Case Law Details
PCIT 1 Vs Surya Impex (Gujarat High Court)
The Gujarat High Court considered an appeal filed by the Revenue challenging the Income Tax Appellate Tribunal (ITAT), Surat order dated 28.03.2022 relating to Assessment Year 2009-10. The appeal arose from reassessment proceedings in which additions had been made on account of alleged bogus purchases.
Background of the Case
The assessee filed its return of income on 29.09.2009, declaring a total income of Rs.1,17,752, and the original assessment under scrutiny was completed on 28.12.2010, determining total income at Rs.2,16,900. Subsequently, based on information received from the Investigation Wing, Mumbai, the assessment was reopened under Section 147. During reassessment under Sections 143(3) and 147, the Assessing Officer (AO) made an addition of Rs.8,10,56,469 on account of alleged bogus purchases.
Assessing Officer’s Findings
The AO alleged that the assessee had received accommodation entries from entities controlled by the Bhanwarlal Jain Group, particularly M/s. Rose Gems (P) Ltd., through bogus purchase transactions amounting to approximately Rs.8.10 crore. Treating the purchases as fictitious, the AO disallowed 100% of the alleged bogus purchases and added the entire amount to the assessee’s income.
Order of the CIT(A)
The assessee challenged the reassessment before the Commissioner of Income Tax (Appeals). The CIT(A) did not sustain the entire addition but restricted the disallowance to 12.5% of the disputed purchases, amounting to Rs.1,01,32,060, relying on judicial precedents.
Tribunal’s Decision
The assessee appealed before the ITAT. The Tribunal partly allowed the appeal and further reduced the addition from 12.5% to 6% of the disputed purchases. It held that the tax authorities were not entitled to tax the entire purchase amount but only the income component embedded in the disputed transactions so as to prevent possible revenue leakage.
Revenue’s Contentions Before the High Court
The Revenue contended that the Tribunal erred in estimating the addition at 6% instead of sustaining the AO’s 100% disallowance, despite the allegation that the purchases were sham transactions facilitated through accommodation entry providers. It also relied on earlier judicial decisions, including N.K. Industries Ltd., to argue that the entire bogus purchases should have been added to income.
Findings of the CIT(A) Considered by the High Court
The High Court noted that the CIT(A) had recorded several factual findings while restricting the addition:
- The assessee was not provided an opportunity to cross-examine the persons whose statements were relied upon.
- The AO had not conducted any independent inquiry and had primarily relied on the Investigation Wing’s report.
- The AO had not examined the assessee’s books of account, stock registers or other documentary evidence.
- The assessee had produced purchase invoices, bank statements evidencing payments, day-to-day stock registers, trading accounts, and confirmations from suppliers.
- The stock registers reflected nil opening and closing stock, indicating that purchases made during the year had been sold during the same year. Treating sales as genuine while treating corresponding purchases as bogus would result in negative stock.
- The CIT(A) also noted that, in similar accommodation entry cases involving the same group, Assessing Officers and appellate authorities had generally restricted disallowances to 3% to 5% of the disputed purchases.
Tribunal’s Reasoning
The High Court referred to the Tribunal’s findings that:
- The AO had relied solely on third-party investigation reports without supplying those materials or permitting cross-examination.
- The assessee had produced detailed documentary evidence, including purchase details, PAN, addresses, invoices, stock registers and sales records, on which the AO made no adverse comments.
- The AO had not rejected the books of account, and the sales were never disputed.
- Since sales could not take place without corresponding purchases, the Tribunal concluded that only the profit element embedded in disputed purchases should be taxed.
- Considering that the profit margin in the diamond industry ranged between 5% and 7%, and following a consistent approach adopted in similar cases relating to the Bhanwarlal Jain Group, the Tribunal restricted the addition to 6% of the disputed purchases.
High Court’s Decision
The High Court observed that the AO had not rejected the assessee’s books of account and that both the CIT(A) and the Tribunal had concurrently concluded that only an estimated addition was justified. It also noted that the assessee had not been provided copies of the statements relied upon or an opportunity for cross-examination, although the authorities could have remanded the matter on that ground. However, considering the documentary evidence produced by the assessee, the findings of the appellate authorities, and the consistent approach adopted in similar cases involving the same group, the Court found no reason to interfere with the Tribunal’s decision restricting the addition to 6%.
