COMMISSIONER OF INCOME TAX III V. DINESHKUMAR CHANDMAL JAIN

TAXAP/970/2013

AI Insights

The case involves two tax appeals by the Commissioner of Income Tax against Dineshkumar Chandmal Jain, concerning the deletion of additions made under Section 40A(3) of the Income Tax Act for the Assessment Years 2005-06 and 2006-07. The ITAT had earlier confirmed the CIT(A)'s decision to delete these additions, which were initially made by the Assessing Officer based on alleged cash payments exceeding Rs. 20,000 to various parties. The High Court's judgment focused on whether these payments were actual cash transactions or merely paper entries. The court found that the Assessing Officer did not verify the alleged recipients of the cash payments, and thus, upheld the ITAT's decision.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 728587 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 09-12-2013
• Assessment Year: misc
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: S UDHIR M EHTA
• Keywords: Accommodation entries; Bogus billing; Cash payments; Impounded material; Income Tax; Reassessment; Survey
• Section: 147; 148; 142(1); 131; 37; 40A(3); 133A; 40(ia)

Judgement Text

"O/TAXAP/969/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 969 of 2013 TO TAX APPEAL NO. 970 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE R.P.DHOLARIA ====================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ====================================== COMMISSIONER OF INCOME TAX III....Appellant(s) Versus DINESHKUMAR CHANDMAL JAIN....Opponent(s) ====================================== Appearance: MR SUDHIR M MEHTA, ADVOCATE for the Appellant(s) No. 1 ====================================== CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE R.P.DHOLARIA Date : 09/12/2013 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1. As common question of law and facts arise in both the Tax Appeals and as such are arising out of the impugned Page 1 of 13 O/TAXAP/969/2013 JUDGMENT common judgment and order passed by the Income Tax Appellate Tribunal (hereinafter referred to as ‘ITAT’) but with respect to different Assessment Years, both these appeals are decided and disposed of by this common judgment and order. 2. Tax Appeal No. 969/2013 has been preferred by the revenue challenging the impugned judgment and order passed by the ITAT dated 05/04/2013 in ITA No. 2635/Ahd/2009 for the Assessment Year 2005-06 with the following proposed questions of law; (A) “Whether on the facts and circumstances of the cases and in law the ITAT has erred in holding that it is an admitted fact re AO and the assessee that the assessee has only given accommodation entries to earn income @0.25% when no such fact were admitted by the assessee either in the return of income during the assessment proceedings or in the grounds of appeal filed before the ITAT?” (B) “Whether on the facts and circumstances of the cases and in law, the ITAT has erred in deleting the addition of Rs.3,52,44,338/- made by the Assessing Officer under Section 40A(3) of the Act without appreciating the fact that the assessee had effected cash payments in excess of Rs.20,000/-, in contravention of the provisions of Section 40A(3) of the Act and also failed to discharge the onus cast on him to prove that such transactions are less than Rs.20,000/- each as claimed by him?” Page 2 of 13 O/TAXAP/969/2013 JUDGMENT (C) “Whether on the facts and circumstances of the cases and in law, the ITAT has erred in deleting the addition of Rs.52,840/- made out of office expenses without appreciating the fact that the assessee failed to prove the genuineness and necessity of the expenses by providing supporting evidences?” (D) “Whether on the facts and circumstances of the cases and in law, the ITAT has erred in deleting the addition of Rs.91,000/- made on account of rent expenses without appreciating the fact that the assessee failed to prove the genuineness and necessity of the expenses by providing supporting evidences?” (E) “Whether on the facts and circumstances of the cases in law, the ITAT has erred in deleting the addition of Rs.28,790/- made out of printing and stationery expenses without appreciating the fact that the assessee failed to prove the genuineness and necessity of the expenses by providing supporting evidences?” (F) “Whether on the facts and circumstances of the cases and in law, the ITAT has erred in deleting the addition of Rs.4,05,500/- made on account of salary expenses without appreciating the fact that the assessee failed to prove the genuineness and necessity of the expenses by providing supporting evidences?” (G) “Whether on the facts and law, the ITAT was correct in deciding the case on merits without deciding the specific ground taken on acceptance of fresh evidence by Page 3 of 13 O/TAXAP/969/2013 JUDGMENT the CIT(A) without an opportunity to the A.O.?” 3. Being aggrieved and dissatisfied with the impugned common judgment and order dated 05/04/2013 passed in ITA No. 2636/Ahd/2009 for the Assessment Year 2006-07, the revenue has preferred Tax Appeal No. 970/2013 with the following proposed questions of law; (A) “Whether on the facts and circumstances of the cases and in law the ITAT has erred in stating that it