DCIT Vs Asian Star Company Ltd (ITAT Mumbai)
ITAT Mumbai held that addition towards bogus purchases unsustainable if the alleged bogus purchases show gross profit higher than the regular gross profit.
Facts- This appeal is filed by The Deputy Commissioner Of Income Tax, Central Circle 2 (3, Mumbai (The Learned AO) against the appellate order dated 1/8/2022 passed by the Commissioner Of Income Tax (Appeals) – 48, Mumbai (The Learned CIT – A) wherein the addition made by the learned assessing officer of ₹ 116,624,231/– on account of accommodation entries and consequent commission of ₹ 8,315,211 was deleted.
Conclusion- Hon’ble Bombay High Court in case of Sundram gems Private Limited has categorically held that in case of Diamond trade, carrat wise stock maintenance would be the sufficient compliance; therefore, the assessee cannot be further burdened to show the colour and number of diamonds. When bills of purchases from other parties and from the same parties where part of the purchase consideration is accepted as genuine, no such details are available in the sale bill, we do not find any reason to deviate from the finding of the learned CIT – A.
We find that the learned CIT – A has correctly considered that the purchases from these parties is genuine when part of purchases from the same parties is not disputed, even otherwise, even if it is held that the purchases from these parties are bogus, then also, the proper course would be to determine the profit arising from the purchases by looking at corresponding sales and what amount of gross profit is earned on alleged bogus purchases. If the alleged bogus purchases show gross profit higher than the regular gross profit shown by the assessee, no further addition is required to be made in the hands of the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
01. This appeal is filed by The Deputy Commissioner Of Income Tax, Central Circle 2 (3, Mumbai (The Learned AO) against the appellate order dated 1/8/2022 passed by the Commissioner Of Income Tax (Appeals) – 48, Mumbai (The Learned CIT – A) wherein the addition made by the learned assessing officer of ₹ 116,624,231/– on account of accommodation entries and consequent commission of ₹ 8,315,211 was deleted.
02. The learned assessing officer has raised following grounds of appeal: –
“1. Whether on the facts and circumstances of the case and in law, the learned CIT (A), has erred in deleting the disallowance of the suspected bogus purchases.
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A), has erred in not appreciating the reliance was placed on the charge sheet filed by the Enforcement Directorate regards to bogus purchases made by the assessee from various parties without supply of actual goods.
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A), has erred in deleting the disallowance of commission as alleged to bogus.”
03. Assessee is a company engaged in the business of trading, manufacturing, import and export of diamonds. It filed its return of income on 31/11/2012 declaring a total income of ₹ 378,440,970/–. Assessment under section 143 (3) of the act was made on 30/3/2016 determining total income of the assessee at ₹ 397,039,090.
04. Subsequently information was received From Investigation Directorate surat on 19/3/2019 that assessee company has made bogus payment of ₹ 10.32 crores to M/s R A Distributors private limited and M/S Ram Shyam exports private limited which are paper companies without having any business activities. These companies are engaged in providing accommodation entries or sending bogus foreign remittances to entities based in Hong Kong and UAE in guise of bogus import purchases. Further information was received from investigation directorate Mumbai that an action under section 133A of The Income Tax Act was carried out wherein it was found that assessee has debited expenses in the form of commission from four different parties. The enquiries were conducted and found that all the 4 companies have the same address and there are not available on the addresses mentioned in the income tax return and no business activity is being carried out from those premises. The statement of directors and shareholders were recorded who denied having any knowledge of business activities of these companies. The total commission expenditure incurred by the assessee company is amounting to ₹ 16,630,422/–.
05. Based on the above information, notice under section 148 of the income tax act was issued on 28/3/2019 after recording the reasons and obtaining approval from The Principal Commissioner of Income Tax – central – 1, Mumbai. Accordingly, the reasons were recorded that (i) assessee has made non genuine payment of ₹ 10.32 crores and (ii) bogus commission payment of ₹ 16,630,422/– during the year under consideration and has not disclosed these fact in its return of income or during the assessment proceedings completed under section 143 (3) of the act and therefore the learned assessing officer has reason to believe that income of ₹ 119,830,422 chargeable to tax has escaped assessment for assessment year 2012 – 13 on account of the failure of the assessee to disclose full and true material facts necessary for assessment of its income for the assessment year under consideration.
