Case Law Details

Case Name : ITO Vs Vimalchand Manikchand Jain (ITAT Surat)
Appeal Number : ITA No. 117, 118 & 119/Srt/2020
Date of Judgement/Order : 25/07/2022
Related Assessment Year : 2011-12

ITO Vs Vimalchand Manikchand Jain (ITAT Surat)

Held that if the parties are failed to prove the genuineness of entire transaction of such tainted purchases, the revenue authorities are not entitled to bring the entire transaction to tax. Authorities can tax the income component in such tainted transactions

Facts-

Based on information, AO carried search action on Rajendra Jain. In his statement, Rajendra Jain confirmed that he was managing various bogus entries for providing accommodation of entry without delivery of actual goods. AO noted that assessee was one of the beneficiaries of such purchases. Accordingly, notice u/s 148 was issued.

On the basis of modus operandi of practice of Rajendra Jain, AO treated 25% of relevant purchase as bogus and disallowed the same.
Assessee challenged the validity of reopening and disallowance of purchases. CIT(A) confirmed the validity of reopening and disallowance of purchase was restricted to 5%.

Being aggrieved, both revenue and assessee has preferred the present appeal.

Conclusion-

We are of the considered view, even if the parties are failed to prove the genuineness of entire transaction of such tainted purchases, the revenue authorities are not entitled to bring the entire transaction to tax, rather to tax the income component in such tainted transactions to avoid the possibility of revenue leakage. It is a settled law that in case of disputed purchases shown from such hawala dealer’s only profit element embedded in such transaction is to be disallowed, to avoid the possibility of revenue leakage and not the substantial part of transaction.

Held that the disallowance restricted by ld CIT(A) is on little lower side, therefore, in order to avoid the possibility of Revenue leakage, disallowance of 6%, instead of 5% would meet the end of justice.

FULL TEXT OF THE ORDER OF ITAT SURAT

1. This group of six (6) appeals/cross objections are directed against the common order of learned Commissioner of Income Tax (Appeals)-3, Surat (in short, the ld. CIT(A) dated 20/02/2020 for the Assessment years (AY) 2011-12 to 2013-14.

2. In all the appeals, the facts are almost common, the revenue as well as the assessee has raised common grounds of appeal/cross objection in different years. The additions in all the appeals were made on account of bogus purchases shown from Rajendra Jain and his group, who were declared as entry provider by the Income Tax Department. Therefore, with the consent of parties, all the appeals and cross objections were clubbed and heard together and are decided by the consolidated order to avoid the conflicting decision. For appreciation of fact, the facts in ITA No. 117/Srt/2020 for the A.Y. 2011-12 are treated as a lead case. The revenue in its appeal has raised following grounds of appeal:

“1 Whether, on facts and in law the ld. CIT(A) was justified in partly allowing the appeal of the assessee and estimating disallowance at @ 5% inspite of the fact that the AO has made the addition of Rs. 4,20,34,971/- being @ 25% of the total bogus purchases, referring to the decision of Hon’ble ITAT in the case of M/s Vijay Proteins Ltd. (55 TTJ 76), wherein 25% of the unverifiable purchases were held to be reasonable amount of disallowance of expenditure?

2. Whether, on the facts and in law, the ld. CIT(A) was justified in relying upon the case of M/s Mayank Diamonds Pvt. Ltd. which is different and distinct from the facts of the assessee’s case?

3. On the basis of the facts and circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer.

3. The assessee in his cross objection being C.O. No. 08/Srt/2020 has raised following grounds:

“1. On the facts and circumstances of the case and law, the CIT(A) erred in confirming reassessment proceedings by issuing notice under Section 148 which is bad in law and require to be quashed.

2. On the facts and circumstances of the case and law, the CIT(A) erred in confirming disallowance of Rs. 84,06,994/- being 5% of suspicious purchases amount Rs. 16,81,39,885/- by treating the same as non-genuine, which has not been claimed as expenses in Profit & Loss Account in view of the fact that the respondent acted as commission agent on behalf of principals and commission income on such transactions have already been credited to P&L Account.

3. On the facts and circumstances of the case and law, the CIT(A) failed to consider that assessment order was passed without furnishing the material, evidenced and opportunity of cross examination to the respondent. This is gross violation of principal of Audi Alteram Partem rendering the order to be bad in law liable to be quashed.

4. Without prejudice to above, the ld. CIT(A) has erred in assessing the impugned bogus purchases and without having considered the sales made to the same parties amounting to Rs. 16,81,39,885/-. Hence, the addition cannot be made solely for purchases since the ld. CIT(A) by implication held that sales to the same parties are genuine.

