TaxTMI 
TaxTMI 
2022 (8) TMI 26
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....ed appeal in ITA No. 4153/Mum/2019 against the order passed by Commissioner of Income-tax (Appeals)-24, Mumbai [the learned CIT (A)], dated 4th March, 2019, wherein the appeal filed by the assessee against the order passed under Section 143(3) read with section 147 of the Income-tax Act, 1961 (the Act) by the Dy. Commissioner of Income Tax, was challenged and learned CIT (A) partly allowed the appeal of the assessee. Therefore, the learned Assessing Officer is aggrieved with the order of the learned CIT (A) in this ITA and assessee has filed cross objection challenging the part of additions confirmed. 03. Revenue in ITA no. 4153/Mum/2019 for A.Y. 09-10 has raised following grounds of appeal:- "1. On the facts and in the circumstances of the case and in Law, the Ld.CIT(A), Mumbai erred in estimating the gross profit at product percentage of 8.75% on circular transactions and directing the AO to restrict the addition to Rs.1,62,531/- as against Rs. 16,48,30,000/- stating that, "whilst the assessee has indulged itself into circular trading as was accepted before the survey team, without giving any findings as to how 8.75% GP can be taken since the corresponding expenditure....
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....r trading transaction, and not the transaction itself." 05. The brief fact of the case shows that assessee is a company engaged in pharmaceutical formulation business. It filed its return of income on 29th September, 2009 declaring total income of Rs.4,30,02,030/-. The assessment under Section 143(3) of the Act was completed on 29th December, 2011 at a total income of Rs.4,30,67,990/-. 06. Subsequently, case of assessee was reopened under Section 147 of the Act for the reason that income to the extent of Rs.16,48,30,000/- being bogus purchases and Rs.1,18,00,000/- being unexplained expenditure has escaped assessment. Accordingly, notice under Section 148 of the Act was issued on 29th March, 2016. Assessee submitted that on 26th April, 2016 that original return filed may be treated as return in response to the above notice. 07. In this case, a survey under Section 133A of the Act was carried out, wherein it was found that assessee company has obtained bogus purchases and accommodation bills of Rs.16,48,30,000/- from Dr. Daston Labs Ltd. and further there is an unexplained cash expenditure of Rs.1,18,00,000/- for manipulation of share price. The learned Assessing Officer iss....
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....ng of such transactions despite considerable time interval of almost 17 months from the survey action before the ADIT (Inv.), Unit-2(2), Mumbai 2.3 During the post-survey proceedings, summons u/s.131 of the IT.Act were issued to M/s.Hercules Chem and M/s.Odyssey Chemicals to verify the sales made by the assessee company to them. However, the said parties could not be traced at the given address. Therefore, the contention of the assessee that the purchases from M/s.Dr. Datson Labs Limited were a part of circular trading activity were not substantiated by the assessee. 2.4 In view of the above, you are hrereby show cause as to why the said bogus purchases as tabulated above should not be disallowed and added to the total income of respective assessment years in your case. "........... 3. During the course of survey proceedings at 205, P.N.Kothari Industrial Estate, LBS Marg, Bhandup(West), Mumbai-400078, certain loose papers were numbered 1 to 4 and impounded as Annexure A-1. While explaining the contents of the said pages, Mr. Ashwani Khemka in his sworn statement stated that page No. 1 and 2 contains details of understanding had with one Mr. Bipin Shah, w....
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....o give our client an opportunity to cross examine him on the said transaction before you. At this stage we would like to re iterate that a copy of account duly signed and confirmed by them is also submitted in your office which confirms this transaction. In the light of above, it can be easily concluded that statement given by him is not correct and given by him is not correct and given under duress We are enclosing the said chart containing details of purchases and sales again for your verification with a request to re-confirm the same again with these parties." 4.5 The above submission of the assessee is duly considered, but not accepted for the following reasons: i. It needs to be mentioned that during the course of statements recorded during survey, Shri Ashwani Khemka was asked to substantiate these purchases shown to have been made from DDLL, he admitted that the assessee company having entered into accommodation entry of purchase bills from DDLL for which no physical delivery was received. However, Shri Ashwani Khemka failed to substantiate his plea that the said bogus purchases were part of turnover purposes only as corresponding bogus sales had b....