is an admitted fact re AO and the assessee that the assessee has only given accommodation entries to earn income @0.25% when no such fact were admitted by the assessee either return of income during the assessment proceedings or in the grounds of appeal filed before the ITAT?” (B) “Whether on the facts and circumstances of the cases and in law, the ITAT has erred in deleting the addition of Rs.1,89,71,624/- made by the Assessing Officer under Section 40A(3) of the Act without appreciating the fact that the assessee had effected cash payments in excess of Rs.20,000/-, in contravention of the provisions of Section 40A(3) of the Act and also failed to discharge the onus cast on him to prove that such transactions are less than Rs.20,000/- each as claimed by him?” (C) “Whether on the facts and circumstances of the cases and in law, the ITAT has erred in deleting the addition of Rs.1,00,000/- made on account of salary Page 4 of 13 O/TAXAP/969/2013 JUDGMENT expenses without appreciating the fact that the assessee failed to prove the genuineness and necessity of the expenses by providing supporting evidences and the same was not allowable as per the provisions of Section 37 of the IT Act?” (D) “Whether on the facts and circumstances of the cases and in law, the ITAT has erred in deleting the addition of Rs.3,89,356/- made under Section 40(ia) without appreciating the fact that the assessee failed to furnish the proof in respect of the payment of TDS either with the return or during assessment proceedings?” (E) “Whether on the facts and law, the ITAT was correct in deciding the case on merits without deciding the specific ground taken on acceptance of fresh evidence by the CIT(A) without an opportunity to the A.O.?” 4. For the sake of convenience, the facts of Tax Appeal No. 969/2013 for the Assessment Year 2005-06 are narrated. 4.1. The assessee filed the return of income for the Assessment Year 2005-06 declaring the total income at Rs.1,51,204/-. The return of income was accompanied by the balance sheet, capital account etc. A survey under Section 133A of the Income Tax Act was conducted on 22/09/2006 (after the return of income was filed by the assessee) at the Mumbai office. The survey was conducted in consequence to the information received from the Economic Offence Wing, Crime Branch, Mumbai where in the course of recording the statement it was revealed that the assessee is doing the Page 5 of 13 O/TAXAP/969/2013 JUDGMENT business of bogus diamond billing on commission basis in the name of M/s. S.M. Trading Co.. It appears that he admitted that he issues the bill and get commission @ 0.25% on the amount of bills. During the course of survey operation and the investigation proceedings, books of accounts etc. were impounded. On verification of the impounded material, it was seen that some documents were related to the assessment for the Assessment Year 2005-06 and, therefore, the proceedings under Section 147 of the Income Tax Act came to be initiated by recording reasons for doing so. Thereafter, notice under Section 148 of the Income Tax Act came to be issued and in pursuance to the notice under Section 148 of the Income Tax Act, the assessee requested the reason for reopening the assessment. On being supplied with the same, the assessee submitted that the return filed on 31/10/2005 may be treated as return filed in response to the notice under Section 148 of the Income Tax Act and, thereafter, notice under Section 142(1) alongwith the questionnaire was issued on 01/08/2008 and the assessee was called upon/requested to furnish all the details. Thereafter, further notice under Section 142(1) of the Income Tax Act dated 24/11/2008 requesting the assessee to remain present on 28/11/2008 alongwith the books of accounts etc was issued. In response to the said letter, the representative of the assessee submitted the books of account and the same were impounded by the Income Tax Department, Mumbai. It appears that meanwhile the books impounded by the Investigation Wing, Mumbai came to be forwarded to the Assessing Officer and on examination of the said documents the assessee was called upon to remain in person for certain clarification in respect of infirmities seen in the books. Thereafter, with a view to verify the income and Page 6 of 13 O/TAXAP/969/2013 JUDGMENT expenditure, the Assessing Officer issued summons under Section 131 of the Income Tax Act, which was forwarded to the residential cum office address at Surat as well as at the Mumbai address. Both the summons were returned unserved with the remark ‘Left’ and, therefore, summons under Section 131 of the Income Tax Act was served by affixture on 24/12/2008. In the summons issued the following details were requested from the assessee; (a) Audited books of accounts and supporting evidence of cash payment made for A. Y. 2004-05 & 2006-07 i.e. F.Y. 2004- 05 & 2005-06. (b) Copy of the statement recorded under Section 133A of the Act during the course of survey proceedings. (c) Copy of statement recorded before Police authority. 