TaxTMI 
TaxTMI 
2011 (6) TMI 802
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....t Member For the Appellant : Subhash Chandra For the Respondent : Vijay Goyal ORDER R.K. Gupta, Judicial Member - This is an appeal by Department and a cross-objection by assessee against the order of learned CIT(A) relating to asst. yr. 2007-08. 2. The Department is objecting in deleting the addition of Rs. 3,61,65,070 made on account of unaccounted investment in purchase from unaccounted income. In second ground the Department has taken an alternate ground that reducing the trading addition of Rs. 3,46,21,220 to Rs. 2,55,465. In last, the Department is objecting in deleting the addition of Rs. 2,68,00,000 made by AO on account of unexplained credit. 3. The brief facts of the case are that Shri Mahendra Kumar Agarwal is proprietor of M/s Mohan Lal Mahendra Kumar (MMJ), Jaipur, M/s Mohan Lal Mahendra Kumar Jewellers (MMJ), Noida, M/s Mohan Lal Mahendra Kumar Jewellers (MMJ), Delhi, and M/s A.M. Exports, Jaipur. Shri Mahendra Kumar is also partner of M/s Mohan & Co. and M/s K.M. Exports. 4. The assessee has shown purchases of Rs. 3,61,65,070 from M/s M.D.R. Jewellers. In response to the summons issued under s. 131 to M/s M.D.R. Jewellers, partner Shri Kewal Ghan....
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....erved that sales of Rs. 14,95,45,500 were made to M/s K.M. Exports, a partnership concern where one of the partners is assessee. No books of accounts of M/s K.M. Exports were produced. The genuineness of the sales remained unproved. 7. The AO relying on the decision of Tribunal Jaipur Bench in the case of Shrikrishian Malpani has held that bogus purchases is defect in maintenance of books of accounts. The AO therefore invoked provisions of s. 145(3) and rejected books of accounts. Thus, the rejection of books of accounts was made on account of unverifiable purchases from M/s M.D.R. Jewellers, cash sales made to various concerns including some doubtful entity and on account of non-production of books of accounts of K.M. Exports to whom substantial sales were made. 8. After rejecting books of accounts the AO made addition of entire purchases of Rs. 3,61,65,070 made from M/s M.D.R. Jewellers as undisclosed investment made out of undisclosed income. 9. Detailed written submissions were filed before learned CIT(A) which are discussed by learned CIT(A) at pp. 3 to 7 of his order as under : "The AO held that the appellant made purchases from M/s M.D.R. Jewellers but sinc....
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....f it is assumed that M/s Amit Agency is a bogus billing firm then who purchased the goods from unknown source-the appellant or M/s M.D.R. Jewellers. The AO in the case of M.D.R. Jewellers has held that purchases from Amit Agency made by M.D.R. Jewellers were from unknown source and therefore, the observation of the AO that purchases of the appellant from M.D.R. Jewellers are from unknown source is wrong and perverse and without any basis. There is no evidence to prove that payment made to M/s M.D.R. Jewellers through account payee cheque has come back to the appellant in cash. The suspicion however strong cannot take place of proof as held by Hon'ble Supreme Court in the case of Umacharan Shaw & Bros. v. CIT[1959] 37 ITR 271 (SC). With this it was submitted that purchases from M/s M.D.R. Jewellers cannot be held as bogus and no addition in this regard can be made. On rejection of books of accounts it was submitted that purchases, sales and expenses are fully vouched and stock register has been maintained. Except purchases from M/s M.D.R. Jewellers all other purchases have been accepted. Cash sales are supported by cash memos and the rate mentioned is verifiable from ma....
