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PER PAWAN SINGH, JUDICIAL MEMBER:
1. This appeal by the Assessee is directed against order of ld.Commissioner of Income Tax (Appeals)-3, (hereinafter referred as “ld. CIT(A)” Surat dated 28.09.2018 for the assessment year 2014-15. The Revenue raised following grounds of appeal:- “1. Whether, on facts and in law the ld. CIT(A) was justified in partly allowing the appeal of the assessee and estimating disallowance at Rs. 60,28,900/- @ 5% of Rs. 12,05,77,986/- despite of the fact the AO has made the addition of Rs. 12,05,77,986/-.
2. Whether, on the facts and in law the ld. CIT(A) was justified in partly allowing the appeal of the assessee upon the decision in the case of M/s Myank Diamond Pvt. Ltd. without considering the facts that M/s Mayank Diamonds Pvt. Ltd. was only a trader of diamonds whereas the assessee was manufacturer and exporter of polished diamond.
Dirgh Diamond 3. Whether, on the facts and in law the ld. CIT(A) was justified in partly on elying upon the case of M/s Mayank Diamonds Pvt. Ltd. which is different and distinct from the facts of the assessee’s 4. On the basis of the facts and circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer.
It is therefore prayed that the order of the CIT(A) may kindly be set aside and that of Assessing Officer be restored.”
Brief facts of the case are that the assessee is engaged in the business of trading and manufacturing of cut and polished diamond. The assessee filed its return of income for the assessment year 2014-15, declaring total income of Rs. 39,33,680/-. The case was selected for scrutiny. During the assessment proceedings, the Assessing Officer asked to furnish the complete details of purchase and sales made during the year consideration along with bills and vouchers of the expenses and also to furnish the quality and quantity wise details. On perusal of details furnished by the assessee, the Assessing Officer noted that assessee has shown certain purchases from the entity managed by Rajendra Jain Group, Sanjay Choudhary group and Dharmichand Jain. Such entities were engaged in providing bogus bills without actual delivery of goods. The assessee has shown purchases, 7 parties from the following details as under:- Sr. Name of the party Amount (Rs.) No.
Arihant Exports Rs.50,97,045 2. Sun Diamond Rs.1,10,67,600 3. Aadi Impex Rs.73,68,050 2 Dirgh Diamond 4. Kalash Enterprise Rs.64,77,9.50 5. Avi Exports Rs. 3,80,67,341 6. Kriya Impex Pvt. Ltd. Rs. 3,58,89,000 7. Karnavat Impex Pvt. Ltd. Rs. 1,66,11,000 Total Rs. 12,05,77,986 3. In order to verify the genuineness of purchases, the Assessing Officer issued notice under section 133(6) to the said parties and deputed Circle Inspector to serve the notices. The Assessing Officer recorded that none of the parties were existed at the given addresses. The Inspector reported that such entities were not available on the addresses provided by the assessee. The Assessing Officer further noted that quality and quantity details of rough as well as finished goods are not maintained by the assessee. The assessee has not made available details of carat wise diamonds, manufactured and the quantity details. The assessee has not provided from which it can be verifiable as to how much carat wise diamonds are manufactured.
On the basis of aforesaid discrepancy, the Assessing officer issued show case notice to the assessee as to why the purchase shown from bogus entities engaged in hawala trading should not be added to the income of assessee. The assessee filed its reply as recorded in para 5 of assessment order. In reply, the assessee stated that their turnover for this year is Rs. 131 Crores as against the turnover of preceding year of Rs. 89,30,87,191/-. The comparative chart shown gross profit (GP) and net profit (NP) were provided. The assessee Dirgh Diamond stated that GP ratio as well as NP ratio for the year under consideration is better than with earlier years. The assessee furnished PAN No., copy of purchase bill, copy of contra confirmation, copy of bank statement, polish of diamond stock register and co-relation in respect of sales made with corresponding purchases. The assessee submitted that as per requirement of Income Tax Act in respect of transaction made with the said parties, the assessee had ample proof and submitted to justify the transaction. The assessee stated that statement of Shri Rajendra Jain Group allegedly recorded during the course of search is not provided to them. No opportunity for cross examination is provided. The assessee has right to cross examine any evidence given by any third person evidence to which much affect the assessee. The assessee stated that if the total purchases are added, corresponding sale will be affected and the GP margin will be much higher than average industry rate. The assessee also relied on certain case law. The assessee finally submitted that the Assessing Officer himself in his final assessment is disallowing only 12.5% of purchases, how 100% disallowance of similar purchases while sitting under the common Chief Commissioner of Income Tax (CCIT), Surat. The reply of assessee was not accepted by Assessing officer. The Assessing after referring in house process of rough and polish diamond noted that assessee has to keep quality and quantity details. The assessee may be Dirgh Diamond maintaining such details but does not wish to make available such details with the Department. The reasons for such not making available to conceal the actual and supress production. The assessee is deliberately not making available quality and quantity details in order to show less production to pay less rate of tax. The assessee in order to supress production has shown bogus purchases from the said hawala trader. The Assessing Officer rejected the books of account by taking view that assessee failed to prove the genuineness of purchase of Rs. 12.05 Crore. The assessee could not produce the books of account along with originally copy of Jhangad of delivery of rough diamonds and polish diamonds. Day to day quantity and quality details. After rejection of books of account, the Assessing Officer disallowed the entire disputed/alleged bogus purchases shown from the said seven parties.
