NAITIK GEMS, MUMBAI V. INCOME TAX OFFICER-32(2)(4), MUMBAI

ITA 4760/MUM/2017

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8640 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Assessment Year: 2009-2010
• Appeal Filed On: 05-07-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N HEMALATHA
• Assessee Lawyers: KALPESH TARULKAR
• Keywords: Bogus purchase; Accommodation entries
• Section: 148

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN (AM) I.T.A. NO. 4760 /MUM/ 2017 (ASSESSMENT YEAR 20 09 - 10 ) M/S. NAITIK GEMS 1103 A, ADITYA TOWER CHANDAVARKAR ROAD MUMBAI - 400 092. PAN : AAEFN5488M V S . ITO WARD 32(2)(4) PR ATYAKSHA KAR BHAVAN, BKC BANDRA MUMBAI - 400 051. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY SHRI KALPESH TARULKAR DEPARTMENT BY MS. N. HEMALATHA DATE OF HEARING 2 .1 1 . 201 7 DATE OF PRONOUNCEMENT 2 . 11 . 201 7 O R D E R THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ORDER DATED 26 - 05 - 2017 PASSED BY LD CIT(A) PARTIALLY CONFIRMING THE ADDITION RELATING TO BOGUS PURCHASES MADE IN ASSESSMENT YEAR 2009 - 10. 2. I HEARD THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE IS A PARTNERSHIP FIRM EN GAGED IN THE BUSINESS OF TRADING AND EXPORT OF DIAMONDS. THE ASSESSING OFFICER RECEIVED INFORMATION THAT THE ASSESSEE HAS AVAILED ACCOMMODATION ENTRIES IN THE FORM OF PURCHASE OF DIAMONDS TO THE TUNE OF RS.692.82 LAKHS FROM CONCERNS CONTROLLED BY SHRI RAJ ENDRA JAIN/SANJAY CHAUDHARY GROUP. HENCE THE AO REOPENED THE ASSESSMENT OF THE YEAR UNDER CONSIDERATION BY ISSUING NOTICE U/S 148 OF THE ACT. SINCE THE ASSESSEE HAD RECONCILED THE SALES AND PURCHASES OF DIAMONDS, THE AO TOOK THE VIEW THAT THE ASSESSEE MI GHT HAVE PURCHASED DIAMONDS FROM SOME OTHER SOURCES AND ACCORDINGLY ESTIMATED THE PROFIT FROM SUCH PURCHASE OF DIAMONDS AT 6% OF THE VALUE OF PURCHASES AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. THE LD CIT(A) ADOPTED THE RATE OF 3% AND AC CORDI NGLY PARTIALLY SUSTAINED THE ADDITION. STILL AGGRIEVED, THE ASSESSEE HAS FILED THIS APPEAL. M/S. NAITIK GEMS 2 3. I NOTICE THAT THE LD CIT(A) HAS REDUCED THE RATE OF PROFIT TO 3% WITH THE FOLLOWING OBSERVATIONS: - 3.4 I HAVE CAREFULLY GONE THROUGH THE ASSESSMENT ORDE R AS WELL AS THE WRITTEN SUBMISSION AND DETAILS FILED BY THE APPELLANT. IT IS SEEN FROM RECORD THAT THE A.O. HAS NOT MECHANICALLY DISALLOWED THE ENTIRE DISPUTED PURCHASES AMOUNTING TO RS. 6,92,82,349/ - , RATHER HE HAS DISALLOWED 6% OF THE AMOUNT OF PURCHASE IN DISPUTE. THE AO HAS MADE THE ADDITION AFTER GIVING DETAILED REASON AND AFTER ANALYZING THE MODUS OPERANDI OF THE TRANSACTIONS OF THE DOUBTFUL PURCHASES. ON THIS ISSUE, THE AO HAS MADE THE FOLLOWING REMARKS. 