5. Respondent craves leave to add further grounds or to amend or later the existing grounds of appeal on or before the date of hearing.”

4. Brief facts of the case are that the assessee is proprietor of ‘Vimal Gems’ a firm is engaged in the business purchase and sales of diamond for and behalf of importers and exporters. The assessee filed his return of income for AY.2011-12 on 30/09/2011 declaring total income of Rs.1,88,880/-. Subsequently, on receipt of information from Investigation Wing, Mumbai the case of assessee was reopened under section 147. The assessing officer received information that a search action was carried out on Rajendra Jain, Sanjay Chaudhary and Dharmi Chand Jain group on 03/10/2013, who were providing bogus entries of sale purchase of diamond, Long Term Capital Gain (LTCG) and loss etc. The statement of Rajendra Jain was recorded by Investigation Wing under section 132 of the Income Tax Act, 1961 (in short, the Act). The said Rajendra Jain confirmed that he is managing various bogus entries for providing accommodation of entry without delivery of actual goods. On the basis of such information, the Assessing Officer noted that assessee is one of the beneficiaries of purchases shown from M/s AVI and Arihant Exports managed by Rajendra Jain, Sanjay Chaudhary and Dharmi Chand Jain Group. On the basis of such information of investigation Group that the assessee has shown purchases of Rs.16,81,39,885/- crore from M/s AVI and Arihant Exports managed by Rajendra Jain, the Assessing Officer recorded the reasons for reopening under section 147 of the Act. The notice under section 148 dated 24/03/2018 was issued and the same was served upon the assessee after taking prior approval of Principal Commissioner-3 Surat.

5. In response to the notice under section 148 the assessee has filed his ITR on 28/08/2018. The Assessee requested for reasons of reopening which were duly furnished to him through letter dated 08/11/2018. Various statutory notices were issued and served upon the assessee. The assessee vide letter dated 24/11/2018 has raised objection on reopening of the case and the department has disposed off the objection raised by the assessee in speaking order and was communicated to assessee vide assessing officers letter dated 03/12/2018.

6. During the re-assessment, the Assessing officer issued show cause notice on 10/12/2018. The contents of show cause notice is recorded in para 6.3 of the assessment order. In the show cause notice, the Assessing Officer asked the assessee to explain as to why the purchases shown from M/s AVI and Arihant Exports, which is managed by Sanjay Chaudhary of Rajinder Jain Group, should not be treated as non-genuine. The assessee filed his reply dated 13/12/2018. The content of reply is recorded in para no.7 of the assessment order. In the reply, assessee stated that he has already filed purchase register, sales register, and confirmation from the parties, affidavit, agency contract note and bank account details. It clearly proves that the assessee carried out business transaction with them. The assessee also stated that he has acted as commission agent on behalf of principal M/s AVI and Arihant Exports. He also stated that the assessee had purchased rough and polished diamonds of Rs. 11,82,33,674/-from Avi Exports. As regards Arihant Exports, the assessee stated that he made purchase of Rs. 4,99,06,211/-. The assessee also stated that the assessee had not purchased goods for himself. The assessee is getting commission from his principal AVI and Arihant Exports @ .05% on purchases and sales transactions on behalf of principal. These facts are evident from the ledger account of AVI and Arihant Exports which are already submitted on 24/11/2018.

7. The reply furnished by assessee was not accepted by Assessing Officer. The Assessing Officer held that during the course of search and post-search inquiry and Rajendra Jain and Sanjay Chaudhary admitted the fact that they were engaged in paper transactions only without any physical stock of the goods. This concern issued bills/give accommodation entries for a commission to various parties, who normally purchase against sales in the account. On the basis of modus operandi of practice of Rajendra Jain and its Group, the Assessing Officer treated the 25% of purchase from AVI and Arihant Exports as bogus and disallowed the same in the assessment order dated 29/12/2018 passed under section 143(3) read with section 147 of the Act.