5. On appeal before the ld. CIT(A), the assessee filed details of statement of facts and challenged the validity of addition. The assessee also filed detailed written submission. The submissions of assessee is recorded in para 7 of order of the ld. CIT(A). the assessee in its submissions in sum and substance contended that the assessee is a partnership firm, engaged in the business of trading and manufacturing of cut and polish diamond. The goods are sold locally as well as exported outside the country. At the time of passing the assessment order, the assessing officer disallowed purchases of Rs. 12.05 Crore. During the Dirgh Diamond assessment, the assessee furnished complete details of purchases and provided all information and evidences called by Assessing Officer. The Assessing Officer made addition on account of unverifiable purchases on the basis of search action carried out at third parties premises without providing any such record to the assessee. The assessee furnished complete details of purchase to prove the genuineness thereof. The assessee never indulged in unauthentic purchases and all the purchases are shown in the regular books. The assessee specifically submitted that Shri Rajendra Jain Group have already restricted their statement recorded by search/survey team. On the merit of addition, the assessee submitted that comparative GP and NP rate in current assessment year comparative to corresponding year is better. The Assessing Officer has made additions of entire purchases shown from such parties after rejection of books of account, which is totally illogical and not legally tenable and relied on certain case law.
The ld. CIT(A) after considering the submission of assessee, assessment order held that identical issue, he has decided in case of Gagnani Impex in Appeal No. CAS-3/512/2015-16 dated 24.11.2016 wherein he has restricted the similar bogus purchases to the extent of 5% of disputed purchases by following order of Hon’ble jurisdictional High Court in Bholanath Polyfab Pvt. Ltd. in dated 26.07.2011 and decision of M/s Dirgh Diamond Mayank Diamond Pvt. Ltd. reported in 2014(11) TMI 812 (Guj). The ld. CIT(A) further held that the Hon’ble jurisdictional High Court in case of Satyanaraya P. Rathi (2013)351 ITR 150, President Industries 258 ITR 654, Samit P. Seth (2013) 356 ITR 451 and Bholanath Poly Fab (2013) 355 ITR 290 held that only percentage of purchase represent of profit may be taxed. On the basis of the aforesaid decisions, the ld. CIT(A) concluded that fact of the present appeal are identical to Gagnani Impex and accordingly restricted addition to 5% of bogus purchase. Aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before this Tribunal.
None has appeared on behalf of the assessee despite service of notice. The assessee sought adjournment on 24.01.2021. Today, neither the assessee sought adjournment nor any representative appeared on behalf of assessee. Therefore, we left no option except to decide the appeal on the basis of hearing the submission of ld. CIT-DR for the Revenue and the material available on record. The ld. CIT-DR for the Revenue submits that the assessee failed to substantiate the genuineness of purchases before the Assessing Officer. The assessee has shown purchase from hawala trader, who were engaged in the business of providing accommodation bill without actual delivery of goods. The Investigation Wing of Department made full-fledged investment against Shri Rajendra Jain Group and company and found sufficient material during Dirgh Diamond search that those group was engaged in providing accommodation entry. The assessee has shown bogus purchase to inflate expenses and reduce the tax liability. The ld. CIT-DR referring the order of Assessing Officer would submits that the during the assessment the assessee was provided full opportunity, however, the assessee failed to prove the delivery of goods and entire purchases shown from hawala dealers are bogus and prayed for 100% disallowance of the impugned purchases.
We have considered the submission of ld. CIT-DR for the Revenue and have gone through the order of lower authorities carefully. 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. 12.05 Crores from 7 parties, who were managed by Rajendra 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 Rajendra Jain Group. The Assessing officer made addition of 100% of purchases shown from Rajendra Jain Groups Companies/entities. We find the assessee has filed certain evidences in order to substantiate the genuineness of purchases. The evidence furnished by assessee consist of PAN of parties, copy of purchase bill, copy of contra confirmation, bank statement showing the transaction through banking channel, stock register and retail Dirgh Diamond sales. The Assessing Officer has not given any findings on such documentary evidence furnished by assessee. The sales of the assessee is not disputed by Assessing officer. The Assessing officer rejected the books of account on the ground that assessee could not produce copy of proof of delivery of rough diamond and polish diamond. 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 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 1.77% and NP @ 0.63%. The assessee has shown total turnover of 132 Crore (approximately) and declared income of Rs. 39.33 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