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....see company in respect of material purchases by assessee company at Rabale unit. During the survey action, vide Q.No.19, Shri Mahendra Kalwankar was requested to furnish the details of any purchase material received from DDLL. In response, Shri Mahendra Kalwankar stated that he did not remember any such party by name DDLL. Further, vide Q.No.20, shri Mahendra Kalwankar was shown the set of bills founds in the accounts department at Rabale unit regarding purchase of material from M/s.Anjaneya Biotech P. Ltd. for F.YS.2008-09 and 2009-10 containing the receiver's signature of SPL on the same. Accordingly, Shri Mahendra Kalwankar was requested to confirm whether any such material had ever been received at Rabale unit as stated in the said bills and whether any purchase order ever issued for such material. In response, Shri Mahendra Kalwankar stated that no such material had ever been received by SPL at Rabale unit. For the sake of ready reference, the scanned copy of the relevant portion of the question Nos. 19 & 20, and answer thereto of sworn statement of Shri Mahendra Kalwankar is as under : "Q.19 Are you aware of a purchase party called Anjaneya Biotech P. Ltd./Anjane....
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....nd 2009-10. Kindly confirm the same. They mention the delivery of material Quinine Sulphate, Quinine Bisulphate and Quinine HCL and address to SPL at its head office at Bhandup (W). There is no receiver's signature on the bills. Has such material ever been received here? Was any PO ever issued for such material ? How was the entry in the accounts made for the same ? Ans.: No, and no such material has never been received here. The bills were sent to me from the head office (Mr. Hitesh Khona) and I have entered the transactions in the accounts. Q.18 There are some other parties in the trading account ledger which I am showing to you currently. It includes parties such as Sharon Bio-medicine Ltd., Benzochem Lifesciences P. Ltd., Adiatika Pharma (P) Ltd., G.M.H.Laboratories, Unijules Lifesciences Ltd., Cheryl Laboratories Ltd. Has any trading activity happened with them? Ans: All these are trading parties, whose bills are sent here for accounting purpose. The material is never received in the Rabale unit. Q.19. M all these cases, only bills and challans are available. No lorry receipts and no packing list are available. There is no proof of deliv....
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.... of the Act on 23.06.2014 and assessee company contended in its reply that he must have been given the statement in unduress and requested to cross examine him. It is certainly an afterthought as after lapse of 30 months from the date of statement recorded such claim was being made. 4.9 The assessee company has also failed to furnish with conclusive documentary evidence the details of the parties to whom they have actually sold and delivered these materials. Thus, the assessee company in its submission has failed to prove the genuineness of the transactions made from the mentioned parties. 4.10 The first and foremost, the assessee has failed to establish genuineness of delivery of goods by any third parties evidence even after given ample opportunities. 4.11 The onus is on the assessee to prove that the purchases were genuine by producing the parties and related evidences The onus to prove the correctness and genuineness of any claim made by the assessee is the assessee itself as it is held in the case of CIT vs. Calcutta Sales Agency Ltd. 19 ITR 191. In this regard, it is also pertinent to mention that while dealing with the concept of burden of proof, o....
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....ses from some parties, whom he could not produce or those parties were not available when the summons under section 131 issued. Therefore, the initials dispute was with regard to genuineness of the transaction regarding purchase of wool from the parties, the assessee had failed to discharge the onus to prove the genuineness of the transactions, mere mentioning of section 68 did not affect the addition made when transaction were found bogus. 4.13 In Sanjay Oilcake Industries vs. Commissioner of Income Tax [2009] 316 ITR 274 (Guj), it was held as under: "Thus, it is apparent that both the commissioner (Appeals) and the Tribunal have concurrently accepted the finding of the Assessing officer that the apparent sellers who had issued sale bills were not traceable. Those goods were received from the parties other than the person who had issued bills for such goods. Though the purchases are shown to have been made by making payment thereof by account payee cheque, the cheque have been deposited in bank accounts ostensibly in the name of the apparent seller, thereafter the entire amounts have been withdrawn by bearer cheques and there is no trace or identity of the person....
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....12.2003 affirmed by the Hon'ble Supreme Court in the case of M/s. Kachwala Gems vs. JCIT (2006) 206 CTR (SC) 585, 288 ITR 10 (SC) has held that even payment by account payee cheque is not sufficient to establish the genuineness of purchases. c) In the most recent judgment delivered on 07.01.2015 by the Hon'ble Bombay High Court in the case of Shri Naresh Pahuja 54 taxmann.com 258, it has been held that mere routing of a gift through a banking channel would not by itself establish that gift was genuine. The Headnote of the above cited judgment is reproduced hereunder; Section 68, read with section 254 of the Income-tax Act, 1961 Cash credits (gift) Assessment year 1995-96 Assessing Officer made addition in income of assessee as income from undisclosed sources holding that gifts received by assessee from one 'K' were not genuine Commissioner (Appeals) as well as Tribunal upheld findings of Assessing Officer On rectification application, Tribunal held that there was no error apparent on record after recording that mere routing of a gift through a banking channel would not by itself establish that gift was genuine - Whether, therefore, finding of facts....