8.4 SINCE, THERE IS NO REAL PURCHASE OF DI AMONDS FROM THE AFORESAID HAWALA DEALERS, IT IMPLIES THAT THE FIRM HAS PROCURED MINIMUM 2053.03 CARATS FROM OTHER SOURCES BETTER KNOWN TO THE ASSESSEE SO AS TO MANUFACTURE A ND EXPORT DURING THE YEAR, AND IN SUCH CASE THE FIRM WILL HE HAVING NIL CLOSING BA LANCE. THIS SHOWS THAT DURING THE YEAR MINIMUM 2053.03 CAROLS HAS COME INTO BUSINESS OF THE ASSESSEE AND IN THESE CIRCUMSTANCES THE ONLY INEVITABLE CONCLUSION TO BE DRAWN IS THAT THE ASSESSEE MIGHT HAVE MADE THESE PURCHASES FROM OTHER PARTIES/OPEN MARKET S OR THROUGH BROKER OR FROM ANY OTHER SOURCE BEST KNOWN TO ASSESSEE. 9. TAKING INTO ACCOUNT THE ABOVE FACTS AND CIRCUMSTANCES, THE ONLY . FAIR CONCLUSION THAT CAN BE ARRIVED IS THAT THE ASSESSEE WAS A BENEFICIARY OF THE ACCOMMODATION HILLS ISSUED BY AFOR ESAID HAWALA DEALERS WHEREIN, THERE WAS NOT ANY ACTUAL/PHYSICAL DELIVERY OF THE GOODS. SINCE THE EXPORTS/SALES ARE CLAIMED TO BE GENUINE AS FOREIGN REVENUE HAS BEEN DERIVED THROUGH BUSINESS ACTIVITIES OF THE ASSESSEE, IT CAN BE REASONABLY INFERRED THAT THE ASSESSEE WAS ACTUALLY IN POSSESSION OF DIAMONDS. THIS IS BASED ON THE FOOTING THAT THERE CANNOT BE ANY SALES WITHOUT PURCHASES. 9.1 HOWEVER, IT IS ALSO A MATTER OF FACT THAT THE DIAMONDS SHOWN TO HE PURCHASED FROM AFORESAID HAWALA DEALERS HAS ENTERED IN TO THE STOCK REGISTER AND THE ASSESSEE HAS SHOWN CORRESPONDING EXPORTS AGAINST THE SAID PURCHASES DEBITED. THIS COULD ONLY MEAN THAT THE DIAMONDS WERE BROUGHT BY THE ASSESSEE FROM GREY MARKET (WHICH IS A VERY COMMON PRACTICE PREVALENT IN SURAT AND MUMBAI), WITHOUT BILL, AND TO ADJUST THIS TRANSACTION INTO THE BOOKS OF ACCOUNTS, HE MUST HAVE OBTAINED BILL FROM ROJENDR JAIN GROUP CONCERN. AS THE ASSESSEE HAS DEMONSTRATED CORRESPONDING SALE AGAINST THE PURCHASE FROM RAJENDRA JAIN GROUP CONCERN, ONE CAN ONLY CO NCLUDE THAT THAT THE PURCHASES WERE MADE BY THE ASSESSEE FROM GREY MARKET AND BILLS WERE OBTAINED FROM RAJENDRA JAIN GROUP CONCERN. IT HAS BEEN NOTICED THAT ACCOMMODATION ENTRIES OF BOGUS PURCHASES ARE ISSUED THROUGH A COMPLEX WEB OF TRANSACTIONS INCLUDING BANKS AND ANGARIAS. M/S. NAITIK GEMS 3 9.2 IN SUCH SCENARIO, WHERE, ON ONE HAND THE GENUINENESS OF THE PURCHASE PARTY IS DOUBTED BUT TH E GENUINENESS OF PURCHASE ON A WHOLE CANNOT BE DOUBTED, THE COURTS HAVE TAKEN A VIEW THAT ONLY T HE PROFIT ELEMENT EMBEDDED IN SUCH A TRANSA CTION COULD BE TAXED. THIS IS A . FAIRLY ACCEPTED PRINCIPLE AND THE SAME WOULD ALSO APPLY IN THIS CASE. HOWEVER, WHAT WOULD BE THE . FAIR MARGINS IN II TRANSACTION IS THE MOOT QUESTION. 