TaxTMI 
TaxTMI 
2025 (12) TMI 839
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....as well as by the Revenue arise from separate but materially similar orders passed by the learned Commissioner of Income Tax (Appeals)-49, Mumbai, in the cases of Lloyds Metals and Energy Limited and Lloyds Enterprises Limited, for Assessment Years 2013-14 to 2019-20. The assessments in all these years have been framed under section 143(3) read with section 153C of the Income Tax Act, 1961, pursuant to search and seizure action in a connected group case, and the impugned orders deal with common issues concerning the nature of alleged bogus purchases and sales, rejection of books, estimation of additional income, and disallowance of indirect expenditure. 2. At the very threshold, it was fairly admitted by both sides that the issues in all these appeals, for all the years and in respect of both assessees, are identical, emanate from the same search and post search investigation, and rest on an overlapping set of findings recorded by the Assessing Officer and the learned CIT(A). It was further pointed out by the learned counsel for the assessee that the core controversy is now no longer res integra, since the same group concerns, on identically worded findings and on the basis of t....
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....income at a much higher rate estimated by the Assessing Officer. * That the learned CIT(A) did not duly consider the alleged high level of risk in facilitating LC funding and booking of accommodation entries, thereby, according to the Revenue, unjustifiably reducing the estimated commission rate to a mere zero point five percent of turnover, which was said to be inconsistent with the performance of similar entities. * That the learned CIT(A) failed to appreciate the legal position, as per judicial precedent including CIT v. State Trading Corporation of India Limited, that once books of account are rejected under section 145(3), the Assessing Officer is the best judge to estimate income and, therefore, his estimation ought to have been sustained. * That the learned CIT(A) erred in holding that indirect and other expenses claimed by the assessee should be allowed as deduction, despite the Revenue's allegation that the overall activities were bogus and illegal. * That the learned CIT(A) failed to appreciate the Revenue's plea that the assessee's alleged business was based on false and fabricated transactions, and consequently any expenditure relatab....
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....gst group entities. At the core of the Assessing Officer's findings is the allegation that none of the searched entities, including the assessees now before us, could demonstrate the usual trail of documents that would attend genuine trading transactions in iron and steel. According to him, there were no delivery challans, no lorry receipts, no weighment slips, no inward or outward registers, no confirmations and no supporting documents evidencing movement of goods. The seized tally books allegedly revealed back to back entries of purchases and sales between entities of the group and other so called paper companies, with matching quantities and dates, which led the Assessing Officer to infer that the transactions were mere accounting entries designed to circulate funds and to avail LC facilities rather than genuine commercial trades. 7. The Assessing Officer further noted that, during the course of search, statements under section 132(4) were recorded from key individuals such as Shri Narsingh Vijay Dhawale, Shri Chetan Mehta and Shri Vinod Jatia, who, according to the Assessing Officer, made admissions regarding bogus sales and purchases, circular trading and LC driven accommod....
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.... related parties however, he noted that assessee had not produced any documents relating to loading, vehicles numbers, receipt of loading charges, truck bill / lorry receipts etc., Thus, he concluded that there is no genuine business. Finally, he estimated the net profit paid after observing and holding as under:- "During the course of assessment proceeding, the assessee company was asked to submit the details in order to verify the purchases and sales transactions entered in the BOAs by the assessee company It was also asked to explain the genuineness of these transactions. However, till date the assessee has not submitted any supporting document, except for the ledger accounts, in order to substantiate the purchases and sales transactions recorded. It appears that the assessee is not in possession of even basic and immediate documents like stock register, purchase invoice, sales invoice, goods inward receipt or document for outward movement of goods. During the course of search action, it was found that the Vinod Jatia Group has been indulging in large scale booking of bogus entries running into crores of rupees by way of bogus sales & purchases through paper/sh....
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....ot further reinforced by nature of compliance & the facts and circumstances of the case. During the course of assessment proceedings following details were called from the assessee however these remained unsupplied * Details and documents On how the sale or purchase transaction was negotiated like quotations, proforma invoice, * details of Factory where the material got manufactured * Company or the brand name under which the material is packed * Details and documents of storage/ Warehousing * details and documents of loading like place of loading, date of loading, Vehicle number in which loaded, receipt of loading charges, truck bilty/Lorry receipt, * Details and documents of transportation like packing list, ewaybill, Bill of Inding. Details of change in mode of transport, * details and documents of unloading like place of unloading, date of unloading, receipt of unloading charge. Vehicle numbers, * Details and documents regarding how the quality of the products ensured Like quality check certificates * Details and documents of use of the purchased item like if traded then details of sale or....