The Court further distinguished the decision in N.K. Industries Pvt. Ltd. on facts and referred to its earlier decision in Mayank Diamonds Pvt. Ltd., where a 5% gross profit rate had been accepted instead of a substantially higher estimate. It held that no substantial question of law arose for consideration and accordingly dismissed the Revenue’s appeal.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Aggrieved by the order dated 28.03.2022 passed by the Income Tax Appellate Tribunal, Surat in ITA No.1378/AHD/2017 for the assessment year 2009-2010. The appellant is before this Court seeking to challenge this action by way of present appeal.
2. The assessee filed a return of income on 29.09.2009 declaring his total income of Rs.1,17,752/-. Original assessment was completed on scrutiny on 28.12.2010 determining the total income at Rs.2,16,900/-.
3. The information was received from Investing Wing, Mumbai and his case was reopened under Section 147 of the Act. Subsequently, the assessment under Section 143(3) and 147 had been concluded on 25.02.2015, by making addition of Rs.8,10,56,469/- on account of the bogus purchases.
4. It is alleged that the assessee firm received accommodation entries from Shri Bhanwarlal Jain Group. Shri Bhanwarlal Jain and his son Shri Rajesh Bhanwarlal Jain provided accommodation entries to various parties in the form unsecured loan and bogus purchases. When accommodation entries in the form of bogus purchases to the tune of Rs.8.10 crores (rounded of) is alleged against the assessee from M/s. Rose Gems (P) Ltd., one of the entities controlled by Shri Bhanwarlal Jain. The Assessing Officer on the ground that assessee had accommodation entry decided to do to disallow the fictitious expenditure claimed by the assessee in the form of bogus purchases. While finalising the assessment to 100% of the alleged bogus purchases claimed, was disallowed and added to the income of the assessee.
5. Aggrieved assessee had challenged the same before the Commissioner of Income Tax (Appeals), where the CIT (Appeals) restricted the addition to 12.5% of the disputed purchases of Rs.8.10 crores amounting to Rs.1,01,32,060/- by relying on various judicial pronouncements.
6. The assessee preferred an appeal before the Income Tax Appellate Tribunal (‘ITAT’ hereinafter), which partly allowed the appeal of the assessee restricting the addition to 6% of the disputed purchases by holding that the Tax Authority not entitled to tax entire transaction, but only income component of the disputed transactions, to prevent the possibility of the revenue leakage.
7. Aggrieved Authority has preferred this appeal, raising following substantial question of law for determination of this Court.
(1) Whether, on the facts and in the circumstances of the case and in law, the learned Tribunal was justified in estimating the addition in respect of bogus purchases at the rate of 6% of such purchases as against disallowance made by the A.O. at the rate of 100% of such purchases amounting to Rs.8,10,56,469/- ignoring the fact that these purchases are sham transactions fabricated through bogus paper concerns of Shri Bhanwarlal Jain Group which were engaged in providing accommodation entries ?
(2) Whether, on the facts and in the circumstances of the case and in law, the learned Tribunal was justified in estimating the addition in respect of bogus purchases at the rate of 6% of such purchases even though in the case of Mayank Diamonds Pvt. Ltd. [2014 (11) TMI 812] the Hon’ble High Court has directed to make addition at the rate of 5% of the total turnover ?
8. We have heard learned Senior Standing Counsel Mrs.Kalpanak Raval assisted by Mr.Karan Sanghani, learned advocate for the appellant. It is vehemently urged that though this Court in Tax Appeal No.200 of 2003 in case of Mayank Diamonds Pvt. Ltd. Versus I.T. Officer, the gross profit rate of 5% is construed to be an average rate of profit in the said industry and therefore, the Court had added the 5% gross profit rate. At the same time, N.K. Industries Ltd. versus Deputy Commissioner of Income Tax, 292 CTR 354 (Guj.), where this Court has held that the Tribunal should have made addition of total purchases. The relevant paragraph 6 reads as under :
“6. The Tribunal in the case of Vijay Proteins Ltd. (supra) has observed that it would be just and proper to direct the Assessing Officer to restrict the addition in respect of the undisclosed income relating to the purchases to 25% of the total purchases. The said decision was confirmed by this Court as well. On consideration of the matter, we find that the facts of the present case are identical to those of M/s. Indian Woolen Carpet Factory (supra) or Vijay Proteins Ltd. (supra). In the present case, the Tribunal has categorically observed that the assessee had dhown bogus purchases amounting to Rs.2,92,93,288/-and taxing only 25% of these bogus claim goes against the principles of Sections 68 and 69C of the Income Tax Act. The entire purchases shown on the basis of fictitious invoices have been debited in the trading account since the transaction has been found to be bogus. The Tribunal having once come to a categorical finding that the amount of Rs.2,92,93,288/- represented alleged purchases from bogus suppliers it was not incumbent on it to restrict the disallowance to only Rs.73,23,322/-.
