PCIT Vs Rakesh Kailashchand Jain (Gujarat High Court)
Summary: The Gujarat High Court, in Principal Commissioner of Income-tax-1 Vs Rakesh Kailashchand Jain, dismissed two connected appeals filed by the Revenue under Section 260A of the Income-tax Act, 1961, challenging the common order dated 21 October 2022 passed by the Income Tax Appellate Tribunal, Surat. The dispute concerned alleged bogus diamond purchases made through entities associated with the Rajendra Jain Group, which had allegedly provided non-genuine purchase bills, unsecured loans and accommodation entries to various parties. The Revenue questioned the Tribunal’s decision to restrict the addition to 6% of the disputed purchases instead of sustaining the Assessing Officer’s 100% disallowance. In Tax Appeal No. 480 of 2023, the substantial question reproduced in the order referred to purchases of ₹7,43,20,222. The Revenue also challenged the Tribunal’s reliance on Mayank Diamonds Pvt. Ltd., contending that the High Court had directed an addition at 5% of total turnover rather than 6% of the disputed purchases.
The assessee was an individual engaged in diamond trading. Information received by the DGIT (Investigation), Mumbai, indicated that a search conducted on the Rajendra Jain Group on 3 October 2013 had revealed alleged activities involving non-genuine purchase bills, unsecured loans and accommodation entries. Scrutiny assessments under Section 143(3) treated the purchases as unexplained accommodation entries. The Commissioner of Income-tax (Appeals), Surat, partly allowed the assessee’s appeals and confirmed an addition at 5% of the impugned purchases. Both sides thereafter approached the Tribunal. The assessee relied on bills, vouchers, stock registers and banking-channel transactions, while the Revenue maintained that the purchases were bogus accommodation entries and that the entire purchase amount should be disallowed. By its common order dated 21 October 2022, the Tribunal partly allowed the Revenue’s appeals but restricted the disallowance to 6% of the impugned purchases.
The High Court also took note of its coordinate Bench decision dated 16 January 2023 in Principal Commissioner of Income-tax-1, Surat Vs M/s. Surya Impex, Tax Appeal No. 674 of 2022. That matter involved alleged accommodation entries provided by the Bhanwarlal Jain Group, the same group implicated in the transactions under consideration. The Court noted that the questions of law in Surya Impex were of a similar nature and arose from comparable factual circumstances, and that the Court had decided the issue in favour of the assessee. This earlier decision, together with the ruling in Pankaj A. Chaudhary, supported the Tribunal’s approach of determining the taxable profit element rather than automatically disallowing the entire value of purchases. Related TaxGuru discussion of Surya Impex and Mayank Diamonds.
Cases Discussed
- Principal Commissioner of Income-tax v. Pankaj J. Chaudhary — Tax Appeal No. 617 of 2022; order dated 07/03/2023 (Gujarat High Court). Relied upon through the Tribunal’s coordinate Bench decision. The High Court declined to interfere with the Tribunal’s fact-based restriction of the addition to 6% after considering the turnover, gross-profit and net-profit figures.
- Mayank Diamonds Pvt. Ltd. — (2014) 11 TMI 812 (Gujarat High Court). Considered by the Tribunal while determining the appropriate profit element in disputed purchases. The Revenue argued that the decision required an addition at 5% of total turnover. The Tribunal compared the gross-profit figures and factual circumstances and adopted 6% of the disputed purchases in the case before it. The link is to a related TaxGuru discussion, not a verified dedicated judgment page.
- Principal Commissioner of Income-tax-1, Surat v. M/s. Surya Impex — Tax Appeal No. 674 of 2022; order dated 16/01/2023 (Gujarat High Court). Relied upon as a coordinate Bench decision involving similar accommodation-entry allegations concerning the Bhanwarlal Jain Group. The Court noted that comparable questions had been decided in favour of the assessee. The link is to a related TaxGuru discussion, not a verified dedicated judgment page.
FULL TEXT OF THE ORDER OF GUJARAT HIGH COURT
1. Mr. Darshan Gandhi, learned advocate is permitted to file his appearance on behalf of the respondent.
2. These appeals arise out of the common order dated 21.10.2022 passed by the Income Tax Appellate Tribunal, Surat (for short ‘the Tribunal’) in the respective appeals.
3. Since the substantial questions of law in these appeals are the same, except the variance in the amounts in the concerned questions of law, the substantial question of law as framed in Tax Appeal No. 480 of 2023 is taken up for consideration.
(i) Whether on the facts and in the circumstances of the case and in law, the Ld. Tribunal was justified in estimating the addition in respect of bogus purchases @ 6% of such purchases as against disallowance made by the Assessing Officer @100% of such purchases amounting to Rs.7,43,20,222/- ignoring that these purchases are sham transactions fabricated through bogus paper concerns of Rajendra Jain Group entities which were engaged in providing accommodation entries?