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.... was paid received and corresponding to bogus entries made in books of accounts. Further any expenditure on account of unaccounted commission is not allowable as per section 37 of the Act. Relevant portion is extracted below. "37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" Explanation 1 For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. In view of the above circumstances, it is abundantly clear that the Books of Accounts (BOAS) do not represent the true and fair picture of the assessee company's income, financial performance and financial positio....
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....sessee are hereby rejected u/s 145(3) of the Income Tax Act, 1961. The searched entities of Vinod Jatia Group of companies used their goodwill and mortgaged their assets& properties with banks to obtain LC facility from the banks. This funding was passed on to Uttam/Topworth/Lloyds group entities. By providing this LC facility to his creditors who in turn passed on this funding to their group companies, the searched entities of Vinod Jatia Group took burden of lot of risk on themselves. They did not received any guarantee or LC from the parties to whom goods were allegedly sold. Therefore the searched entities of Vinod Jatia Group would have earned additional commission for providing additional facility of LC to various parties. In the case of searched entities, where documents are on record regarding mortgaging properties for LC facility, the income is estimated at rate of 7% of turnover. However, the assessee company was not bearing risks of mortgaging properties; hence income is estimated at lower rate in the case of the assessee company. Considering the market practices, facts in other similar cases and overall facts & circumstances of the case, the income on ....
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....ficer then proceeded to make a separate disallowance in respect of indirect expenses claimed by the assessees in their profit and loss accounts. He tabulated the various heads such as salary, staff welfare, bill discount charges, rent, selling expenses, audit fees, travelling and sundry expenses, aggregating to Rs. 1,14,35,599 in the lead year, and observed that, in his opinion, these expenses were unreal and fabricated since, in his view, the underlying business itself was not genuine. He emphasised that the assessees had not satisfactorily explained these expenses or furnished supporting evidence. He then noted that the ratio of alleged bogus transactions with searched entities to the total turnover worked out to about seven percent, and on that basis proceeded to disallow a corresponding portion of the indirect expenses. His relevant finding is as under:- "On the basis of documents available on records, it is established that Searched entities is engaged in the practice of booking bogus sales & bogus purchases entries from the various parties. During the year under consideration, the searched entities has claimed various Indirect Expenses. The assessee company ....
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....made over and above the income already reflected in the audited financial statements. The learned CIT(A) reasoned that this approach indicated that the Assessing Officer had not in truth rejected the books in entirety, but had treated them as a partially reliable basis upon which further estimation could be superimposed. In such a situation, in the view of the learned CIT(A), a formal rejection of books under section 145(3) was not strictly warranted, because the Assessing Officer could have made additions on the basis of the very material in the books and seized records without invoking best judgment provisions. He therefore held that the rejection of books was not justified in the facts of the case, although he accepted the broader factual narrative relating to the nature of transactions. 14. Coming to the estimation of additional income, the learned CIT(A) recorded that the Assessing Officer had adopted a composite rate of five percent on the higher of alleged bogus purchases or bogus sales, purportedly to subsume commission, LC discounting gains, interest arbitrage and suppressed gross profit. The learned CIT(A) examined this methodology and found it wanting. He observed tha....
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....he learned Departmental Representative filed elaborate written submissions and advanced oral arguments, essentially reiterating and reinforcing the findings of the Assessing Officer. He emphasised that the learned CIT(A) was not justified in observing that there were no discrepancies in the documentary evidence filed by the assessees, since, as per the assessment record, the assessees had repeatedly failed to furnish the primary evidences of movement of goods and had not produced the directors in response to summons under section 131. The learned DR invited our attention to the detailed narrative of the Assessing Officer regarding seized tally extracts, bank trails, LC documentation and the sworn statements of Shri Narsingh Dhawale, Shri Chetan Mehta and Shri Vinod Jatia, which, according to him, demonstrated that the purchases and sales were merely on paper. He also contended that the learned CIT(A) had admitted and relied upon documents produced for the first time at the appellate stage without calling for a remand report or affording the Assessing Officer an opportunity to examine them, which, in his submission, was contrary to settled appellate procedure. 18. On the question....