06. In response to the notice under section 148, the assessee filed its return of income on 4/4/2019 declaring a total income of ₹ 378,440,970/–. Reasons recorded were communicated to the assessee on 10/4/2019. The notice under section 143 (2) was issued to the assessee on 29/8/2019. The assessee filed objection, which were also disposed of on 30/9/2019.
07. The learned assessing officer during the course of assessment proceedings issued a notice on 18/10/2019 to furnish the necessary details with respect to the transactions with RA distributors private limited and Ramshyam Exports private limited.
08. Assessee submitted its reply on 22/11/2019 stating that assessee does not have any transactions with Ramshyam exports private limited. The learned AO held that the assessee has entered into a transaction with level four entities and subsequently the money was transferred to Ram Shyam exports private limited. Thus, it was noted by the learned assessing officer that after the level of four – six layers, Ram Shyam exports private limited ultimately has received the money. Thereafter the learned AO asked the assessee to produce the Ledger account, the invoices and bank statement of all the intermediary companies up to level VI and 1 to 1 mapping of corresponding purchases and sales. Assessee submitted the same. However, the learned that assessing officer did not believe the explanation and noted that that assessee has transacted with entities at level four and six as in the fund trail by the investigation wing Surat. The funds have moved out to entities based in Hong Kong and UAE in the form of remittance received by these entities in the guise of payment for import of diamonds. The customs authorities have found that the bills of entries of bogus and there was no such import made by 12 companies which included Ram Shyam exports private limited. Therefore, the learned assessing officer held that ₹ 6.26 crores of purchases made by the assessee through intermediary companies of ram Shyam exports private limited is bogus and nongenuine.
09. With respect to RA Distributors private limited assessee has purchased diamonds of ₹ 53,892,888. Assessee explained that this is in actual delivery of goods, which were subsequently sold on export. The assessee submitted the Ledger account, purchase invoices, bank statement, corresponding sale invoices and 1 to 1 mapping of goods purchased from this company and subsequently exported. The learned assessing officer was also shown that the transactions are in the ordinary course of business at arm’s-length price with actual delivery of goods. Therefore, same are genuine. The learned AO issued later on 30/10/2019 to RA Distributors private limited under section 133 (6) of the act asking for certain information, the latter returned back with remark of postal authorities of “left”. This was informed to the assessee’s and assessee was directed to produce the party. Assessee on 16/12/2019 stated that the transaction with that party to place eight years back after that there is no transaction with the assessee and assessee is now not in touch with that party. Therefore, assessee is not in a position to give the reasons why the notice is un served. The learned AO rejected the contention of the assessee and stated that assessee has failed to produce the parties as well as the new address of that party therefore no independent verification could have been done and hence the purchases are unproved. Mere filing of purchase invoices, bank statement showing purchase transaction and Ledger account are not conclusive evidence of genuine purchases accordingly he held that total purchases of ₹ 5.38 crores from this party is also bogus.
010. With respect to the commission expenditure of 4 parties which were not taxable at the addresses given in the return of income, assessee submitted that parties are genuine, they have been providing the services of mediation between the buyers and seller, facilitation in smooth transaction, assortment and evaluation of material and timely follow-up for procurement of material and its payment itself. The payments have been made through cheques, commission expenses were also in earlier years are accepted, the admission made by the directors of the company have been subsequently withdrawn. Assessee submitted the copy of Ledger account, copy of the bills invoices debit notes and also the bank statement to show the payment. The learned AO issued notices under section 133 (6) of the act to the various parties calling for information. In response to that notice one party submitted reply, however other three parties did not respond. Accordingly, the learned AO disallowed the payment of commission of ₹ 8,315,201/– to all the 4 parties.
