A.C.I.T. - 19(2), MUMBAI V. M/S. MUN GEMS, MUMBAI

ITA 6145/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3153 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 06-10-2017
• Court: TRIBUNAL

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI AMARJIT SINGH , JM ITA NO. 6145 /MUM/ 2017 (ASSESSMENT YEAR: 2007 - 08 ) ACIT 19(2) ROOM NO. 207, MATRU MANDIR, MUMBAI - 400 007 VS. M/S. MUN GEMS 303, PANCHRATNA OPERA HOUSE, MUMBAI - 400 004 PAN/GIR NO. AAHFM 4996 J ( APPELLANT ) : ( RESPONDENT ) APPELLANT BY : SHRI D. G. PANSARI RESPONDENT BY : NONE DATE OF HEARING : 04.02.2019 DATE OF PRONOUNCEMENT : 28.02 .2019 O R D E R PER SHAMIM YAHYA, A. M.: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 30, MUMBAI (LD.CIT(A) FOR SHORT) DATED 04.07.2017 AND PERTAINS TO THE ASSESSMENT YEAR (A.Y.) 2007.08. 2. THE GROUNDS OF APPEAL READ AS UNDER: 1. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE LEARNED. CTT(A) ORDER IS NOT PERVERSE FOR NOT CONSIDERING THE ORDER OF' HON'' BLE SUPREME COURT IN THE CASE OF N K PROTEIN LTD DATED 16.01.2017, WHICH IS ON THE SIMILAR ISSUE OF BOG US PURCHASES AND WHEN THE APEX COURT ORDER WAS ALREADY THE LAW OF THE LAND WHEN THE LD. C I T(A) HAS GIVEN HIS DECISION VIDE ORDER DATED 04.07.2017 ?' 2. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE LEARNED. CIT(A) WAS JUSTIFIED IN SUSTAINING ONLY AN ADDITION @ 3% PROFIT RATE ON TOTAL PURCHASES OF RS.5.57,61,124/ - MADE FROM 4 PARTIES WHEN IN FACT THE ASSESSEE HAD FAILED TO PROVE THE GENUINENESS OF THE SAID PURCHASES ? 3. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE LEARNED. CIT(A) HAS ERRED IN DIRECTING THE AO TO RESTRICT THE ESTIMATION OF THE PROFIT AT 3% INSTEAD OF 100% OF THE TOTAL NON - GENUINE PURCHASES WHEN HE HIMSELF HAS ACCEPTED THAT THESE PURCHASES ARE NON GENUINE AS HELD BY AO ? 4. THE APPELLA NT PRAYS THAT THE ORDER OF THE LD.CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. 2 ITA NO. 6145/MUM/2017 3. BRIEF FACTS OF THE CASE ARE AS UNDER: THE ASSESSEE IS A PARTNERSHIP FIRM, ENGAGED IN THE BUSINESS OF 'IMPORTER, MANUFACTURER AND EXPORTER OF CUT AND POLISHED DIAMONDS'. THE RETURN OF INCOME FOR THE YEAR UNDER APPEAL WAS FILED ON 30 - 10 - 2007, DECLARING TOTAL INCOME OF RS.2,49,38,867/ - . THE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT AT TOTAL INCOME OF RS.2,49,38,870/ - . THEREAFTER THE CASE WAS REOP ENED U/S 147 OF THE ACT, BY ISSUING NOTICE U/S 148 OF THE ACT ON 17 - 03 - 2014. ASSESSMENT, U/S 143(3) R.W.S 147 OF THE ACT, WAS COMPLETED BY THE LD. AO, ON 27 - 03 - 2015, DETERMINING THE TOTAL INCOME AT RS. 8,06,99,990/ - . 