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....Agency, Rajesh Sales Corpn. has shown to have made purchases of Rs. 8,68,11,610 from M/s Amit Agency but major payments were adjusted by passing journal entries. 3. M.D.R. Jewellers made payments of Rs. 1,00,47,500 to M/s K.M. Exports without any consideration which is against business prudence. The account was closed by passing journal entries. 4. By not producing the books of accounts of M/s Amit Agency and M/s K.M. Exports both Shri Kewal Chand and Shri Mahendra Kumar are thwarting the Department's efforts to unearth the true state of affairs. 5. Shri Atal Behari Agarwal proprietor of Amit Agency was not produced. 6. Shri Kewal Chand admitted that he transferred the same stock to the appellant which he purchased from Amit Agency. 7. M/s Amit Agency has not shown any considerable income except income under s. 44AF on sale of plywood products. 8. No actual payments by M/s Rajesh Sales Corpn. and M.D.R. Jewellers to M/s Amit Agency. 9. In the books of account of M/s M.D.R. Jewellers certain adjustment entries do not appear which were appearing in the appellant's books. That these entries were made with the conse....
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.... The appellant has no obligation to prove source of source. Further there cannot be double addition for one and same thing. The AO of M/s M.D.R. Jewellers has made addition for unverifiable purchases made from Amit Agency and others. The sales of M.D.R. Jewellers were treated as genuine and therefore, appellant's purchases cannot be held non-genuine. Further the AO has not made any addition in respect of transaction with K.M. Exports as no purchases were made. Production or non-production of books of accounts of K.M. Exports has no relevance to the addition made by the AO. The rejection of books of accounts does not give unfettered powers to the AO to make the addition arbitrarily. The AO has made addition of 100 per cent of the bogus purchases more so when the sales of the assessee have been accepted. In the case of Mohan & Co. and M/s Agrasen Jewellers the addition was made @ 25 per cent of the alleged bogus purchases whereas in the case of Mahendra Kumar Agarwal addition was made for 100 per cent of the purchases. The appellant has not made any purchases from M/s Amit Agency and therefore is not concerned with the alleged dubious transactions in th....
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....at pp. 8 to 10 as under : "Contention of the Authorised Representative is considered. The appellant deals in precious and semi-precious stones, gold jewellery and bullions. The appellant has made purchases of Rs. 3,61,65,070 from M/s M.D.R. Jewellers which were in turn purchased by M.D.R. Jewellers from M/s Amit Agency. The AO has held that M/s Amit Agency is nothing but a paper concern created for issuing accommodation bills. That summons issued to M/s Amit Agency remained unserved. Shri Atal Behari proprietor, of the concern gave his statement on oath during survey conducted by the BCTT Wing on M/s Amit Agency. In his statement he has admitted that no actual sales or purchases are done in the concern and only accommodation bills are issued. In its return of income no income from business of precious/semi-precious stones and bullion has been shown. Thus, the AO could establish successfully that M/s Amit Agency is a bogus concern. However, in the present case no purchases have been made from M/s Amit Agency but from M/s M.D.R. Jewellers. The AO has not held that M/s M.D.R. Jewellers is a bogus concern. In the case of M/s M.D.R. Jewellers its AO made trading addition after ....
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.... to be made it should be made in the hands of Rajesh Sales Corpn. or M.D.R. Jewellers, The appellant has not made any purchases from M/s K.M. Exports and therefore if books of accounts of K.M. Exports were not produced, it cannot effect the trading results as it has no relevance with the purchases made by the appellant from M.D.R. Jewellers. Simply because Shri Kewal Chand Jain and Shri Mahendra Kumar are partners in M/s K.M. Exports it does not establish that M/s Amit Agency is controlled by these two persons. M/s K.M. Exports is also an income-tax assessee. If books of accounts are not maintained by that concern appropriate action may be taken by the AO of K.M. Exports but it should not affect the book results of the appellant. Further the AO's observation that Shri Mahendra Kumar Agarwal benefited by the adjustment entries has also been proved wrong by reversing the entry in the books of accounts and making payment of Rs. 2,68,00,000 by the appellant to M/s Rajesh Sales Corpn. by account payee cheque in March, 2010. Undisputedly M/s Amit Agency is a bogus concern and transactions made through such bogus concern may not be genuine. But as the prevailing prac....