8. On appeal before ld. CIT(A), the assessee filed detail written submissions. The submission of the assessee is recorded in para no.4 of order of ld. CIT (A). The assessee challenged the validity of reopening as well as the disallowance of the purchases. The ld. CIT(A) confirmed the validity of reopening by following the decision of Gujarat High Court in Peas Industrial Engineers Pvt Ltd (2016) ( 73 taxmann.com 185 Guj), Puspak Bullian (P) Ltd (2017) 85 taxmann.com84 Guj and Aaspas Multimedia Ltd (2017) 83 taxmann.com 82 Guj, wherein in all cases it was held by Hon’ble Jurisdictional High Court that when the assessing officer received information that form investigation wing that transaction entered by assessee of accommodation entry is a sufficient information on which basis reasonable belief can be framed. Further the disallowance of purchases was restricted to 5% of disputed purchased by following the order of his predecessor in case of Kaushal R Jain(PAN: ADVP 61588B) for AY 2007-08 dated 10.10.2019, which is extracted in the impugned order.

9. Being aggrieved by the order of the ld. CIT(A), both the parties i.e. the Revenue and the assessee have filed their respective appeal as well as cross objection before us. The Revenue has also challenged the deleting of 95% addition and in restricting to the extent of 5% only. On the other the assessee has filed its Cross objection in restricting the addition to the extent of 5%.

10. We have heard the submission of ld. Commissioner of Income-Tax –Departmental representative (ld. CIT-DR) for Revenue and the ld. Authorised representative (ld.AR) of the assessee. The ld. CIT- DR for the Revenue supported the order of the Assessing Officer. The ld. CIT-DR submits that Investigation Wing of Revenue made full fledge inquiry in case of Rajendra Jain and Sanjay Chaudhary group. The Rajendra Jain and Sanjay Chaudhary during the search operation as well as in post-search operation admitted that they were engaged in providing accommodation entries that actual book of accounts. No stock diamonds were found during the search on Rajendra Jain and Sanjay Chaudhary. The ld. CIT-DR further submits that Rajendra Jain and Sanjay Chaudhary while filing return of income has offered that their income as commission agent (entry provider). Further, the appeal of those entries provider Rajendra Jain and Sanjay Chaudhary are pending before the Tribunal and the Hon’ble Bench may take judicial notice of all those facts while deciding the present appeal. Disallowances restricted by ld. CIT(A) @5% is on a very lower side.

11. On the other hand, the learned AR for the assessee submits the profit margin in the diamond industry is very less and the disallowances restricted by the ld. CIT(A) is on higher side. The assessee was merely a commission agent and received commission @.50%. The learned AR submits that the Assessing Officer have not disputed the sales of assessee. The Assessing Officer made disallowance only on the basis of report of investigation Wing without making any independent investigation. No finding on the documentary evidences files by assessee was given by Assessing Officer. In case the disallowance restricted by learned CIT(A) to the extent of 5% is affirmed the assessee may be allowed relief to the extent of gross profit declared by assessee.

12. In support of grounds raised in Cross Objection, the ld AR for the assessee submits that the reopening is not valid and is based on third party information. The reasons recorded are vague and reopening on such vague reasons is void-ab initio. The assessee has filed following documents on record.

(1) Copy of set of return of income for AY 2011-12,

(2) Chart of sales and purchase made,

(3) Ledger account of assessee in the books of AVI Export,

(4) Extract of purchases & sales register of AVI Export with assessee,

(5) Ledger account of assessee from AVI Export,

(6) Stock register of AVI Export,

(7) Bank account showing the transaction with assessee.

(8) Chart of sales and purchase made from Arihant Export, 10

(9) Ledger account of assessee in the books of Arihant Export,

(10) Extract of purchases & sales register of Arihant Export assessee,

(11) Ledger account of assessee from Arihant Export,

(12) Stock register of Arihant Export,

(13) Notice under section 148 with reasons of reopening,

(14) Objection against reopening dated 22.11.2018,

(15) Reply to show cause notice dated 13.12,2018,

(16) Copy of statement dated 05.12.2013 recorded by search team, and letter dated 01.04.2014 written by Rajinder Jain and Surrender jain admitting them as entry provider,

(17) Reply before CIT(A) and the decision in case of Anshuman Ramdayalji Kumawat (ITA No.1974/Ahd/2016.