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....d out that the learned CIT(A), while calling for and examining comparative cases, had obtained industry data showing that the average gross margin in wholesale trading in metals ranged between zero point one seven percent and zero point six three percent, and, therefore, even his estimation at zero point five percent was on the higher side. He contended that in the case of the assessees, the profit margin disclosed on the alleged circular transactions was around zero point two seven percent, which, in his submission, adequately covered any commission-like element embedded in the transactions. 21. Most importantly, the learned counsel drew our attention to the fact that this very controversy, arising from the same search, same seized material, similar patterns of alleged circular transactions, identical methodology of estimation, and similar relief granted by the learned CIT(A), had come up before this Tribunal in the case of Indrajit Properties Private Limited, another group concern. In that case, for Assessment Years 2013-14 to 2019-20, the Assessing Officer had likewise estimated additional income at five percent of alleged bogus turnover, the learned CIT(A) had restricted the....
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....he audited books fully capture whatever margin was actually realised. 24. The coordinate bench, in Indrajit Properties Private Limited, has, after an exhaustive analysis of the same search proceedings, categorically recorded that there is absolutely no seized document or statement indicating receipt of cash or other unaccounted consideration by the assessee. It has emphasised that, if indeed such substantial sums, aggregating to about Rs. 250 crores across years, had moved in cash, it would be wholly contrary to human conduct and business prudence to expect that no trail whatsoever would surface in a search of the magnitude carried out. The bench has also highlighted that no payer has been identified, nor any addition made in the hands of any alleged counterparty, thereby rendering the Revenue's theory of substantial unaccounted payouts wholly conjectural. The coordinate bench has further held that, in the context of such circular transactions, the margin disclosed in the books itself represents the commission element and that, in the absence of any positive material, no further estimate of additional income can be made merely on surmise. The relevant portion is reproduced as un....
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....y cash receipts by the assessee. It is important to mention here that in a case where there would have been such statements during the course of search alleging such cash receipts, the assessee would have an opportunity to cross examine the deponent. However, as per the facts of the present case, the assessee is in a worst situation in as much as the AO and Ld. CIT(A) has merely presumed and inferred cash consideration and thus the assessee had no such opportunity. 20. We further noticed that the additions made by the AO for all the six years is of approximately Rs. 250 crores. However, it is impossible and against the prudence that such substantial amounts have been paid to the assessee without leaving behind any documentary evidence such as notings, diaries or any cash trail. The complete absence of such evidence, in spite of extreme action of search and seizure, strongly suggest that no cash income was actually received by the assessee. Thus the absence of any evidence in itself is a positive evidence to suggest absence of cash transactions. On this proposition reliance is being placed upon the decision of the Coordinate Bench of the Mumbai of the Hon'ble Tribunal i....
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....ard, it was submitted that as per prevailing industry practice, the profit margin earned in case of a genuine wholesale trading is between 0.17% and 0.63%. (This fact has been accepted by the Ld. CIT(A) on Pg. 86). Therefore, in our view, even assuming that the transaction entered by the assessee are circular in nature and non-genuine, then in that eventuality the findings of the Ld. CIT(A) that the assessee must have earned 0.5% commission is contrary to commercial logic. No prudent businessman would pay such a high commission to a mere entry provider, especially when the commission exceeds or equals the profit margins earned in legitimate trading activity. Hence, the commission earned by the assessee has to be much lower than the industry's average net profit margin. 24. Even otherwise, the profit margin disclosed by the assessee on alleged circular transactions comes to 0.27% for the year under consideration (chart showing profit margin for the all the years is enclosed in the file). Therefore, in our view, considering the thin margin in this line of business, it is held that the profits disclosed by the assessee in its audited books of account includes commission i....
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....ting material pertaining to the particular assessee and year, found as a result of search. Here, as the coordinate bench has already noticed in Indrajit Properties Private Limited and as is equally true of the present assessees, there is no seized material indicating that the profit disclosed from the impugned transactions is understated or that some further consideration has passed outside the books. The entire edifice of the addition rests on a presumed higher commission or arbitrage which, in turn, is inferred only from the alleged circular nature of entries. Such an edifice, unsupported by any incriminating material, cannot sustain an addition under section 153C. 27. We may add that even on first principles of best judgment assessment, an estimate, howsoever honest, cannot be built on pure conjecture divorced from evidence. The Supreme Court in Dhakeshwari Cotton Mills Limited 26 ITR 775, while recognising that the Assessing Officer is not fettered by strict rules of evidence, has equally cautioned that he cannot make a pure guess without reference to any material. In the present cases, beyond the characterisation of transactions as circular and the absence of typical tradin....