011. Accordingly the assessment order under section 143 (3) read with section 147 of the act was passed on 30/12/2019 making the addition of ₹ 116,624,231 with respect to the purchase transaction and disallowance of commission expenditure of ₹ 8,315,211, determining the total income of the assessee at ₹ 521,978,532/–.
012. Assessee aggrieved with assessment order preferred appeal before the learned CIT – A, who passed a consolidated order on 1/8/2022 four assessment year 2012 – 13, 2014 – 15, 2017 – 18, 2018 – 19 and 2019 – 20. Though the issue in other assessment year from the impugned assessment year i.e. 2012 – 13. Assessee challenged the reopening of the assessment, the learned CIT – A dismissed this ground of appeal. Against the addition of ₹ 116,624,231 on account of bogus purchases, he held that assessee has purchased from nine exempt private limited, MD of show Distributors private limited and with the exempt private limited whether they can be termed as bogus entities whose name A. The fourth or sixth layer only based on said transaction flowing down, crossing 4 – 6 layers or more layers and ultimately lending to the account of Ram Shyam exports private limited company. He found that neither of these companies can be said to be bogus entities providing accommodation entry and not the payment to these three persons/companies will resume the colour of non- genuineness only based on information of investigating wing Surat. He found that assessee has submitted the evidences in the form of Ledger accounts, purchase invoices, bank statements as well as 1 to 1 mapping of corresponding purchases and sales. The AO has acknowledged these evidences but has not rejected them. He further found that Nayan Exim private limited has sold Rs. 5.29 crores, out of which only 2.49 crores doubted by the AO, MD of show Distributors private limited has sold goods worth ₹ 6.97 crores out of which the AO has touched only Rs. 2.19 crores whereas in writ the exempt private limited assessee has purchased 7.40 crores out of which only ₹ 1.58 crores have been held to be bogus. He further held that that there is an allegation that there is a chain of companies alleged by the investigating authorities, however the assessing officer has not provided any evidences which established that these three entities are working in a coordinated fashion of issuing bogus bills in tandem with the other entities which are mentioned, there is no corroborative evidence to show that the entities from whom assessee has purchased material are bogus entities. He further referred to the charge sheet filed by the enforcement directorate on 18/7/2014 and stated that the names of these parties from whom assessee has purchased material did not find any mention. He further finds that the goods purchased from these parties have been sold systematically and quantitative Delhi thereof is given in the tax audit report and quantity perfectly tallies with the books of accounts. Neither any adverse comment, nor any defect has been pointed out by the AO regarding the quantitative details on purchase or sales details. He further stated that the assessee maintained proper books of accounts including purchase register, since register, stock register, Ledger, daybook, bankbook et cetera and no defect or irregularity was found. He further held that as there is no finding of the assessing officer about the sales made by the appellant against the purchases the addition cannot be made. With respect to RA Distributors private limited, the learned CIT further held that with respect to the purchases the assessee has submitted the invoices, bank statement, sales and purchase register, account confirmation of the transactions, which have been entered into before eight years. According to him, the assessee has discharged his onus of proving the genuineness of the purchases. The goods purchased from this entity were also sold and quantity Delhi thereof is given in the tax audit report which is not been rejected by the learned assessing officer. Alternatively, he held that even if the purchases of ₹ 11.66 crores is found to be doubtful there is no scope for any addition in the instant case following the decision of honourable Bombay High Court Muhammad Haji Adam & co (ITA 1004 of 2016) wherein it has been held that the purchases cannot be rejected without disturbing the sales in case of a trader and the additions limited to the extent of bringing the gross profit on purchases at the same rate of other genuine purchases could have only have been made. After that, he found that the gross profit of 6.81% from the above said purchases and the gross profit of the assessee from the audited books of account is 6.73% and the gross profit related to bogus purchases exceeds the gross profit from genuine purchases there is no scope of making further addition. Accordingly, the addition was deleted.