6.1 In the case of NR Paper & Boards Ltd. (supra), this Court has discussed the issue as to whether after making of block assessment, regular assessment is barred or prohibited by law. This Court has held that there would be no overlapping in the nature of assessment made under this Chapter of undisclosed income and the regular assessment made u/w.143(3). However, if the said decision is read in contest of questions raised in the present appeal, it cannot be reads as having held that even if the material found during the course of search expose the falsity of the entries made in the regular books of accounts, the consequent concealed income cannot be assessed as undisclosed income in the block assessment under Chapter XIV-B. The said decision shall therefore not be applicable on the facts and circumstances of the present case. The Tribunal is justified in holding the same against the assessee and in favour of the revenue.”
9. We have given it the due consideration and also noticed that a detailed order passed by the CIT (Appeals), where it has noticed two aspects; (i) that the opportunity to cross-examination was not provided, and (ii) there had been no independent inquiries made by the Assessing Officer. It relied on the report of the Investigation Wing, Mumbai. The CIT (Appeals) was of the opinion that the Assessing Officer has not discussed any of the details, books of accounts, documents, etc.; and that he is not even examined or found any defects in the stock registers, books of accounts, as also other documents. The appellant has also produced day-to-day stock registers, details of purchases and sales, the trading account and the stock registers has shown that there is NIL opening and closing stock, which means that the purchases made during the year are all sold during the year. Also reasoned out that if the sales are treated as genuine and the impugned purchases are treated as bogus then the stock will go into negative to the extent of impugned purchases. The day-to-day stock register shows the receipts and issue of diamonds and stock in hand along with name of party to whom purchase and sale is made. The stock register is both for rough diamonds and polished diamonds. The statement of Shri Bhanwarlal Jain and the report of the Investigation Wing was much relied upon. As against that, the CIT (Appeals) noticed the copies of purchase bills, copy of bank statements showing the payment, day to day stock registers showing incoming and outgoing diamonds and the daily stock tally, confirmation of the party from whom the said purchases were made. Thus, having noticed that all payments were made from bank accounts and all these evidences had not been discussed by the Assessing Officer, with no word as to why these documentary evidences were not acceptable by the Assessing Officer, the CIT (Appeals) chose to follow the cases of beneficiaries of accommodation entries of said Bhanwarlal Group cases, where the Assessing Officer (ACIT / ITOs) have not made 100% disallowances, but the disallowances ranging from 3% to 5% of the impugned purchases. The relevant observations made by the CIT (Appeals), Surat in relation to the same in paragraph 0.7 to 0.9 as under :
“0.7 The AR has brough to my notice that on identical facts, there is a binding decision of Hon’ble Gujarat High Court in the case of M/s. Mayank Diamond Pvt. Ltd., reported in 2014 (11) TMI 812 (Guj) in Tax Appeal No.200 of 2003 dated 07.11.2014. In that case, the appellant was engaged in trading of polished diamonds. The learned Assessing Officer came to the conclusion that purchases amounting to Rs.1,86,36,447/-are bogus and disallowed the same. The learned CIT (Appeals) dismissed the appeal, however, the Hon’ble ITAT gave partial relief to the assessee by directing the learned Assessing Officer to make addition @12.5%. On appeal, the Hon’ble High Court of Gujarat has held that ‘….Gross Profit rate of 5% is the average rate of the industry and we think it fit to make addition on account of % gross profit rate. …’
0.8 Also, the AR brought to my notice the decision of the Commissioner of Income Tax, Mahidharpura, (AT 2007-08) dated 21.03.2016, wherein on identical facts and after considering the above legal positions, the learned CIT (Appeals), has taken a view that the decision of the Hon’ble High Court of Gujarat in the case of M/s. Mayank Diamond P Ltd., (supra) is binding and hence, confirmed the disallowance of 5% of the impugned purchases.
0.9 During the appeal proceedings, the AR has produced before me the copies of assessments done by many learned Aos at Mumbai, in the case of beneficiaries of accommodation entries of the same Bhanwarlal Group cases. In cases identical to the appellant, the learned AO (ACIT / ITOs) have not made 100% disallowances even if they have held that purchases are bogus. They have made disallowances ranging from 3% to 5% of the impugned purchases. A chart showing the details of those assessments is annexed as Annexure ‘A’. Similarly, the learned Commissioners of Income Tax (Appeals) in Mumbai have confirmed disallowance @ 3% in different cases. A table showing details is annexed as Annexure ‘B’. The annexures may be treated as integral part of this order. From the above, it is clear that the learned Aos and learned CsIT (Appeals) are of the view that the beneficiaries of accommodation entries have made a benefit of 3% to 5% of the impugned purchases.”