4. THE REASONS FOR REOPENING OF THE AS SESSMENT IS BASED ON THE INFORMATION THAT SEARCH & SEIZURE OPERATIONS WERE CONDUCTED ON 03 - 10 - 2013 BY THE DGIT, INVESTIGATION WING, MUMBAI, IN THE CASE OF SHRI RAJENDRA KUMAR JAIN, SANJAY CHOUDHARY AND DHARMICHAND JAIN GROUPS. DURING THE COURSE OF THE SEARCH OPERATION, IT WAS FOUND THAT SEVERAL NAME LEND ING DUMMY DIRECTORS, PARTNERS/ PROPRIETORS OF VARIOUS CONCERNS WHICH WERE LITERALLY CONTROLLED, OPERATED AND MANAGED BY SHRI RAJENDRA KUMAR JAIN, SANJAY CHOUDHARY AND DHARMICHAND JAIN AND THE PERSONS - IN - CHARGE OF THE DUMMY CONCERNS, BELONG TO THEIR NATIVE PLACE. THOSE PERSONS ADMITTED THIS , IN THE SWORN STATEMENTS RECORDED DURING THE COURSE OF SEARCH OPERATION AND THEY HAVE ALSO ADMITTED THAT WERE MADE TO THE POSITION BY SHRI RAJENDRA KUMAR JAIN, SANJAY CHOUDHARY AND DHARMICHAND JAIN. IT WAS FOUND THAT THE GROUP CONCERNS ARE ALL PAPER / COMPANI ES/FIRMS, PROPRIETORSHIP CONCERN WITH NO REAL BUSINESS ACTIVITIES, OPERATING SOLELY WITH THE PURPOSE OF FACILITATING FRAUDULENT FINANCIAL TRANSACTIONS WHICH INCLUDES, AMONG OTHERS, PROVIDING ACCOMMODATION ENTRIES IN THE FORM OF UNSECURED LOANS TO INTERES TED PARTIES, ISSUING OF 3 ITA NO. 6145/MUM/2017 BOGUS SALE BILLS TO VARIOUS PARTIES AND PROVIDING A BOGUS FRONT TO CONCERNS WHICH DO NOT WANT TO IMPORT DIAMONDS IN THEIR OWN HANDS/BOOKS OF ACCOUNTS. POST SEARCH INVESTIGATION REVEALS THAT THE ASSESSEE HAS TAKEN ACCOMMODATION ENTRI ES IN THE FORM OF BOGUS PURCHASES FROM M/S. AVI EXPORT, M/S. MOULIMANI, M/S. SUN AND M/S VITRAG AMOUNTING TO RS.61,62,619/ - , RS.64,07,32,488/ - , RS.50,70,510, RS.37,95,507/ - TOTALING TO RS. 5,57,61,124/ - . 5. AFTER OBTAINING THE EXPLANATIONS FROM THE ASSESSEE , IT WA S SEEN BY THE AO THAT BARRING THE STOCK REGISTER ENTRY AND CHEQUES PAYMENTS, CUSTOM APPRAISAL REPORT, NO OTHER DOCUMENTS SUCH AS DELIVERY CHALLANS ETC. WERE PRODUCED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. HENCE, AO CONCLUDED THAT THE A SSESSEE ADOPTED A MODUS OPERANDI TO REDUCE ITS TRUE PROFITS BY INFLATING ITS EXPENSES INCLUDING PURCHASE BY TAKING ACCOMMODATION ENTRIES. IT WAS HELD THAT THE PURCHASES REMAINED UNVERIFIABLE IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND SAME WERE REJECTED A S PER PROVISIONS OF SECTION 145(3) OF THE ACT. THEREFORE, BASED ON THE STATEMENTS RECORDED ON OATH DURING THE SEARCH OPERATIONS FROM SHRI RAJENDRA KUMAR JAIN SANJAY CHOUDHARY AND DHARIMCHAND JAIN AND OTHERS, THE PURCHASES MADE FROM THE FOUR PARTIES ARE T RE ATED BY THE AO AS NON - GENUINE. THE AO ALSO STATED THAT IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, THE ASSESSEE HAVE INDULGED IN NON - GENUINE TRANSACTIONS AND THE INTENTION OF INDULGING IN SUCH ACTIVITY IS TO SUPPRESS THE TRUE PROFITS AND TO DEFRAUD T HE REVENUE. THEREFORE , THE TOTAL PURCHASES MADE F ROM FOUR PARTIES AMOUNTING TO RS. 5,57,61,124/ - ARE TREATED AS NON - GENUINE PURCHASE AND IS ADDED TO T HE TOTAL INCOME OF THE ASSESSEE. 