PCIT 1 Vs Pankaj K Choudhary (Gujarat High Court)
Summary: The Gujarat High Court considered the Revenue’s appeal under Section 260A of the Income-tax Act, 1961, challenging the Income Tax Appellate Tribunal’s decision to restrict an addition arising from alleged bogus diamond purchases to 6% of the disputed purchase value. The assessee, Pankaj K Choudhary, was engaged in importing, exporting and trading polished and rough diamonds. For assessment year 2007-08, the original assessment under Section 143(3) determined income at Rs. 6,50,490. Subsequently, information received from the Investigation Wing, Mumbai, led to reopening of the assessment. The reassessment determined total income at Rs. 4,40,50,830 after an addition of Rs. 4,34,00,343 in respect of alleged accommodation entries.
The Revenue alleged that purchases from Parvati Exports, Mahalaxmi Gems Pvt. Ltd. and Mayur Exports were non-genuine because these entities were connected with the Bhanwarlal Jain group, which was allegedly engaged in providing accommodation entries. The Assessing Officer disallowed the entire disputed purchase amount, maintaining that payments through banking channels did not by themselves establish genuine transactions. The assessee had furnished confirmations, purchase bills, bank statements, stock records and income-tax return documents. On appeal, the Commissioner of Income Tax (Appeals) concluded that the assessee had obtained bills from the disputed suppliers while making purchases from other sources and that disallowance of the entire purchase amount was unjustified. The addition was restricted to 12.5%, amounting to Rs. 54,25,040.
Both the Revenue and the assessee appealed before the Tribunal. Considering the turnover, gross profit, available evidence and the circumstances surrounding the alleged accommodation entries, the Tribunal further restricted the addition to 6% of the disputed purchases. It referred to the Gujarat High Court’s decision in Mayank Diamonds Pvt. Ltd. and observed that, in the circumstances, the income component of the disputed transactions rather than the entire purchase value was required to be brought to tax. The Tribunal considered the 6% estimate sufficient to address the possibility of revenue leakage.
Before the High Court, the Revenue argued that the Tribunal had wrongly reduced the addition from 100% to 6%, despite the alleged involvement of concerns controlled by the Bhanwarlal Jain group. It also questioned the Tribunal’s application of Mayank Diamonds Pvt. Ltd. The High Court found that the Tribunal’s conclusion was based on material on record and an analysis of the relevant facts and figures. The Court declined to interfere with the factual estimation adopted by the Tribunal.
The High Court also referred to Principal Commissioner of Income Tax 1, Surat v. Surya Impex, decided by a coordinate Bench on 16 January 2023, concerning similar accommodation-entry allegations involving the same Bhanwarlal Jain group. Since the substantial questions proposed by the Revenue were already answered and the Tribunal’s findings did not warrant interference, the High Court held that no substantial question of law arose. Accordingly, the Revenue’s tax appeal was summarily dismissed.
Cases Discussed
- Principal Commissioner of Income Tax 1, Surat v. M/s. Surya Impex (Gujarat High Court; Tax Appeal No. 674 of 2022; 16/01/2023): The High Court relied on this coordinate Bench decision involving accommodation entries allegedly provided by the same Bhanwarlal Jain group. The Court noted that the questions of law and factual circumstances were similar and that the earlier decision had been rendered in favour of the assessee. This supported dismissal of the Revenue’s appeal.
- Mayank Diamonds Pvt. Ltd. (Gujarat High Court; 2014 (11) TMI 812): The Tribunal considered this decision while estimating the addition attributable to disputed purchases. It examined the gross profit and disputed transactions in that case and distinguished the assessee’s profit figures before determining that a 6% addition would be sufficient in the present circumstances.
FULL TEXT OF THE GUJARAT HIGH COURT ORDER
Heard learned advocate Mr. Nikunt Raval with learned advocate Ms. Kalpana Raval for the appellant.
2. The present Tax Appeal filed under section 260A of the Income Tax Act, 1961, arises out of order dated 27.9.2021 of the Income Tax Appellate Tribunal, Surat in Income Tax Appeal No. 1152 of 2017 in respect of Assessment Year 2007-2008.