Profit element to be taxed in case of bogus purchases

13. We have considered the rival submissions of both the parties and have gone through the order of authorities below. We find that Assessing Officer while making addition on account of disallowance of 25% of purchases shown from AVI Export and Arihant Exports; solely relied upon the report of Investigation Wing without giving any finding on the documentary evidence furnished by assessee or making any independent investigation. The assessing officer has not disputed the sales of the assessee. No sale is possible without purchases. The statement of accounts of the assessee was not rejected by the assessing officer. The assessing officer disallowed 25% of purchases shown from AVI Export and Arihant Export by following the decision of Tribunal in Vijay Proteins (55 TTJ 76). On appeal before ld CIT(A) the assessee challenged the validity of reopening as well as the disallowance of the purchases. The ld. CIT(A) confirmed the validity of reopening by following the decision of Gujarat High Court in Peas Industrial Engineers Pvt Ltd (2016) ( 73 taxmann.com 185 Guj), Puspak Bullian (P) Ltd (2017) 85 taxmann.com84 Guj and Aaspas Multimedia Ltd (2017) 83 taxmann.com 82 Guj, wherein in all cases it was held by Hon’ble Jurisdictional High Court that when the assessing officer received information that form investigation wing that transaction entered by assessee of accommodation entry is a sufficient information on which basis reasonable belief can be framed. Further the disallowance of purchases was restricted to 5% of disputed. The ld CIT(A) followed the order of his predecessor in case of Kaushal R Jain(PAN: ADVP 61588B) for AY 2007-08 dated 10.10.2019, which is extracted in the impugned order.

14. We are of the considered view, even if the parties are failed to prove the genuineness of entire transaction of such tainted purchases, the revenue authorities are not entitled to bring the entire transaction to tax, rather to tax the income component in such tainted transactions to avoid the possibility of revenue leakage. The assessee has shown purchases from AVI Export and Arihant Exports which is managed by Rajendra Jain and his group. This fact is not disputed that the assessee has not entered in the transaction with the firms managed by Rajinder Jain and his group. It is a known fact that Rajendra Jain group and his associates were engaged in providing accommodation entry without actual delivery of goods. No stock of any goods/ diamonds was found at the time of search on this group. The limited issue for our consideration is whether the disallowance of alleged bogus purchases/impugned bogus purchases @ 5% are reasonable or justified. It is a settled law that in case of disputed purchases shown from such hawala dealer’s only profit element embedded in such transaction is to be disallowed, to avoid the possibility of revenue leakage and not the substantial part of transaction. The assessing officer disallowed purchase of 25% on the basis of decision in Vijay Proteins (supra). In our view the facts in Vijay Proteins are quite differ from the fact of case in hand. In said case the assessee was manufacturing here the assessee is trader, though the assessee is claiming commission agent. The ld CIT(A) restricted the disallowance @ 5% by following the decision of his predecessor in case of other assessee.

15. Before us, except claiming that the assesse is commissions agent and has received only commission from principal. No document of agency is filed. No other document to substantiate that the principal deducted TDS before making payment of sale is filed on record. Even otherwise this plea is seems to have been raised to claim the sympathy that income of commission agent is very limited. In our view the disallowance restricted by ld CIT(A) is on little lower side,therefore, in order to avoid the possibility of Revenue leakage, disallowance of 6%, instead of 5% would meet the end of justice. Similar view was adopted by this combination, wherein the beneficiary of such purchases has shown very meagre NP. Therefore, we modify the order of ld. CIT(A) and restrict the addition of impugned/bogus purchases to the extent of 6%.

16. So far as grounds No. 1 of CO, which relates to validity of reopening is concern, we concur with the finding of the ld CIT(A) that at the time of reopening in matter of beneficiary of bogus entry provider mere information from the investigation wing is sufficient as has been held by Gujarat High Court in Peas Industrial Engineers Pvt Ltd (supra), Pushpak Bullion (P) Ltd (supra) and Aaspas Multimedia Ltd (supra). In the result, the grounds of appeal raised by the revenue are partly allowed and the grounds raised in Cross Objection by assessee are dismissed.

17. In the result, the grounds of appeal raised by the Revenue are partly allowed resultantly, the C.O. filed by the assessee is dismissed.

18. Now we take the Revenue’s appeal in ITA Nos. 118 & 119/Srt/2020 for the A.Y. 2012-13 & 2013-14 as well as the cross objections filed by the assessee in C.O. No. 09 & 10/Srt/2020. In all these appeals and cross objections, the grounds, facts and submissions of both the parties are identical to the grounds, facts and submissions made in ITA No. 117/Srt/2020 for the A.Y. 2011-12. Considering the fact that we have partly allowed the appeal of Revenue in A.Y. 2011-12 and dismissed the cross objection raised by assessee. Therefore, considering the totality of facts and circumstances of the case, the finding given by us in the former para i.e. in ITA No. 117/Srt/2020 for the A.Y. 2011-12 shall apply mutatis mutandis in these appeals also.

16. In the result, all the appeals of the Revenue are partly allowed and the cross objections by assessee are dismissed.

Order pronounced on 25/07/2022 in open court and result was placed on notice board.

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