4 ITA NO. 6145/MUM/2017 6. UPON THE ASSESSEES APPEAL, THE LD. C IT(A) NOTED THAT HE WAS IN AGREEME NT WITH THE FINDINGS OF THE A.O. THAT THE PURCHASES ARE NOT MADE FROM THESE PARTIES. HOWEVER, HE NOTED THAT THE A.O. HAS ADDED THE ENTIRE AMOUNT OF PURCHASES FROM THESE FOUR PARTIES. BUT AT THE SAME TIME, THE A.O. DID NOT DISTURB THE SALE, IGNORING THE FAC T THAT THERE WILL NOT BE ANY SALE WITHOUT THE PURCHASES. HE O PINED THAT THERE ARE EVERY CHANC E THAT THE ASSESSEE MIGHT HAVE PURCHASED THE GOODS THROUGH GREY MARKET. HE FURTHER OBSERVED AS UNDER: 6.9 FROM THE ABOVE DISCUSSION, ONE CAN SAFELY CONCLUDE THAT THE APPELLANT HAD OBTAINED ONLY THE BILLS FROM THE ABOVE - MENTIONED PARTIES WITHOUT ACTUALLY GETTING THE MATERIAL. HOWEVER, IT IS ALSO A MATTER OF FACT THAT THE PURCHASES FROM THESE CONCERNS HAVE BEEN ENTERED INTO THE STOCK REGISTER AND THE ASSESSEE HAS SHO WN CORRESPONDING SALES AGAINST THE SAID PURCHASES. THIS COULD ONLY MEAN THAT THE DIAMONDS WERE BOUGHT BY THE ASSESSEE, FROM GREY MARKET WITHOUT BILLS AND TO ADJUST THESE TRANSACTIONS INTO THE BOOKS OF ACCOUNTS, THE APPELLANT OBTAINED BILLS FROM RAJENDRA JA IN GROUP CONCERNS. IN SUCH SCENARIO, ON ONE HAND THE GENUINENESS OF THE PURCHASE PARTY IS DOUBTED BUT THE GENUINENESS OF PURCHAS E ON A WHOLE CANNOT BE DOUBTED. 6.10 IN THIS CASE, I FIND THAT QUANTITATIVE DETAILS WERE MAINTAINED, LD. AO NOT DOUBTED THE GEN UINENESS OF SALES, HOWEVER, HELD THAT THE APPELLANT INDULGED IN NON - GENUINE PURCHASES TO SUPPRESS THE PROFITS AND REJECTED THE BOOKS OF ACCOUNTS UNDER SECTION 145 (3) OF THE I T ACT AND PROCEEDED TO ADD THE ENTIRE AMOUNT OF SUCH PURCHASES MADE FROM THE THR EE PARTIES, INSTEAD OF MAKING THE PROFIT ELEMENT EMBEDDED IN SUCH BOGUS PURCHASE. AS STATED EARLIER WHEN THE SALES ARE GENUINE, IT IS NOT POSSIBLE TO SELL THE GOODS WITHOUT MAKING ANY PURCHASES. IF THE PURCHASES ARE NOT MADE FROM THOSE PARTIES, THE APPELLA NT MUST HAVE PURCHASED FROM SOME OTHER PARTIES. IN SUCH A SITUATION, ADDING THE ENTIRE AMOUNT OF PURCHASE TO THE TOTAL INCOME IS NOT CORRECT BECAUSE IT WILL GIVE A DISTORTED PICTURE OF THE PROFIT MARGIN. IN MY CONSIDERED OPINION, WHICH IS SUPPORTED BY SEVE RAL JUDICIAL FORUMS, ESTIMATING THE PROFIT PERCENTAGE ON SUCH PURCHASES IS THE CORRECT WAY TO BRING THE INCOME TO TAX. THUS, THE ISSUE WOULD BOIL DOWN TO FINDING OUT WHAT IS THE CORRECT ELEMENT OF PROFIT EMBEDDED IN BOGUS PURCHASES WHICH THE APPELLANT WOUL D HAVE MADE FROM SUCH UNKNOWN ENTITIES. 