013. With respect to the commission expenditure disallowed of ₹ 8,315,211, the learned CIT – A though notices under section 133 (6) of the act were issued to the four parties but only one party furnish the reply and no information was received from the other three parties, but the assessee has submitted the debit notes, details of tax deducted at source, bank statements and financial statements along with the income tax return of those parties. With respect to the statement of the directors, he held that the statement was recorded under section 132 of the act in earlier research in case of the appellant in the year 2010 and assessment was completed under section 153A of the act wherein all the transaction of the appellant which above-mentioned four companies were held to be genuine. He further noted that in all cases of recipient of the commission, the revenue/assessing officer observed that the commission expenses paid by this concerned were disallowed, commission income received by this concerned from the appellant during the year under consideration are accepted under the same head of income by the same assessing officer. He further produced a chart at paragraph number 10.4.5 of his order showing that the commission income shown in the audited account of these four entities who received the commission are offered. In the scrutiny assessment of all these four recipient who received the commission, the commission income has been accepted. The learned CIT – A further noted that even the proceedings initiated under section 24 of the prohibition of Benami property transaction act 1988 initiated against the recipient of the commission also held that these entities are not bogus. Accordingly he deleted the addition of Rs. 83,15,211/–.
014. Aggrieved with the order of the learned CIT – A the learned assessing officer is in appeal. The only ground is taken by the learned assessing officer is deletion of disallowance of bogus purchases and commission. The learned departmental representative referred to the assessment order with respect to the addition of bogus purchases it was submitted that assessee has failed to produce the party and therefore the addition is made with respect to RA distributors private limited. She further referred to the statement submitted by the assessee showing 1 –to 1 mapping and stated that the purchases are shown in carrats but not in quantity. Therefore, the statement does not have any validity. It was further stated that assessee could not show any proof of delivery. It was further stated that purchase invoices does not have any direction. It was further the claim that there is no identification of the material purchased are sold. Accordingly, the argument of mapping of purchases with the sale is incorrect. It was further claimed that the learned and CIT – A has merely accepted the submission of the assessee and did not carry out any information from the assessee with respect to correlation of purchases with sales. It was further stated that when diamonds are traded there are no document shown with respect to insurance, assortment et cetera packets, transportation details and therefore it is merely a general statement, which does not show any core relation between purchases and sales. With respect to the decision of the honourable Bombay High Court it was submitted that that decision does not help the case of the assessee. Further, the gross profit rate taken by the learned CIT – A is also not correct, as there is no basis for taking gross profit rate of unaccounted purchases.
015. With respect to the commission expenditure, it was submitted that learned assessing officer has clearly doubted the rendition of services by the parties to whom the commission have been paid. The order of the benefit and does not show how the services have been rendered. The particulars of the services are mentioned are very general and therefore the learned and CIT – A has deleted the addition without proper verification. She further relied on the decision of honourable Gujarat High Court in case of Gujarat insecticides 40 Taxman 166. She further relied on the decision of honourable Calcutta High Court in case of CIT versus Swati Bajaj 446 ITR 56 and specifically referred to paragraph number 65 to 69.
016. The learned authorized representative referred to the order passed by the learned CIT – A and submitted that the one-to-one mapping of purchases are shown at page number 123 – 124 of the paper book he submitted that the purchases from RA distributors private limited and also purchases from Nayan exempt private limited, read the exempt private limited and MB offshore private limited with respect to the sale. He submitted that the learned CIT – A has deleted the addition on the merit and on the alternative ground of cross profit. With respect to mapping of the purchases with sale, he referred that the purchases are made in the month of February whereas the sales are also shown by way of an export in the month of March. It was the claim that the purchases have gone into the sale is undisputed and the learned assessing officer has also not questioned the same. This fact has been recorded by the learned CIT appeal. Even otherwise he submitted that the issue is squarely covered by the decision of the honourable Bombay High Court quoted by the learned CIT – A. It was further submitted that the decision of the honourable Calcutta High Court relied upon by the learned departmental representative related to the penny stock companies but same does not apply in the case of the assessee. It was stated that the decision of the honourable Gujarat High Court relied upon by the learned departmental representative is distinguishable on the fact and in that decision there was nothing to suggest that the recipient of such commission payment has rendered any services to the assessee and the onus was on the assessee claiming such deduction to establish that such payments were made for services rendered. It was submitted that it is not only the order of the Benami transaction act but also the order in case of the parties were rendered the services in whose hands the commission income has already been taxed was relied upon by the learned CIT – A. When the income is taxed in the hands of the parties who have rendered the services to the assessee and those parties were also assessed by the same assessing officer, the revenue now cannot contest that the income though offered in the hands of the recipient of the commission as commission income which they have earned on rendition of the services, but the same assessing officer when assessing the case of the assessee who paid the commission says that there is no proof of rendition of the services is not acceptable.