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....clusive evidence to support its claim of the purchases made from the DDLL and hence, could not discharge the burden of proof cast upon it. The contention of the assessee in his submission primarily relates to sales having been effected and hence the alleged purchases cannot be doubted, which too has not been proven to be circular as discussed. 4.19 Taking into account the above facts and circumstances, the only fair conclusion that can be arrived in this case is that the assessee was indeed a beneficiary of the accommodation bills issued by the DDLL wherein there was not any actual / physical delivery of goods from the mentioned parties. An accommodation bill is obtained for introducing unaccounted goods into the accounting system. After considering the entire submission and documents produced by the assessee, it is crystal clear that the assessee did not purchase the goods from DDLL. Further, summons u/s. 131 of the IT.Act, 1961 were again issued during scrutiny proceedings to sale parties as per addresses given by assessee. However, as per the Inspector's report the said parties could not be traced. Hence, assessee's contention that purchases made are a part of c....
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....ining understanding with Mr. Bipin Shah was found. However, our client would like to place on record that was only and understanding which was never effectively carried out. Also, there are no evidences on record to prove that share prices were actually manipulated. Increase in stock price, if any, is attributable to good market scenario and good results declared by the company. There is not an iota of evidence to conclude that price was manipulated by the company and there are never any allegation in the life time of the company by the watch dog of stock market namely, Securities and Exchange Board of India (SEBI), 5.3 The assessee's contention is not acceptable in view of above discussion. Thus, it is clear that there is unexplained expenditure to the tune of Rs. 1,18,00,000/- by the assessee company for manipulation of share price and the same needs to be disallowed as per the provisions of section 69C of the 1.T.Act, 1961." 08. Aggrieved by the order of the learned Assessing Officer assessee preferred the appeal before the learned CIT (A), who passed an order as per paragraph no. 5.1 to 6 as under:- "5.1 I have given my careful consideration to....
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....that the Appellant had evidencing impounding of documents; 5.2.4 The Appellant was specifically queried as to which documents were not placed on records of the AO and formed the additional evidences before this office. Later on, the Appellant vide letter dated September 27, 2017 segregated and submitted certain documents which were admitted as additional evidence and sent to the AO for his Remand Report. The documents submitted are as under: j. VAT confirmation certificate from Dr. Datsons Lab Limited (formerly known as Aanjaneya Biotech Private Limited) indicating that they were registered under the MVAT Act 2005 k. Confirmation from Aanjaneya Biotech Private Limited as to entering in of transactions with Your Appellant l. Copy of VAT Returns filed by Aanjaneya Biotech Private Limited m. Fresh certificate of incorporation for change of name n. Complete Chart showing details of purchases, sales, Gross Profit made on each of the transaction, and percentage of Gross Profit o. Mapping of Sales vis-à-vis purchases p. Returns of Central Excise showing trading turnover made q. Copies of bank statement....
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....Suspicious" dealer by the MVAT department. On the same lines, it is not a case of the AO that the Appellant was called upon by the MAVT Department to pay MVAT in place of the selling party as no set off (input credit) of the Appellant was withdrawn 5.2.9 Next point that is worth noting is that there may be a case wherein an Assessee may just obtain bills of purchases in order to inflate the purchases and thereby reduce the taxable income without accounting for corresponding sales. The Appellant has duly submitted the manner of disposal of goods and also profit on each transaction. All these transactions are verified by the AO as recorded by the AO in paragraph 5.6 of the Remand Report. 5.2.10 Further, the AO has not challenged the sales made by the selling party. This means that when the AO has not disputed the sales transactions disclosed by the supplier in its books, who is an income tax assessee, then it cannot be assumed that the purchases are bogus more so when the transaction has been supported by proper documentary evidences and payments are made to suppliers through proper banking channels. This view is supported by ACIT v. M/s Jaybharat Textiles & Real Es....