(ii) Whether on the facts and in the circumstances of the case and in law, the Ld. Tribunal was justified in estimating the addition in respect of bogus purchases @ 6% of such purchases by relying on the decision of Hon’ble Gujarat High Court in the case of Mayank Diamonds Pvt. Ltd. [2014(11) TMI 812] as against the direction of the Hon’ble High Court in that case to make addition at the rate of 5% of the total turnover?
2. Facts in brief indicate that in this case, the assessee is an individual engaged in the business of trading activity of diamonds. The assessee had filed his return of income. Information was received by the DGIT (Investigation), Mumbai that during the search proceedings in the case of Rajendra Jain group on 03.10.2013, it was gathered that the Rajendra Jain group was engaged in the business of issuing non genuine purchase bills, unsecured loans and accommodation entries to various parties.
2.1 In each case, a scrutiny assessment under Section 143(3) of the Act was carried out determining a figure of total assessed income on account of unexplained purchases being accommodation entries. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A), Surat. The appeals were partly allowed whereby the CIT(A) confirmed 5% of the impugned purchase. Aggrieved by the decision of the CIT(A), Surat, the Revenue preferred appeals before the Tribunal, Surat which by order dated 21.10.2022 partly allowed the appeals of the Revenue and restricted the disallowance at the rate of 6% of the impugned purchase.
3. Perusal of the order of the Tribunal would indicate that having noticed that the grievance of the assessees in these appeals is that they had submitted bills and vouchers, stock registers and the transactions were through banking channels and therefore addition at the rate of 5% sustained by the CIT(A) should be deleted whereas the main grievance of the Revenue was that since all the purchases were bogus and in the nature of accommodation entry, the addition made by the Assessing Officer should be sustained. The Tribunal noted that the issue under consideration was squarely covered by the judgment of the coordinate Bench in the case of Pankaj A. Chaudhary in ITA No. 1152/AHD/2017 dated 27.09.2021 wherein the coordinate Bench at Surat had sustained the addition at the rate of 6% of bogus purchases.
4. When the appeals were taken up for hearing, learned advocate appearing for the Revenue submitted that the order of the Tribunal in the case of Pankaj K. Chaudhary was carried in appeal before this Court and this Court by an oral order dated 07.03.2023 in Tax Appeal No. 617 of 2022 held as under:
“5.3 Considering the facts and relevant aspect, the Income Tax Appellate Tribunal partially allowed the appeal of the assessee to further reduce the disallowance at 6%. In so concluding, the Tribunal observed in paragraph No.21 as under,
“…….during the financial year under consideration the assessee has shown total turnover of Rs. 66,09,62,458/-. The assessee has shown Gross Profit @ 78% and net Profit @ 0.02% (page 11 of paper Book). The assessee while filing the return of income has declared taxable income of Rs. 1,81,840/- only. We are conscious of the facts that dispute before us is only with regard of the disputed purchases of Rs. 4.34 Crore, which was shown to have purchased from the entity managed by Bhanwarlal Jain Group. During the search action on Bhanwarlal Jain no stock of goods/material was found to the investigation party. Bhanwarlal Jain while filing return of income has offered commission income (entry provider). Before us, the Ld. CIT-DR for the revenue vehemently submitted that the ratio of decision of Hon’ble Gujarat High Court in Mayank Diamond Private Limited (supra) is directly applicable on the facts of the present case. We find that in Mayank Diamonds the Hon’ble High Court restricted the additions to 5% of GP. We have seen that in Mayank Diamonds P Ltd (supra), the assessee had declared GP @ 1.03% on turnover of Rs 1.86 Crore. The disputed transaction in the said case was Rs. 1.68 Crore. However, in the present case the assessee has declared the GP @ 0.78%. It is settled law that under Income-tax, the tax authorities are not entitled to tax the entire transaction, but only the income component of the disputed transaction, to prevent the possibility of revenue leakage. Therefore, considering overall facts and circumstances of the present case, we are of the view that disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage. In the result the ground No. 2 of appeal raised by the assessee is partly allowed and the grounds of appeal raised by revenue are dismissed.”
6. The view taken and the conclusion arrived at by the appellant Tribunal are based on material before it and after analysing the facts and figure available before it. When the Tribunal has thought it fit to reduce the disallowance at 6% from 12.5%, the Tribunal had before it the facts which were duly analysed by it. No interference is called for in the said conclusion and findings of the Tribunal in the present appeal by this court.
6.1 The another weighing aspect is that the Tax Appeal No. 674 of 2022 in Principal Commissioner of Income Tax 1, Surat vs. M/s. Surya Impex which came to be decided by the co-ordinate Bench on 16.1.2023 dealt with the very issue of accommodation entries provided by Bhanwarlal Jain Group. The group involved in the said case is the same group who is saddled with allegations of providing accommodation entry to the assesse. In M/s. Surya Impex (supra) the court held in favour of the assessee. The questions of law involved in the said case were of the same nature and were in the context of similar facts involving the same group.”
5. For the aforesaid reasons, therefore, in view of the oral order passed by this Court in an identical appeal, the substantial question of law proposed by the appellants stands answered. No question of law, much less substantial question of law, arises in the facts of the present appeals. The appeals lack merit and are dismissed accordingly. No costs.