017. On the query by the bench, the assessee submitted the details of the process of the purchases as well as the gross profit working of the assessee. It was submitted that the gross profit margin of the trading segment of the bogus purchases was computed by the learned CIT – A at 6.81% whereas the cross profit margin of the other genuine purchase transaction and its corresponding sale is 5.55% assessee submitted the carrot wise quantitative details of the alleged bogus purchases and the other purchases not disputed. He further showed the invoices of the other parties which are accepted by the learned assessing officer and the invoices of the alleged bogus parties where the description is similar, therefore, he submitted that it is not the practice to mention the number of diamonds involved in the purchases but it is only sold in carrats.
018. It was also the claim of the learned authorized representative that in case of the parties, which are alleged to be bogus, the learned assessing Officer has accepted the purchases from the same parties partly. Accordingly his claim was that it is not the only one reason by which the learned CIT – A is deleted the addition but he has applied several test for allowing the claim of the purchases as genuine. In view of this it was his submission that the order of the learned CIT – A deserves to be upheld.
019. We have carefully considered the rival contention and perused the orders of the lower authorities. Merely there are two editions contested by the revenue. 1 addition on account of bogus purchases of ₹ 11.66 crores on account of accommodation entries, 2 addition on account of commission expenditure of ₹ 8,315,211/–.
020. The learned CIT – A has decided issue of bogus purchases as under:-
“7.2 It is observed that the AO has made the impugned addition after receiving information from Investigation Wing, Surat in the following manner-
2. In connection with the caption subject, it is to clarify that the 12 Indian Companies are ultimate beneficiaries (mentioned as T2.1 to T2.12 in the report) in the case of Afroz Mohamed Hasanfatta, from where remitted to foreign bank accounts. The Custom Authorities found on verification that the bills of entries were bogus and there was no such import made by these 12 companies related with Afroz Mohamed Hasanfatta as mentioned in the bill of entry. On receipt of the confirmation of bogus import, the Enforcement Directorate conducted investigation and filed a charge sheet against some persons on 18.07.2014 related with Afroz Mohamed Hasanfatta. On verification in the case of 12 companies related with Afroz Mohamed Hasanfatta, it appears that the account of the foreign based entities, wherein funds were funded in guise of import payment from Indian based entities. These companies are proved to be bogus and have disguised fund transferred in form of bogus purchases or bogus loan transactions. The identification of source of fund received by the said 12 entities are mentioned in the interim report forwarded by this office.
1. The fund trail was undertaken from the starting point of the bank account of above 12 parties and traced back to the source of deposits entities. The activity for tracing the potential source resulted in analysis from Level 2 to Level 9 which were mentioned in the report forwarded along with its annexure to the jurisdictional AO. Segregation of fund received in the bank account of above mentioned 12 entities/parties was according to beneficiary name/depositor name.
2. As mentioned in the report, transaction mentioned at Level 1 are foreign outward remittances made by the 12 companies/entities related with Afroz Mohamed Hasanfatta from their bank accounts. The transactions mentioned at Level 2 are funds received by these 12 entities from various Indian Entities. Transactions mentioned at Level 3 are fund received by the entities mentioned at Level 2. Similar downwards transactions are mentioned in subsequent level. 3. So far as transactions related with M/s. Asian Star Company. Ltd. is concerned, the following amount is shown to have been received by a company out of the 12 entities as mentioned in the report:
