TaxTMI 
TaxTMI 
2025 (6) TMI 153
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....pense @1% as against disallowance by ld. AO @3% of the circular trading on account of replacement for bank guarantee payment and restricting the expenses of salary and wages at 50%; whereas the assessee has challenged the validity of reopening u/s. 148 on various counts including reasons recorded by the AO and addition of Rs. 80,22,725/- which has been estimated @1% of the quantum of circular trading and adhoc disallowance of 50% of salary and wages of Rs. 51,31,610/- and commission of Rs. 18,00,000/-. 4. The brief facts are that assessee is an individual having a proprietary concern, M/s. Krishna Enterprises and is engaged in the business of trading in mobile phones and other electronic items. He has filed the return of income u/s. 139(1) on 30/11/2016 declaring total income of Rs. 1,16,09,610/-. The said return was duly processed and accepted u/s. 143(1). Later on, on the basis of information received, the case was reopened u/s. 147 and notice u/s. 148 was issued on the basis of following "reasons recorded":- "1. The assessee is an individual whose proprietary concern, M/s Krishna Enterprises is engaged in the business of trading in mobile phones and other electronic items. Th....
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.... survey or post-survey proceedings. In the absence of the furnishing of relevant details by the assessee, it is imperative to estimate the profit earned out of the said circular trading. During the course of survey and post-survey proceedings, M/s KGR Enterprises Private Limited provided the following information regarding the sales and purchases made with M/s Priyanka Communications (1) Pvt. Ltd by the assessee for AY 2016-17: Entity trading with the M/s Priyanka Communications (I) Pvt. Ltd for AY 2016-17 Amount of Sales Amount of Purchases Krishna Enterprises 36,80,67,841 106,14,54,012 The sum of purchases and sales undertaken by the assessee with M/s Priyanka Communications (1) Pvt. Ltd for AY 2016-17 amounts to Rs 142,95,21,853/- 3. Enquiries made by the A.O, as sequel to information received: Return of income for AY 2016-17 in the case of the assessee was perused and it was found that the assessee has not declared any income on account of circular trading in its return of income 4. Findings of the A.O. It is clear that the assessee has also not offered any income out of such circular trading with M/s KGR Enterprises Pvt Ltd and M/s Priyanka Communications (....
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....reasons, it is seen that the ld. AO has observed that such circular trading must have been undertaken with a profit motive in mind, and commission must have been charged by the assessee on inflated purchases and sales booked by it. This commission charged is to be considered at least @ 3% of total purchases and sales for the AY 2016-17 from these two entities, which amounts to Rs 4,28,885,655/- (3% of Rs 142,95,21,853/-. Thus, the ld. AO has presumed that circular trading must have been undertaken with a profit motive in mind and commission "must have been" charged by the assessee on the purchase and sale. Further, he has presumed that the commission charged is to be considered at least at 3% of total purchase and sales. Ergo, this reason is purely based on his guess work and conjecture that circular trading might have resulted in some kind of commission income. 6. Apart from that, it is seen that ld. AO has relied on information emanating from the survey proceedings, however, it has been pointed out by the ld. Counsel that on perusal of the statements on oath of Mr. Kailash Karamchandani (on page nos. 2 to 5 of the assessment order) and of the assessee (page nos. 6 to 9 of the as....
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....and M/s. Priyanka Communications (India) Pvt. Ltd., were engaged in circular trading. Nowhere, in the reasons, he has referred how these statements are incriminatory. If there was any circular trading then, whether during the course of survey or in the statement, something has mentioned or found that either there was some kind profit element which has not been disclosed in the circular trading or there was any kind of commission income which was paid or to be paid on sale or purchase. In fact, in the statement on oath of Mr. Kailash Karamchandani which has been reproduced in the assessment order, it is seen that he has categorically stated that circular trading has been done on the same price and have also admitted that there is no benefit accrued to the assessee or KGR. This statement per se cannot be said to be incriminating to hold that there was some element of commission income. It is merely a guess work and conjecture by the AO to infer that assessee might have received some commission income. Apart from that, on the one hand, ld. AO postulates that there might be profit motive behind circular trading and secondly, there might be commission earned by the assessee, which he es....
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....fact that in the case of KGR Enterprises, assessment order u/s 153A has been passed wherein the ld. AO has mentioned that trades were done to save on bank guarantee commission and there is no allegation or addition in the order of KGR Enterprises for payment of any such commission by KGR Enterprises to the assessee. If in the assessment order of the entity from which ld. AO has alleged that assessee might have received commission, no such finding or allegation have been made for payment of any commission has been paid to assessee, then how ld. AO can presume that assessee might have received the commission. Thus, we hold that reasons recorded do not justify reopening of the assessment. Accordingly, the entire re-assessment order is quashed. 10. Similarly, in A.Y.2017-18, exactly same reasons have been recorded by the ld. AO that assessee might have earned commission @3% on sale and purchases. In view of our finding given that reasons recorded are not sustainable and do not vest with jurisdiction to the AO to reopen the case will apply mutatis mutandis in this year also. Accordingly, the reopening u/s. 147 and the re-assessment order passed u/s. 147 r.w.s. 144 for A.Y. 2017-18 is q....
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....as under:- "In this regard it is seen that the jurisdictional Hon'ble Mumbai ITAT has adopted a rate ranging from 0.15% of sales and purchases to 2% of the sales and purchases for estimating the expenses incurred in respect of such kind of bogus trading. In the case of Goldstar Finvest P. Ltd. Mumbai vs DCIT (ITA NO.74/Mum/2015], the Hon'ble Mumbai ITAT has adopted a rate of 0.15% for estimating the unexplained expenses in the case of Spanco Ltd Vs Department of Income Tax [ITA No.1128/Mum/2012], the Hon'ble Mumbai ITAT has adopted the rate of 0.25%. However, in the case of ITO 10(2)(4), Mumbai vs Moonlight Electrical [ITA No. 7344/Mum/2016], the Hon'ble Mumbai ITAT has adopted the rate of 2% for estimating the unexplained expenditure for such kind of bogus trading. It is also seen that the Hon'ble Ahemdabad ITAT in the case of Arman Fashion Pvt Ltd v ITO [ITA no. 2400 and 2407/Ahd/2012] in a similar case of bogus circular trading for fulfilling the "turnover" criteria of banks for getting finance, had restricted the addition made by the AO by adopting the rate of 0.05% of the total turnover It is also seen that the Hon'ble Ahemdabad ITAT in the case of JC....
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....circular trading and same quantity and value of goods were purchased and sold amongst each other. According to the ld. AO, M/s.KGR Enterprises might have paid commission @3% and therefore, he has estimated 3% commission, both on purchase as well as on sales. The ld. CIT (A) has reduced the estimate of commission from 3% to 1% following certain decisions of the Tribunal. 18. Now, whether at all there could be any estimated commission on such circular trading or not, then there has to be some finding or information in the case of KGR Enterprises that it has paid certain commission or there is any material or evidence found in the course of search / survey in the case of KGR Enterprises that some unaccounted commission has been paid. As noted earlier, in the various statements including of Kailash Karamchandani, director of M/s. KGR Enterprises Pvt. Ltd., nowhere he has stated that any kind of commission was paid to the assessee, in fact he has stated that there is no benefit being pressed on to any of the parties nor there is any profit element. This entire exercise of circular trading was done by KGR for the purpose of saving on by replacement of bank guarantee payment. It has been....