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....discussed the issue in respect to rejection of books of account and held that the AO was right in rejecting the books of account. Following findings were given by learned CIT(A) in respect to this issue : "Regarding rejection of books of accounts the appellant has shown sales to M/s Amit Agency and M/s Silver & Silver. Both these concerns have been established as bogus concerns and therefore sales are not fully verifiable. Further sales of Rs. 14,95,45,500 to M/s K.M. Exports remained unverifiable as no books of accounts of K.M. Exports were produced. Further cash sales to different parties were also not amenable to verification. Thus, on account of unverifiable sales the rejection of books of accounts is hereby confirmed. Second ground of appeal is decided against the appellant." 12. The learned CIT-Departmental Representative who appeared on behalf of the Department first placed reliance on the order of AO. Some portion of the order of the AO was read also. Reliance was placed on the decision of Hon'ble Supreme Court in case of Kachwala Gems v. Jt. CIT[2007] 288 ITR 10/158 Taxman 71. Regarding reducing the trading addition which was made by the AO, alternatively i....
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....ble as no books of account of M/s K.M. Exports were produced. If by any reason no books of account of other party were produced then no adverse inference can be drawn against assessee as sales were made through proper banking channel. 15. In respect to sales made to M/s Amit Agency and M/s Silver & Silver, the learned CIT(A) has drawn adverse inference that these two parties have been established as bogus concerns, therefore sales made to these parties by assessee are also not verifiable. There is no reason to hold that the sales made by assessee are not verifiable as assessee has made sales through proper banking channel. Books of account have been produced and no defect was found in maintaining the books of account by the assessee. Onus lay upon assessee has been duly discharged. It was further submitted that this is not the case of the Department that M/s Amit Agency and M/s Silver & Silver have given any statement against the assessee that they have not made purchases from the assessee. It was further submitted that learned CIT(A) has also drawn adverse inference that assessee has made cash sales to different parties which were also not amenable to verification. It was furth....
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....rejecting the books of account and making the addition in the gross profit as mentioned above. This order was passed by the AO on 31st Dec., 2009. In the case in hand, the assessment was also completed on 31st Dec., 2009. Therefore, it cannot be said that the facts in case of M/s M.D.R. Jewellers were not ascertainable and were not verifiable. Simultaneously assessments were going on in both the cases i.e. in case of assessee and in case of M/s M.D.R. Jewellers. In view of the above facts and circumstances, we are of the considered view that the AO was not justified in holding that the assessee has used its own unaccounted money for showing the purchases made from M/s M.D.R. Jewellers. 17. Though the learned Departmental Representative has placed reliance on the order of AO but how the order of the learned CIT(A) is defective could not be explained. The learned CIT(A) has given a categorical finding after giving opportunity to the AO who was present during the appellate proceedings then only has concluded that no addition can be made on account of investment from unaccounted money. In view of these facts and circumstances, we hold that learned CIT(A) was justified in deleting th....
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....reased from Rs. 42.9 crores to 63.8 crores. The profit rate on sale of bullion is better with 0.66 per cent as compared to 0.14 per cent declared in the immediate preceding year. However, in the jewellery the GP rate has come down from 1.92 per cent to 0.76 per cent. In MMJ, Delhi the declared GP rate of 0.50 per cent on sales of Rs. 4.02 crores is definitely lower than 11 per cent on sales of Rs. 30.7 lacs. The reason was that in the immediate preceding year mainly it was sale of jewellery. The sale of bullion was only of Rs. 85,000. This year the position is reversed as there is no sale of jewellery and entire sale is of bullion only. 22. The AO has applied GP rate arbitrarily without any basis. In MMJ, Jaipur the AO applied GP rate of 3 per cent though in the immediate preceding year it was only 0.95 per cent. The sales have increased by 25 per cent as compared to last year. Last year sale of jewellery was Rs. 3.9 crores which has come down to Rs. 98 lacs. The margin in gold jewellery is always higher than the bullion. In the case of MMJ, Delhi last year the assessee was dealing almost in gold jewellery only and therefore GP rate was 11 per cent. This year there is no sale of....