10. This is dealt with again in extenso by the Tribunal as under :
“19. We find that the Assessing Officer made addition solely on the basis of third party information / report of investigation wing, Mumbai. The report of investigation, Mumbai was not provided to the assessee. During the assessment, the assessee demanded the copy of statement of Bhanwarlal Jain and his cross examination, copy of such statement was not provided to the assessee. The Assessing Offcier, nowhere rejected the demand of assessee. We find that the assessee filed detailed evidence consisting details of purchase, PAN and addresses of parties, purchase invoice, stock register, day to day register and sales register. No comment was made by Assessing Officer on the documentary evidence furnished by assessee. The sales of assessee was not disputed. No sale is possible in absence of purchase. The Assessing Officer estimated addition on account of purchases without rejecting books of accounts of assessee. The learned CIT(A) restricted to addition to the extent of 12.5% of the total purchased shown by taking view that the assessee shown G.P of less than 1.15%. In our view the disallowance restricted by Ld. CIT(A) is on higher side. The profit margine in the industry is 5% to 7%. It is settled law in case of disputed purchases shown from such hawala dealers on the profit element embedded to avoid the possibility of revenue leakage is to be disallowed. No doubt made the assessee has shown extremely low G.P i.e. 1.15% only, yet the disallowance at rate of 12.5% is on higher side. This combination is similar cases, wherein the purchases are shown from Bhanwarlal Jain for providing accommodation entry, have restricted or enhanced the addition to the extent of 6% of impugned or disputed purchases. Therefore, taking the consistent the disallowance of purchases in the present case is also restricted to 6% of the disputed purchases. In the result, the grounds of appeal raised by assessee is partly allowed.”
11. Having found that the Assessing Officer has chosen not to reject the books of accounts of the assessee and had made the estimated additions of the pieces of the purchases. Both, the CIT (Appeals) and the Tribunal, have concurrently and rightly held to make the additions, which the CIT (Appeals) had done @ 12.5% of the impugned purchases, which have been reduced and restricted to 6%. It will not be out of place to make a mention that the Assessing Officer’s inquiry was based on the report of the Investigation Wing, Mumbai, the copy of the statement of Shri Bhanwarlal Jain and others had been asked for by the assessee, which also had not been provided nor was he allowed a cross-examination. This, of course, could have been a reason for the Authority concerned to restore the matter back to the Assessing Officer, however, noticing the elaborate evidence consisting the details of purchase, PAN, etc., coupled with the Assessing Officer and the CIT (Appeals) dealing with the case of Shri Bhanwarlal Jain and others involved therein, if addition directed of 6% of the disputed purchases by noting that the profit margin in the said industry is 5% to 7% without even going by the estimation of the possible profit margin in the industry, suffice to note that in all cases relating to Shri Bhanwarlal Jain, both, the Assessing Officer and the CIT (Appeals), Mumbai, have chosen to make addition @ 3% to 5% of the bogus purchases. That view of the matter, no purpose is going to be served in interference. There are concurrent findings with sound reasons. We have also given an opportunity on 03.01.2023. An explicit order noting that there is a reference of group of cases of Shri Bhanwarlal Jain and others. The Revenue is not in a position to bring before this Court as to what had happened to all those cases that whether they travelled to the High Court or to the Hon’ble Apex Court.
12. This Court in Tax Appeal No.200 of 2003 in case of Mayank Diamonds Pvt. Ltd. (supra) was required to decide the estimation of the gross profit @ 12.5% against the gross profit of 1.03% shown by the assessee. The Court allowed the gross profit rate of 5% holding that 12.5% is drastically higher. In N.K. Industries Pvt. Ltd., (supra), where the Court had considered the addition of entire amount on the ground that the fictitious purchases is a factually different than what was already held at M/s. Mayank Diamonds Pvt. Ltd., (supra). In the other cases of Shri Bhanwarlal Jain also, addition rates are 3% to 5% where no further challenge possibly is there or it has not been processed further. This Court finds that no question of law, much less any substantial question of law arises for consideration of this Court.
13. Thus, since this Tax Appeal does not have any substantial question of law involved and hence, the same is dismissed.
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