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....s took place is unrealistic. If this view is adopted, even sales made in the process were also not genuine. Therefore, in my opinion what was required to be done by the AO was adopting a pragmatic approach to tax such circular transactions. What is taxable under the Income-tax Act 1961 would be the income and not receipt. 5.2.13 Overall Gross Profit comparison of the Appellant (including other transactions as well as circular trading transactions) of various years is as under: Year Sales Gross Profit Gross Profit % 31.03.2009 1,038,763,531 72,976,744 7.03% 31.03.2010 1,391,678,464 160,410,018 11.53% 31.03.2011 1,440,962,506 142,809,317 9.91% 5.2.14 As for circular trading, from the details submitted as verified by the AO during remand proceedings, it can be seen that the Appellant has shown profit ranging from @ 1.96% to 16.67%. From the charging pattern, it is very apparent that the purchases are made at a fixed rate for a few months and the sales are made at fixed rate for a few months and Gross profit of exact percentage is derived for particular period. It is pertinent to observe that name of the product is Quini....
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....in audited accounts. Therefore, considering only purchases disregarding corresponding structured sales to deduce correct income is not acceptable. In CIT v. Balchand Ajit Kumar 263 ITR 610 (MP) has held that the total sales cannot be regarded as the profit of the assessee. In Manmohan Sadani v. CIT 304 ITR 52 (MP) the Hon'ble High Court held that total sales cannot be regarded as profit of the assessee, on the contrary it is a net profit rate which has to be adopted in such cases. In N.K. Industries Ltd. v. Dy. CIT (Guj), Tax Appeal Nos. 240 to 242, 260 & 261 of 2003, the Gujarat High Court has held that the addition should be made of income component only. 5.2.17 In view of the above findings of facts and relying on the judicial precedents, I am of the considered opinion that the entire sale of the Appellant cannot be taxed as 'Income' of the appellant only the net profit part can be taxed. 5.2.18 Reliance is placed on the decision of hon'ble Income Tax Appellate Tribunal - Ahmadabad in the case of Arman Fashion Pvt. Ltd., v. ITO ITA No.2400 and 2407/Ahd/2012 wherein it was held that, "Ethical aspects of such an exercise can be debated an....
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....ross profit margin for each year and there is no uniformity in trading results from circular trading. Accordingly, respectfully following the decision of Hon'ble Ahmadabad ITAT in the case of Arman Fashion Private Limited (supra), I resort to estimation of profit percentage. 5.2.20 The maximum profit offered is 8.66% and minimum profit offered is 1.96% for the impugned assessment year, I estimate a percentage of 8.75% on circular transactions. The rationale for adopting 8.75% is that even section 44AD of the Act gives a benchmark rate of 8%. Since the Appellant has indulge into circular trading, in order to plug any possible leakage of revenue, the estimation of 8.75% profit on overall transactions will meet the end of justice in my view. Separately, the estimate of 8.75% also matches the overall Gross Profit of the Appellant. The addition based on aforesaid estimation is worked out as under: Asst Year sales Gross Profit Gross profit % Estimated addition @ 8.75% on sales Net addition sustained 20099-10 8,04,57,500 1,56,27,500 8.66% 1,57,90,031 1,62,531 5.2.21 Having discussed the above, I hereby direct the AO to restrict the....
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.... requirement was projected at around Rs.3 crore. Mr. Ashwin Khemka was to provide funds to the tune of Rs.1 crore initially to manipulate the market price. The "Screen Management charges" were fixed at Rs.1.50 lac per month for six months. 5.3.5 During the course of hearing, the Appellant submitted that whilst there was an agreement entered between Managing Director, Mr. Ashwin Khemka and Bipin Shah, the Appellant was neither beneficiary of this deal nor had anything to do with it. Further, the share price movement between April 2008 to April 2010 along with daily price movement between 01/08/2008 to 30/04/2009 were submitted before this office. The high and low stock market price of the Appellant are tabulated hereunder: submitted before this office. The high and low stock market price of the Appellant are tabulated hereunder: Month High Price Low Price August 2008 26.40 20.20 September 2008 31.50 20.50 October 2008 30.00 19.05 November, 2008 24.00 14.35 December 2008 17.40 13.90 January, 2009 17.00 13.50 February 2009 15.90 11.55 March, 2009 14.70 10.00 April 2009 18.46 11.....
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.... was beneficiary of this agreement, I hereby delete the addition made by the AO of Rs. 1,18,00,000/-. These grounds of appeal are allowed. 6. In the result, the appeal is partly allowed". 09. Therefore aggrieved by the order of the learned CIT - A the parties are in appeal before us. The learned assessing officer is aggrieved that the learned CIT - A has deleted the addition of Rs. 164,830,000 on account of bogus purchases and restricted it to only Rs. 162,531/- applying the gross profit percentage rate of 8.75% on circular transaction. The learned assessing officer is further aggrieved that the addition of Rs 1.80 Cr made by the learned assessing officer on account of unexplained cash expenditure where share price of the assessee company increased approximately 50% and assessee company has incurred unexplained expenditure of Rs. 180 lakhs, is deleted by CIT (A). 010. The assessee has also filed cross objection wherein it is aggrieved that the learned CIT - A has upheld the addition of Rs. 162,531/- a where the gross profit of the assessee was benchmarked at 8.75% against the declared gross profit of 8.66%. According to the assessee the gross profit as declared....