9.3 TAKING INTO CONSIDERATION ALL THESE ASPECTS, ONCE AGAIN, THE ISSUE ARRIVES AS TO WHAT WOULD BE THE MARGIN, ONE CAN EXPECT WHILE BUYING THE MATERIAL FROM GREY MARKET INSTEAD OF NORMAL COURSE. TWO ASPECTS NEED TO BE TAKEN INTO CONSIDERATION IN SUCH CIRCUMSTANCES. FIRST IS, THESE DIAMONDS IN THE GREY MARKET ARE ALWAYS CHE APER THAN THE DIAMONDS SOURCED FROM THE GENUINE DEALER. THIS IS BECAUSE, THE GENUINE DEALER WOULD CHARGE HIS INCIDENTAL COST INCLUDING THE WHOLE ADMINISTRATIVE COST WHILE SELLING THE DIAMOND IN THE MARKET, WHEREAS THE PETTY DEALERS IN THE GREY MARKET DO NO T CARRY SUCH INCIDENTAL CHARGES ON SUCH SALES, WHEREIN THEY ARE ONLY LOOKING FOR A QUICK PROFIT. SECONDLY, THERE IS ALWAYS AN ELEMENT OF DISCOUNT IN THE CASE OF INSTANT CASH PURCHASE. THIS IS A COMMON PRACTICE FOLLOWED IN THE DIAMOND MARKET, AND THE ENTITI ES OPERATING IN THE MARKET WOULD ALWAYS LOOK FOR REAPING SUCH BENEFITS. 9.4 THUS, FROM THE ABOVE ANALYSIS OF THE FACTS, IT IS CRYSTAL CLEAR THAT THE PURCHASES MADE BY THE ASSESSEE . FROM THE ABOVE CONCERN AND CLAIMED AS PURCHASE EXPENSES IN HIS PROFIT AN D LOSS ACCOUNT ARE NOT GENUINE. AND THERE IS PROFIT ELEMENT EMBEDDED IN THESE TRANSACTIONS WHEREIN THE PURCHASES HAVE BEEN MADE FROM OTHER ENTITIES NOT FROM THE CLAIMED ENTITY I.E. AFORESAID HAWALA DEALERS. 10. NOW THE QUESTION ARISES WHAT SHOU LD BE THE A CTUAL PROFIT ELEMENT EMBED IN THESE ACCOMMODATION ENTRIES AS THESE ENTRIES ARE HAVING SOME FIXED PERCENTAGE OF PROFIT OR COMMISSION OR ANY OTHER BENEFITS ATTACHED. EACH AND EVERY TRADING UNIT HAS ITS - DIFFERENT PROFIT RATIO DEPENDING ON THE ITEMS TRANSACTE D. THEREFORE, THE PR OFIT ELEMENT EMBEDDED IN THESE TR ANSACTIONS SHOULD DEFINITELY BE IN REAL AND CLOSE PROXIMITY TO THE NATURE OF BUSINESS AND PROFESSION. 10.1 THE NORMAL PROFIT PERCENTAGE IN CASE OF DIAMOND TRADERS/MANUFACTURES IS PREVAILING IN THE RANGE OF 6 - 10%. THEREFORE, THE PROFIT ELEMENT IN CASE OF ACCOMMODATION ENTRIES PERTAINING TO DIAMOND TRANSACTIONS SHOULD BE IN THE SAME RANGE. IN CASE OF METAL BUSINESS, THE QUANTUM OF PROFIT ELEMENT AS DECIDED IN VARIOUS JUDICIAL PRONOUNCEMENTS WITH RESPECT TO THE BOGUS PURCHASES HAS BEEN CONSIDERED AT 12.5% AND IS BASED ON THE CORE . FACT THAT THE SALES TAX ON THESE ITEMS IS 