of sale of Rs. 12.05 Crores and disallowance of 100% of such purchases. In our view, 100% of disallowance of such purchases without disputing the sales is not justified. Similarly, disallowance restricted by ld. CIT(A) to the extent of 5% is also not justified when the assessee has shown GP of less than of less than 1% (.88%). Considering over all facts and circumstances of the case, we are of the view that disallowance of 6% of the disputed purchases of Rs. 3.46 Crore, would meet possibility of revenue leakage. Hence, the Assessing officer is directed to disallow/restrict the addition of bogus purchases to the extent of 6% 7