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....the goods and it was confirmed by them that material has not been received at the factory premises. The managing director of the assessee company has accepted that assessee is involved in circular trading. Accordingly the goods are sourced from one company and sold to another company in circular transaction fictitiously without any movement of goods or even with any real intention of trading in those goods. The transactions were only of trading and not affecting manufacturing activities of assessee. The parties who were involved in circular trading of goods were summoned by AO but could not be traced. Therefore the learned assessing officer held that assessee has failed to substantiate the circular trading of amount of purchases of Rs. 164,830,000/- for assessment year 2009 - 10, Rs. 121,289,604 assessment year 2010 - 11 and Rs. 17,413,004 assessment year 2011 - 12. Hence, learned AO made addition of 100 % of such tainted purchases. On appeal before the learned CIT - A, assessee submitted that it is a case of the circular trading where assessee has shown profit at the rate of 1.96% to 16.67%. Assessee also submitted that the gross profit for these three respective assessment years ....
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....ore there is no reason why the profitability with respect to the genuine business of the assessee should be disturbed. By adopting the gross profit of whole business, ld CIT has done violence to the genuine business of the assessee, which is not permitted. He is only required to estimate profit embedded in the circular trading transaction of bogus purchases only. The bogus purchases were to the extent of Rs. 164,830,000/-. This has been accepted to be the circular trading purchases made by the assessee along with other parties. Therefore, the profit is required to be imputed only with respect to the bogus purchases of Rs. 164,830,000/-. Therefore, the approach of the learned CIT - A of estimating the gross profit of whole of the business of the assessee instead of taking profit element embedded in the bogus purchases is not correct, hence same is rejected. 014. There is another flaw in the order of the ld CIT (A). The learned CIT - A has estimated gross profit rate of the assessee at 8.75%. To support it, a shelter was taken Under the provisions of Section 44AD of the act. The provisions of Section 44AD determines the net taxable profit of an assessee, who is carrying on his bus....
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....ecently in [ 2022] 136 taxmann.com 345 (Mumbai - Trib.) Deputy Commissioner of Income-tax v DBM Geotechnics and Construction (P.) Ltd.* has upheld the income embedded at the rate of 12.5% in such purchases as income of the purchaser. 020. The assessee has relied upon the decision of the coordinate bench in ITA number 790/AHD/2018 for assessment year 2000 1314 in case of Pradeep overseas Ltd dated 16/9/2021, where in the case of circular trading where the AO made the addition to the extent of 5% of the bogus purchases, the learned CIT - A reduced it to 0.3%. On appeal before the coordinate bench, the order of the learned CIT - A was upheld. The another decision of the coordinate bench in ITA number 4874/M/2017 for assessment year 2013 - 14 dated 27/11/2018 in case of Kiran Ali Bist was relied upon where the learned assessing officer estimated the profit at that rate of 2% of the turnover, the learned CIT - A restricted to 0.1% and same was confirmed by the coordinate bench. Therefore, the claim of the assessee is that the profit ratio should be estimated at this low percentage. We do not agree with the argument of the assessee for the simple reason that in the case of the assesse....
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....arned CIT - A sustained the addition to the extent of Rs. 7,294,808 and Rs. 729,169/-. Against this we direct the learned assessing officer to retain the addition to the extent of 12.5% of the bogus purchases, i.e. Rs 1,51,61,200/- (being 12.5% of Rs. 121,289,600/-) for assessment year 2010 - 11 and Rs. 2,176,625/- (being 12.5% of Rs. 17,413,000/-) for assessment year 2011 - 12. 024. Accordingly, ground number 1 and 2 of the appeal of learned assessing officer for assessment year 2009 - 10, 2010 - 11 and 2011 - 12 are partly allowed. 025. Now we come to ground number 3 of the appeal of the learned AO for assessment year 2009 - 10 with respect to the deletion of the addition of Rs 1,18,00,000/- as unexplained expenditure. The facts relating to the additions shows that during the course of survey a loose paper was found wherein the survey team observed that an understanding with one person was reached for many polluting the stock prices of the assessee. The assessee submitted that no such understanding was ever implemented. It was also stated that neither the stock exchange nor the securities and board of India has alleged any price money inflation in the market price of the sh....