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....were produced before learned CIT(A) which were audited. All the purchase vouchers and sale bills were produced. Purchases made from M/s M.D.R. Jewellers were verifiable as partner of M/s M.D.R. Jewellers appeared before the AO for necessary test check. Books of accounts of M/s M.D.R. Jewellers were produced before the AO. The sales made by M/s M.D.R. Jewellers have been accepted by its AO while passing order under s. 143(3), copy of the same is placed on record. Therefore, in our considered view, no adverse inference can be drawn in respect to purchases made from M/s M.D.R. Jewellers. Thereafter, the learned CIT(A) observed that M/s Amit Agency and M/s Silver & Silver have been established as bogus firms, therefore, sales made to these parties remained unverifiable. In our considered view, these observations of learned CIT (A) are not correct as assessee has made sales from its stock which has not been disturbed, sales made by assessee have been accepted. If other parties are bogus then it cannot be said that the genuine party who made sales to these parties are also bogus. Further, the learned CIT(A) has drawn inference that books of account of M/s K.M. Exports were not produced a....
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....has not pointed out any instance of sale at lower price. The resulted figure of the formula i.e. (sales + closing stock) minus (opening stock + purchases + direct expenses) is gross profit. When all the components of the formula are verifiable then the resulted figure cannot be doubted. Hon'ble Rajasthan High Court in the case of Malani Ramjivan Jagannath v. Asstt. CIT [2007] 207 CTR (Raj) 19 : [2009] 316 ITR 120 (Raj) has held as under : '10. In the face of these undisputed facts and circumstances, the Tribunal in our opinion could not have interfered with the order of CIT(A). In doing so, it had ignored all admitted facts noticed by us above, in the face of which there was no occasion for the AO to have resorted to estimate method. The gross profit is primarily result of excess of sales over purchases, opening stock, closing stock, the unsold stock at two terminals is only balancing factor. Admittedly out of this four components of trading results, there could not have been any ground for the Revenue to arrive at different result. So far as closing stock is concerned, inventories of existing stock were not found to be incorrect by the AO i.e. that positi....
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....6 M/s Mohan Lal Mahendra Kumar Jewellers, Delhi Year Turnover Gross profit % of GP 2005-06 10,90,51,036 2,35,081 0.22 2006-07 30,74,808 3,38,309 11.00 2007-08 4,02,21,839 2,02,513 0.50 M/s Mohan Lal Mahendra Kumar Jewellers, Noida Year Turnover Gross profit % of GP 2005-06 2006-07 59,52,77,454 2,34,402 0.04 2007-08 1,97,89,70,379 18,83,315 0.10 M/s A.M. Exports, Jaipur Year Turnover Gross profit % of GP 2005-06 2,11,28,22,537 42,85,764 0.20 2006-07 4,98,16,10,475 35,84,906 0.07 2007-08 27,58,67,117 5,52,401 0.20 (a) MMJ Noida and A.M. Exports (gross profit better than last year and no defect in books of account except cash sales and sales to M/s K.M. Exports by MMJ, Noida). The declared gross profit for the current year is better than previous year in the case of MMJ, Noida and A.M. Exports. The current year's gro....
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....ithin a period of time. In such case the assessee has to take delivery of goods from such supplier at fixed rate decided. Therefore in such types of transactions there may be a loss to the assessee, because the assessee has to deliver goods to the buyer at market price which may be lower than the purchase cost of the assessee. Therefore submission is that in such type of business GP rate cannot be compared with that of previous year or even firm to firm. However the assessee is maintaining all the vouchers for purchase and sales and also for expenses. The assessee is also maintaining day-to-day stock register. Therefore looking to all such reasons and maintenance of complete books and vouchers, trading result declared by M/s MMJ, Jaipur may be accepted. The learned AO has not rebutted the facts mentioned in the above explanation but acted arbitrarily and made wild estimated of 3 per cent gross profit without assigning any logic or tangible reason. (c) MMJ, Delhi (gross profit lower than last year and no defect in books of account except cash sales, turnover increased and shifted from jewellery to bullion) It is submitted that during the year the assessee ....