3. The facts are that the assessee is engaged in the business of import and export and trading of cut of polished and ruff diamonds. The assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act) was completed against the assessee on 10.3.2009. Total income was determined to be Rs. 6,50,490/-. The assessment was subsequently reopened on the basis of the information received from the investigation wing, Mumbai. In the assessment undertaken under section 143(3) read with section 147 of the Act, the income was determined to be Rs. 4,40,50,830/-, which was after making addition of Rs. 4,34,00,343/-
3.1 The addition was made on the ground that certain accommodation entries were made by the assesse. The accommodation entries were stated to have been provided by bogus companies of Bhanvarlala Jain group. The companies named Parvati Exports, Mahalaxmi Gems Pvt. Ltd. and Mayur Exports, from whom the alleged bogus purchases were made by the assessee, were according to the department non-genuine entities, not engaged in the actual business.
3.2 While the Assessing Officer made addition as above, in the appeal preferred by the assessee, the Commissioner of Income Tax (Appeals), passed order dated 20.2.2017 restricting the addition to 12.5% of the purchases amounting to Rs. 54,25,040/-.
3.3 It appears that cross appeals came to be preferred before the Income Tax Appellate Tribunal against the decision of the appellate Commissioner. The Income Tax Officer preferred Appeal No. 1152 of 2017, whereas the assessee preferred Appeal No. 1379 of 2017.
3.4 The Tribunal restricted the addition to 6% of the disputed purchases shown by the assessee.
3.5 Seeking to call in question the aforesaid decision of the Tribunal, the department proposed the following questions, claiming to be arising as substantial questions of law,
“(i) Whether, on the facts and in the circumstances of the case and in law, the 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 AO at the rate of 100% of such purchases amounting to Rs. 4,34,00,343/- ignoring the fact that these purchases are sham transactions fabricated through bogus paper concerns of Bhanwarlal Jain Group companies which were engaged in providing accommodation entries?
(ii) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in estimating the addition in respect of bogus purchases at the rate of 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.
4. Learned advocate for the appellant submitted that the said Jain group was engaged in providing accommodation entries, bogus loan and purchases and such purchases were utilised by the assessee and bogus purchases were made through benami concerns. It was submitted that no stock was found at the search Bhanvarlal Jain group. The assessee had shown very meager profit of 0.78% of turnover and net profit at 0.02% of turnover. It was submitted that whatever nature of transactions were there, they were the transactions with the entities, which were controlled by the said Bhanvarlal Jain group.
5. The Assessing Officer noticed the contentions of the assessee that confirmation, purchase bills, bank statement, stock register, copy of ITR were already filed. The Assessing Officer was, however, of the view that transactions were bogus and merely that it routed through the banking channel, was not sufficient to conclude that they were the genuine transactions. The contention of the assessee that he had not dealt with the Bhanvarlal Jain group was also negatived. The appellate Commissioner took the view that disallowance was required to be sustained at 12.5% of the purchase. The Assessing Officer was directed accordingly to workout disallowance. In para 10.6, the Commissioner of Income Tax (Appeals), recorded thus,
“As held above, it is clear that the appellants have made purchases from elsewhere, but have obtained bills from the impugned suppliers. From the Trading & P & L account and Audit report it can be seen that the GP rate shown by appellant is 1.85% oil sales. In such circumstances the disallowance of 100% of purchases cannot be justified. Also as held above, the appellant would nave indulged in above practice in order to get some benefit. And it is this benefit derived by the appellant that need to be taxed. What would be the magnitude of benefit derived by the appellant is the mute question. In the appellant’s case, it is seen that GP rate shown is 0.78%”.
5.1 The final view was expressed in para 10.10,
“Following the above judicial pronouncements and views taken by Ld. CIT(A) & AOS in a few identical cases. In a couple of identical cases, where the GP shown by the appellants is more than 5%, I have confirmed the disallowance of the impugned purchases to the extent of 5% of the impugned purchases. However in the instant case the appellant is showing measly G.P. of only 0.78% on turnover. In view of this I am of the considered opinion that disallowance of 12.5% of the impugned purchases would be reasonable and would meet the ends of justice. Hence, the disallowance is restricted to 12.5% of the impugned purchases for the assessment year in appeal.”
5.2 The disallowance at 100% was made in the assessment order for the year under consideration to the tune of Rs. 4,34,00,343/-, which was reduced to 12.5% at Rs. 54,25,040/-. Thereafter, the issue was delat with by the appellate Tribunal. The appellate Tribunal endorsed to the view taken by the appellate Commissioner. It was observed that Assessing Officer failed to consider the evidence furnished by the assessee.
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.
7. For all the above reasons, substantial questions of law proposed by the appellant in this appeal stands already answered. No question of law much less any substantial questions of law arise in the facts of the present case. No other substantial question of law arises. The appeal is meritless. It is summarily dismissed.