12.5%. IN CASE OF DIAMOND BUSINESS, THE CORRESPONDING SALES TAX IS APPLICABLE AT THE RATE OF 1%. M/S. NAITIK GEMS 4 10.2 IT IS PERTINENT TO MENTION HERE THA T THE MINIMUM PROFIT PERCENTAGE, AS EXPLAINED IN THE INSTRUCTION NO. 02/2008 DATED 22 ND FEBRUARY 2008, INTRODUCED BY HON'BLE . FINANCE MINISTER FOR . THE ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURING AND OR TRADING OF DIAMONDS AS BENIGN ASSESSMENT PROCED URE IS AT 6%. AND HENCE IT CAN BE PRESUMED THAT MOST OF THE TRADERS IN THE MARKET ACTUALLY OPERATE NOT BELOW THIS LEVEL OF MARGIN IN THE OPEN MARKET. BAP WAS TO BE APPLICABLE . FOR THOSE DIAMOND MERCHANTS, WHO WERE SHOWING PROFIT MARGIN OF 6% OF THEIR TURNO VER. ALTHOUGH, THIS BAP TALKS ABOUT THE NET PROFIT MARGIN (NP), FOR A PETTY DEALER, OPERATING WITHOUT ANY ESTABLISHMENT, THE GP WOULD BE ALMOST SIMILAR TO NP. 10.3 IN VIEW OF THE FACT THAT THE BOGUS PURCHASE(ACCOMMODATION ENTRIES) HAS BEEN RECORDED IN TH E BOOKS OF ACCOUNT OF THE ASSESSEE, I AM OF THE CONSIDERED OPINION THAT THE PROFIT ELEMENT EMBEDDED THEREIN WITH RESPECT TO THE TRANSACTIONS ENTERED BY THE ASSESSEE WITH PAPER CONCERN LIKE AFORESAID HAWALA DEALERS DEALING IN DIAMOND WOULD BE SUBJECT TO TAX . AND I HEREBY CONSIDER THAT 6% OF THE TOTAL AMOUNT OF RS.6,92,82,349/ - WHICH CONIES TO RS, 41,56.941/ - SHOULD BE TAKEN AS ADDITIONAL PROFIT ON UNPROVED/ NON - GENUINE PURCHASE AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 3. 5 THERE IS MERIT IN THE ARGUME NTS OF THE AO AS GIVEN ABOVE AND FOLLOWING SUCH ARGUMENTS IT IS HELD THAT THE A.O. WAS RIGHT IN ESTIMATING ADDITIONAL PROFIT ON UNPROVED/NON - GENUINE PURCHASES. THE A.O. HAS FAIRLY CONCEDED IN PARA 9.1 OF HIS ORDER THAT THE APPELLANT HAD INCURRED EXPENDITUR E ON SUCH PURCHASES, BUT SUCH EXPENDITURES REMAIN UNEXPLAINED. THUS, SOME DISALLOWANCE OUT OF THE DISPUTED PURCHASES WILL HAVE TO BE MADE, BUT THE QUESTION REMAINS WHETHER DISALLOWANCE AT THE RATE OF 6% OF THE UNPROVED PURCHASES IS FAIR OR NOT. THE MAIN RE ASON FOR ADOPTING SIX PERCENT AS FAIR ADDITIONAL PROFIT WAS BECAUSE THE AO THOUGHT THAT INSTRUCTION NO. 2 OF 2008 DATED 22.02.2008 WILL BE APPLICABLE TO THIS CASE. HOWEVER, FROM A PLAIN READING OF INSTRUCTION NO. 2 OF 2008 IT IS SEEN THAT THIS INSTRUCTION WAS MEANT TO BE APPLICABLE FOR ASSESSMENTS MADE DURING FY 2008 - 09. CLEARLY, THE ASSESSMENT OF THE APPELLANT HAS NOT BEEN MADE DURING FY 2008 - 09. FURTHER, THE CLAUSE E OF THE SAID INSTRUCTION STATES THE RATE OF PROFIT AS A PERCENTAGE O F TURNOVER WOULD