4.2. It appears that prior to issuance of the notice dated 24/12/2008 and on the basis of the impounded books of accounts it was found by the Assessing Officer that a total sum of Rs.18,22,21,689/- was paid in cash to six different parties and the statement of which is as under; Sr. No Name of the party to whom payments are made. L.F. No. Total amount paid in (Rs.) 1. M/s. Alfa Trading Co. 6/6 4,88,71,069/- 2. M/s. Anant Trading Co. 12/13 1,27,87,314/- 3. M/s. Kamal Trading Co. 30/43 3,78,72,484/- 4. M/s. Mona Trading Co. 36/51 13,00,000/- 5. M/s. Marshal Trading Co. 37/53 6,07,02,214/- 6. M/s. Navkar Trading Co. 41/58 2,06,88,608/- Total 18,22,21,689/- 4.3. During the reassessment proceedings, the assessee was asked to explain the above amount. It was submitted on Page 7 of 13 O/TAXAP/969/2013 JUDGMENT behalf of the assessee that the assessee has not made any single payment exceeding Rs.20,000/- to the aforesaid parties at a time. It was further submitted that in view of the statement that the payment to the parties did not exceed Rs.20,000/- the Assessing Officer being not satisfied with the explanation submitted by the assessee, the Assessing Officer held that the assessee has violated the provisions of Section 40A(3) of the Income Tax Act in respect of the aggregate payment of Rs.17,62,21,689/- and accordingly disallowed Rs.3,52,44,338/- being 20% of such payment under Section 40A(3) of the Income Tax Act. The Assessing Officer disallowed Rs.91,610/- with respect to conveyance allowance, Rs.52,840/- with respect to office expenses, Rs.91,000/- with respect to office rent expenses, Rs.28,970/- with respect to printing stationery expenses, Rs.4,00,500/- with respect to salary expenses and directed to make addition of the aforesaid amount and held it taxable at Rs.3,60,60,458/-. 5. Being aggrieved and dissatisfied with the order passed by the Assessing Officer making the addition of Rs.3,52,44,338/- under Section 40A(3) of the Income Tax Act, the assessee preferred appeal before the CIT(A) and the CIT(A) partly allowed the said appeal however deleted the addition of Rs.3,52,44,338/- made by the Assessing Officer under Section 40A(3) of the Income Tax Act. The CIT(A) upheld the reassessment proceedings and deleted the addition made by the Assessing Officer. 6. Being aggrieved and dissatisfied with the order passed by the CIT(A), both the revenue as well as the assessee preferred the appeals and by impugned common judgment and order the Page 8 of 13 O/TAXAP/969/2013 JUDGMENT ITAT has dismissed both the appeals confirming the order passed by the CIT(A). 7. Being aggrieved and dissatisfied with the impugned common judgment and order passed by the ITAT and in confirming the deletion of addition of Rs.3,52,44,338/-/- made by the Assessing Officer under Section 40A(3) of the Income Tax Act, the revenue has preferred Tax Appeal No. 969/2013. 8. Being aggrieved and dissatisfied with the judgment and order passed by the ITAT in ITA No. 2636/Ahd/2009 for the Assessment Year 2006-07 confirming the similar deletion by the CIT(A) deleting the addition made by the Assessing Officer under Section 40A(3) of the Income Tax Act, the revenue has preferred Tax Appeal No. 970/2013. 9. Shri Sudhir Mehta, learned Counsel appearing on behalf of the appellant has vehemently submitted that both the CIT(A) as well as the ITAT have erred in deleting the addition made by the Assessing Officer under Section 40A(3) of the Income Tax Act without appreciating the fact that the assessee had effected the cash payment of Rs.20,000/- in contravention of Section 40A(3) of the Income Tax Act. It is submitted that as such the assessee failed to discharge the onus cast on him to prove that such transactions are less than Rs.20,000/- each as claimed by him. It is further submitted by Shri Mehta, learned Counsel appearing on behalf of the revenue that both the CIT(A) as well as ITAT have erred in directing the Assessing Officer to compute the income on the basis of 0.25% on the total turnover without appreciating the fact that estimate of the profit was not an issue and the Assessing Officer made the Page 9 of 13 O/TAXAP/969/2013 JUDGMENT disallowance for violation under Section 40A(3) of the Income Tax Act. It is further submitted that as such the assessee had never admitted either in the assessment proceedings or in the appeal filed before the CIT(A) that he was to get only 0.25% as commission on the bills. It is submitted that CIT(A) had materially erred in deleting the addition made by the Assessing Officer under Section 40A(3) of the Income Tax Act and directing the Assessing Officer to compute the income at 0.25% on the total turn of Rs.102,57,52,103/-in the appellants hand which comes to Rs.25,64,380/-. Making the above submissions, it is requested to admit/allow the present Tax Appeals. 