7. THEREAFTER, THE LD. CIT(A) QUOTED SEVERAL CASE LAWS. HE PROCEEDED TO DISALLOW 3% ON THE TOTAL PURCHASES BY HOLDING AS UNDER: 6.14 T AKING INTO CONSIDERATION THE ABOVE FACTS, THE ISSUE ARRIVES AT, IS TO WHAT WOUL D BE THE MARGIN, ONE CAN EXPECT WHILE BUYING THE MATERIAL FROM GREY MARKET INSTEAD OF NORMAL COURSE OF BUSINESS FROM REGULAR DEALERS. TWO ASPECTS NEED TO BE TAKEN INTO CONSIDERATION IN SUCH CIRCUMSTANCES. FIRST, THESE DIAMONDS IN THE GREY MARKET ARE ALWAYS CHEAPER THAN THE DIAMONDS SOURCED FROM THE GENUINE DEALER. THIS IS BECAUSE, THE GENUINE DEALER WOULD 5 ITA NO. 6145/MUM/2017 CHARGE HIS INCIDENTAL COST INCLUDING THE WHOLE ADMINISTRATIVE COST WHILE SELLING THE DIAMOND IN THE MARKET, WHEREAS THE PETTY DEALERS IN THE GREY MARKET D O NOT 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. 6.15 HENCE, THE TASK IS TO ASCERTAIN THE ADDITIONAL GP, WHICH THE A PPELLANT MUST HAVE EARNED BY PURCHASING THE DIAMONDS FROM THE GREY MARKET, THAN FROM THE REGULAR DEALER. THIS WOULD BE THE MARGIN, WHICH THE PETTY TRADER IN THE GREY MARKET OFFERS OVER THE GENUINE TRADER. 6.16 CONSIDERING THE ABOVE FACTS OF THE CASE WHICH ARE SIMILAR FOR THE YEAR AND ALSO TAKING INTO ACCOUNT THE SUBMISSIONS OF THE AR, ADDING THE ENTIRE AMOUNT OF PURCHASES FOR THE YEAR BY THE AO, IS NOT BASED ON CORRECT FOOTING. COMING TO THE PROFIT MARGIN IN THE TRADE, THE TASKFORCE GROUP FOR DIAMOND INDUS TRY CONSTITUTED BY THE GOVERNMENT OF INDIA, MINISTRY OF COMMERCE AND INDUSTRY, AFTER CONSIDERING THE BAP SCHEME, RECOMMENDED PRESUMPTIVE TAX FOR NET PROFIT CALCULATED @2% OF TRADING ACTIVITY AND @3% FOR MANUFACTURING ACTIVITY OR @ 2.5% ACROSS THE BOARD. IT IS ALSO ASCERTAINED THAT THE OPERATING 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 THE AOS ARE ALSO ADOPTING 3% ON THE PURCHASES MADE FRO M BHANWARLAL GROUP CONCERNS, AS THE PROFIT ELEMENT EMBEDDED, IN THE SUBSEQUENT ASSESSMENTS FINALIZED ON THE SIMILAR SET OF FACTS. IN VIEW OF THE SAME AND ALSO SINCE THE PROFIT MARGIN IS LESSER IN THIS SECTOR, ADDITION OF THE AMOUNT OF ENTIRE PURCHASES IS N OT REALISTIC. CONSIDERING THE LESSER PROFIT MARGIN IN THIS SECTOR I.E. AROUND 2 TO 3 PERCENT AND THE TAXES SAVED IS AROUND 1% AND ALSO ON PURCHASES MADE FROM PLACES LIKE SURAT, THERE IS NO LEVY OF TAX, I AM OF THE CONSIDERED OPINION THAT IF THE ADDITION IS SUSTAINED TO THE EXTENT OF 3% OF THE PURCHASES MADE AS THE PROFIT ELEMENT EMBEDDED IN SUCH PURCHASES FROM FOUR PARTIES BELONGING TO THE RAJENDRA JAIN AND OTHERS, THE SAME WILL MEET THE ENDS OF JUSTICE. ACCORDINGLY I DIRECT THE AO TO RESTRICT THE ADDITION @3%, ON THE TOTAL PURCHASES OF RS. 5,57,61,124/ - FROM THE FOUR PARTIES AS THE PROFIT ELEMENT EMBEDDED IN SUCH PURCHASES. GROUNDS RAISED ON THIS ISSUE ARE TREATED AS P ARTLY ALLOWED'. 