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....ed by assessee is lower, reason for the same has been explained which could not be controverted by the Department by bringing any positive material. No defects in the books of account were found. All the purchases and sales are vouched. Therefore, we are of the considered view that there was no justification in making trading addition and sustaining partly at the end of the learned CIT(A). 27. The learned CIT-Departmental Representative has placed reliance on the decision of Hon'ble Supreme Court in the case of Kachwala Gems (supra). The Hon'ble Supreme Court in this case has observed "that it is well-settled that in a best judgment assessment there is also certain degree of guesswork. No doubt, the authority should try to make a fair estimate of the income even in best judgment assessment and should not act totally arbitrarily, but there is necessarily some amount of guesswork involved in a best judgment assessment. In this case the AO resorted to best judgment of the assessee on the following grounds : The assessee has not maintained the quantitative details/stock register. There was no evidence to verify the closing stock, the genuineness of purchase was not proved....
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.... of M/s Amit Agency in the books of assessee it was seen by the AO that there was an opening credit balance of Rs. 2,17,96,260 against which corresponding sales of the same amount were made and there was no outstanding balance. Considering the fact that journal entry was passed by assessee by debiting the account of M/s Rajesh Sales Corpn. and crediting the current account of the assessee, AO considered Rs. 2.68 crores as unexplained cash credit. 33. It was submitted by the assessee that the journal entry passed by debiting Rajesh Sales Corporation and crediting the assessee's current account was wrongly passed and wrong entry was rectified on 30th Sept., 2009. However, the assessee failed to provide copy of ledger account in which rectification entry was passed. The AO considered reversing of entry as an afterthought. That for two years Rs. 2.68 crores remained with the assessee and he could not rectify the entry. The accounts were audited and returns were filed. As the books of accounts of the current year were open and therefore, adjustment was made. During the year a survey was conducted on 2nd Sept., 2009 and adjustment entry was passed after the date of survey. In any ....
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.... that mere book entry does not create income. Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT[1971] 82 ITR 363 has also held that mere accounting entry would not give rise to income unless income has resulted in real terms. 36. The AO in his comments on the written submissions of the Authorised Representative has observed that M/s Rajesh Sales Corpn. declared purchases worth Rs. 8,68,11,610 from M/s Amit Agency. In real terms the payment was to be made to M/s Amit Agency. Since the transaction with that firm is not genuine, no actual payment was to be made. The assessee got routed the payment of Rs. 2.68 crores through M/s Rajesh Sales Corpn. and ultimately credited to his current account by passing journal entry. As per the assessee's account no account with M/s Amit Agency was to be settled. The AO has drawn inference that the assessee's undisclosed income was introduced by way of journal entries. Actual issue is not of proving identity, genuineness and creditworthiness of Rajesh Sales Corporation. That what is apparent is not real in this case. Further, the submission of the Authorised Representative that mere accounting entry cannot gener....
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....the aforesaid sum of Rs. 2.68 crores. However, in the books of accounts of Rajesh Sales Corpn. the appellant's account was correctly credited but it was debited to M/s Amit Agency. This entry has been made in the books of accounts of M/s Rajesh Sales Corpn. because the appellant was instructed to make the payment to M/s Amit Agency and therefore, with the mutual consent of all concerned parties these adjustment entries were to be made. Here it is important to note that as on 31st March, 2007 no payment has been received or made by any of the parties namely the appellant, Amit Agency and by M/s Rajesh Sales Corpn. This factual situation is not in dispute and is also not challenged by the AO in his reports from time to time and in the discussion before me during the course of appellate proceedings. With these facts, it is absolutely clear that there is no credit which can be said as unexplained for the amount of Rs. 2.68 crores in the books of accounts of the appellant for which the addition has been made by AO under s. 68 of IT Act. In fact, in appellant's books there is debit entry of Rs. 2.68 crores debiting to Rajesh Sales Corpn. The AO is not found correct in making obse....