BE R EVIEWED ANNUALLY ON THE BASIS REVENUE GENERATION AND RESULTS OF SCRUTINY ASSESSMENT, SEARCHES AND SURVEYS MADE DURING THE YEAR'. THUS, THE BENIGN ASSESSMENT PROCEDURE (BAP) OR THE PERCENTAGE MENTIONED IN THE INSTRUCTION NO. 2 OF 2008 CANNOT BE APPLIED ACR OSS THE BOARD IN ALL CASES OF ASSESSEES ENGAGED IN DIAMOND BUSINESS. IN DIAMOND TRADE THE RATE OF VAT IS STATED TO BE 1% AND IN SOME PLACES LIKE SURAT THE SAME IS STATED TO BE FULLY EXEMPT. THE TASK FORCE GROUP FOR . DIAMOND INDUSTRY CONSTITUTED BY THE GOVE RNMENT OF INDIA, MINISTRY OF COMMERCE AND INDUSTRY, AFTER CONSIDERING THE BAP SCHEME, RECOMMENDED PRESUMPTIVE TAX FOR NET PROFIT CALCULATED 2% OF M/S. NAITIK GEMS 5 TRADING ACTIVITY AND 3% FOR MANUFACTURING ACTIVITY OR @ 2.5% ACROSS THE BOARD. IT IS ALSO STATED THAT THE OPE RATIVE PROFIT IN CASE OF DIAMOND TRADING FOR COMPUTATION OF ALP BY THE TP WING IS CONSISTENTLY IN THE REGION OF AROUND 1.75% TO 3%. IT IS ALSO BROUGHT TO MY NOTICE THAT IN SIMILAR CASES OF DIAMOND BUSINESS, SOME CIT(A)'S HAVE TAKEN A VIEW THAT 3% OF THE DI SPUTED PURCHASES SHOULD BE CONSIDERED AS FAIR ADDITIONAL PROFIT. IN VIEW OF THE ABOVE AND ALSO SINCE THE PROFIT MARGIN IS LESSER IN THIS SECTOR, ADOPTING 6% AS THE ADDITIONAL PROFIT BY THE AO, IS NOT BASED ON CORRECT OR FOOTING. CONSIDERING THE FACT THAT T HE PROFIT MARGIN IN THIS SECTOR IS AROUND 2 TO 3 PERCENT AND THE TAXES SAVED IS ALSO AROUND 1%, I AM OF THE CONSIDERED OPINION THAT IF THE ADDITION IS SUSTAINED TO THE EXTENT OF 3% OF THE DISPUTED PURCHASES, THE SAME WILL MEET THE ENDS OF JUSTICE. THUS, AF TER CONSIDERING THE TOTALITY OF FACTS THE ADDITION MADE BY THE AO IS RESTRICTED TO 3% OF THE DISPUTED PURCHASES. THUS 3% OF RS. 6,92,82,349/ - WHICH IS RS. 20,78,470/ - IS TAKEN AS PROFIT OF THE APPELLANT ON PURCHASES THAT ARE NOT FULLY AND PROPERLY EXPLAINE D. ADDITION OF RS. 20,78,470/ - IS ACCORDINGLY CONFIRMED OUT OF AN ADDITION OF RS.41,56,941/ - AND THE BALANCE IS DELETED. GROUNDS OF APPEAL NO. 1 IS THEREFORE PARTLY ALLOWED. 4. I NOTICE THAT THE LD CIT(A) HAS GIVEN PROPER REASONS FOR NOT ACCEPTING TH E RATE OF 6% AND FOR ADOPTING THE RATE OF 3%. HENCE I AM OF THE VIEW THAT HIS ORDER DOES NOT CALL FOR ANY INTERFERENCE. 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 2 .11 . 201 7. SD / - (B.R.BASKARAN) ACCOUNTANT MEMBER MUMBAI ; DATED : 2 / 11 / 20 1 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A ) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( SENIOR P RIVATE S ECRETATRY ) PS ITAT, MUMBAI