8. AGAINST THE ABOVE ORDER, THE REVENUE IS IN APPEAL BEFORE US. 9. WE HAVE HEARD THE LD. DEPARTMENTAL REPRESENTATIVE (LD. DR FOR SHORT) AND PERUSED THE MATERIAL AVAILABLE ON RECORD. NONE APPEARED FOR AND ON BEHALF OF THE ASSESSEE DESPITE NOTICE SENT . THE NOTICE SENT HAS RETURNED UNSERVED. HENCE, WE PROCEEDED TO ADJUDICATE THE ISSUE BY HEARING THE LD. D R AN D PERUSING THE RECORDS. 10. UPON CAREFUL CONSIDERATION WE FIND THAT THE ASSESSEE HAS PROVIDED THE DOCUMENTARY EVIDENCE FOR THE PURCHASE. ADVERSE INFERENCE HAS BEEN DRAWN AS PER THE A.O. THAT THE ASSESSEE HAS NOT PRODUCED THE D AY - WISE STOCK REGISTER AND BOOK S PRODUCED FOR VERIFICATION ARE NOT IN WORKING CON DITIONS . WHAT IS THE MEANING OF THE OBSERVATION IS 6 ITA NO. 6145/MUM/2017 NOT CLEAR. THE A.O. HAS PRIMARILY RELIED UPON THE FINDINGS IN RAJENDRA JAIN GROUP SEARCH. THE A.O. HAS NOT EVEN ISSUED NOTICE TO THESE PARTIES SAID TO BE BOGUS. WE FIND THAT IN THIS CASE THE SALES HAVE NOT BEEN DOUBTED. IT IS SETTLED LAW THAT WHEN SALES ARE NOT DOUBTED, 100% DISALLOWANCE FOR BOGUS PURCHASE CANNOT BE DONE. THE RATIONALE BEING NO SALES IS POSSIBLE WITHOUT A CTUAL PURCHASES. THIS PROPOSITION IS SUPPORTED FROM THE HON'BLE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF NIKUNJ EXIMP ENTERPRISES (IN WRIT PETITION NO 2860, ORDER DT. 18.6.2014). IN THIS CASE, THE HONBLE HIGH COURT HAS UPHELD 100 % ALLOWANCE FOR T HE PURCHASES SAID TO BE BOGUS WHEN SALES ARE NOT DOUBTED. HOWEVER, IN THAT CASE ALL THE SUPPLIES WERE TO THE GOVERNMENT AGENCY. IN THE PRESENT CASE, THE FACTS OF THE CASE INDICATE THAT ASSESSEE HAS MADE PURCHASE FROM THE GREY MARKET. MAKING PURCHASES THROU GH THE GREY MARKET GIVES THE ASSESSEE SAVINGS ON ACCOUNT OF NON - PAYMENT OF TAX AND OTHERS AT THE EXPENSE OF THE EXCHEQUER. IN SUCH SITUATION, IN OUR CONSIDERED OPINION, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, 3 % DISALLOWANCE OUT OF THE BOGUS PURCHASES MEETS THE END OF JUSTICE , AS REASONED DONE BY THE LD. CIT(A) ABOVE . THE CASE LAW QUOTED BY THE REVENUE IN THE GROUNDS OF APPEAL IS A DISMISSAL OF SLP S I M P L I C I T O R BY THE HON'BLE APEX COURT. IT DOES NOT MEAGRE THE ORDER OF THE HON'BLE APEX COURT WITH THAT. 11. IN THE RESULT, THIS APPEAL BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 8 . 0 2 . 2 0 1 9 S D / - S D / - ( AMARJIT SINGH ) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 2 8 . 0 2 . 2 0 1 9 ROSHANI , SR. PS 7 ITA NO. 6145/MUM/2017 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT - CONCERNED 5. DR, ITAT, MUMBAI 6. GUARD FILE BY ORDER, (DY./ASSTT. REGISTRAR) ITAT, MUMBAI