10. Heard Shri Sudhir Mehta, learned Counsel appearing on behalf of the revenue and perused and considered the order passed by the Assessing Officer, the impugned order passed by CIT(A) as well as the impugned judgment and order passed by the ITAT. At the outset, it is required to be noted that with respect to the Assessment Year 2005-06, the Assessing Officer directed to make the addition of Rs.3,52,44,338/- under Section 40A(3) of the Income Tax Act on the ground that the assessee had paid a total amount of Rs.18,22,21,689/- to six different parties in cash. It was the specific case on behalf of the assessee from the very beginning that as such no such transactions had taken place and the bills were issued on paper and all the aforesaid entries were also on paper and as such he was to get 0.25% commission on the total amount of bills. It is an admitted position that the Assessing Officer did not issue any notice to the aforesaid six parties to whom the aforesaid amount of Rs.18,22,21,689/- were alleged to have been paid by the assessee in cash. The CIT(A) deleted the Page 10 of 13 O/TAXAP/969/2013 JUDGMENT addition of Rs.3,52,44,338/- which was made by the Assessing Officer under Section 40A(3) of the Income Tax Act and directed the Assessing Officer to compute the income at 0.25% on the total turnover of Rs.102,57,52,103/- in the appellants hand which comes to Rs.25,64,380/- by observing as under; “I have considered the rival contentions. The fact of the matter, which is admitted on both sides is that the appellant has only given accommodation entries to earn income @0.25%. Since the sale required corresponding availability of goods, bogus purchases have been shown to have been effected from the market. This admission is on oath and there is apparently no reason to presume that appellant would have chosen to state lies on oath. Similarly the A.O. should have had no reason to disbelieve what has been stated by the appellant before the Economic Office Wing, Mumbai which in the first place was the reason to reopen the assessment of proceeding year. It is therefore clear that the books of account will give only a picture of “make believe” nature, quantum and profitability of business. But behind the veil the reality as found and admitted was that only bills were issued on commission basis. However, the estimation of real income will have two important components. Firstly, the rate of claimed commission @ 0.25% which has not been disputed by the AO nor retracted by the appellant till now. The other component would be to ascertain the quantum of sale on which this rate needs to be applied. As per audit report the total sale stands at Rs.1,02,57,52,103/-. It transpires that the assessee has given entries not only in rough and Page 11 of 13 O/TAXAP/969/2013 JUDGMENT polished diamonds but also in garments, jewelery, copper scrap and colour stones. In my view, when at the beginning itself the AO mentions that the appellant had admitted the true nature of business to be only giving hawala entries, the ascertainment of profit would have been vis-a-vis the commission earned on verifiable turnover. All the entries of purchases are patently wrong claims with nonexistent parties. No goods were purchased nor were they sold. The transactions were in reality in sham transactions. Therefore, the so called huge cash payments made for purchases are only paper entries. The monies received from the claimed purchasers through banking channels had to be returned to them and hence the cash movements. But the cash has not been paid towards purchases, it is only claimed so. Therefore, it is merely return of money which had been received from various parties to whom “only the bills” were issued and no goods were sold in realty. Hence, this was not an expenditure and thus can not be subjected to disallowance under Section 40A(3). Thus to my mind the huge addition in this respect deserves to be deleted. Instead the AO is directed to compute income @0.25% on a total turnover of Rs.102,57,52,103/- in the appellants hand which should be Rs.25,64,380/-. However, the appellant will not get any benefit of expenditure claim against this.” 11. The aforesaid finding has been confirmed by the ITAT by passing the impugned judgment and order. We are in complete agreement with the view taken by the CIT(A) Page 12 of 13 O/TAXAP/969/2013 JUDGMENT confirmed by the ITAT. When it was not established and proved that the payment of Rs.18,22,21,689/-, which was alleged to have been paid by the assessee to the aforesaid six parties alleged to have been paid in cash, was not actually paid in cash and when it was found that the entries and the bills were only paper entries without any transaction and when the Assessing Officer did not choose to verify the parties who have alleged to have purchased the same from the assessee or tried to ascertain whether the same are disclosed in the respective accounts, the Assessing Officer was not justified in making the addition of Rs.3,52,44,338/- under Section 40A(3) of the Income Tax Act. Except the case on behalf of the assessee, which was his case from the very beginning, that on the bills he was to get only 0.25% commission, when the CIT(A) directed the Assessing Officer to compute the income at 0.25% on the total turnover by further observing that the assessee will not get any benefit of expenditure claim against the same and when the same is confirmed by the ITAT, we see no reason to interfere with the impugned judgment and order passed by the ITAT. Similar case is with respect to the Assessment Year 2006-07. 12. In view of the above and for the reasons stated hereinabove, no question of law, much less substantial question of law arises in the present Tax Appeals and accordingly they deserve to be dismissed and are dismissed. (M.R.SHAH, J.) (R.P.DHOLARIA,J.) Siji Page 13 of 13 "