TaxTMI 
TaxTMI 
2026 (3) TMI 126
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....peals relate to same assessee and issues are identical, they have been clubbed together and disposed of in a consolidated order, for the sake of convenience. All the appeals are on the common issue of estimation of income by applying certain percentage on the sales turnover. Of course, there are incidental issues relating to disallowance of indirect expenses, depreciation etc. There are also issues relating to addition of 'unexplained cash credit' under section (u/s.) 68 of the Income Tax Act, 1961 (in short the 'Act'). However, facts relating to all these issues are more or less identical in all the assessment years in appeal. That being the case, we will proceed to deal with cross appeals relating to A.Ys. 2013-14 as lead matters and decision taken therein would apply mutatis mutandis to other appeals as well. 4. In Department's Appeal being ITA No. 3972/Mum/2025 A.Y. 2013-14 in total, eleven grounds have been raised. Ground Nos. 1 to 7 are on the issue of reduction of estimation of profits/income from 7% to 0.5% by learned First Appellate Authority. Whereas, Ground Nos. 8 and 9 are against allowance of assessee's claim of indirect expenses and depreciation. Ground Nos. 10 and....
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....ficer observed that various entities of Topworth, Uttam Galva & Llyod Group of companies have created shell entities to enter into bogus transaction and generate huge turnover so as to avail LC facilities from Banks. He observed, the entities without entering into actual trading were generating invoices and making payment to parties within the group by discounting bills in the Banks. Thus, in a way, the entities have utilized the LCs for payment of bogus purchase/bills to paper and Shell entities utilizing the funds of the Bank. In this context, the Assessing Officer has described the modus operandi of the assessee and other entities as under:- "6.2.8 Modus operandi of these bogus entries: * First of all the company "A" (Uttam Group, Topworth Group & Llyod Group etc) creates a dummy company in the name of say "B". * Now company B raises sales invoices to the company of Jatia Group (Say Company X). * Company "X" made payment to company "B" through the L/C issued by the Bank. * The company "B" got money without selling any goods but only for generating invoices. * On the same day company "X" raises sale invoices (Purchase price + ....
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....turnover of the assessee. After reducing the business income offered by the assessee, the AO added back the differential amount of Rs. 10,91,83,463/- to the income of the assessee. The assessee contested the aforesaid addition before learned First Appellate Authority. 9. After going through the entire gamut of facts, materials and evidences available on record and keeping in view the submissions made by the assessee as also the finding of the Assessing Officer, learned First Appellate Authority observed that the purchases and sales of the assessee were effected through consignor-consignee basis and goods were directly delivered to the customer by the selling party. He observed that assessee effects purchase of goods by making payment through LC facility availed from Banks. Once purchases are made, funds are immediately transferred to the seller through bill discounting. In other words, the bankers of the buyer as well as the seller are involved in the transactions. He observed, once the purchase and sales are effected, they are duly accounted for in the books of account of the purchasing and selling parties. Even, the income generated out of sale transaction gets accounted for i....
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....assessee and other group entities have mutually got benefited by misusing the LC facility of Banks. In the process, both the assessee and other group entities must have generated additional income. To that extent, he agreed with the finding of the AO. However, he was of the view that estimation of income at 7% of sales turnover is on a much higher side. Relying upon the order passed by the First Appellate Authority in case of another group entity M/s. Duli Trade & Commodities Pvt. Ltd., learned First Appellate Authority estimated the additional income at 0.5% of the sales turnover. Accordingly, he directed the AO to restrict the addition to Rs. 1,01,59,654/-, being 0.5% of the total sales turnover. 12. Being aggrieved with the aforesaid decision of learned First Appellate Authority, both the Revenue and assessee are in appeal before us. 13. Learned Departmental Representative (DR) submitted, in course of search and seizure operation, incriminating materials were found indicating that assessee and group entities were involved in back to back purchase and sale transactions within the group utilizing the LC facilities of bank. He submitted, in the statement recorded from key per....
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.... group entities. In this context, he drew our attention to the following decisions: 1. DCIT vs. Supreme Holdings and Hospitality (India) Ltd. ITA No. 1437/Mum/2024. 2. DCIT vs. M/s A.P. Trading Co. ITA No. 1434/Mum/2024. 3. Shrilekha Trading P. Ltd. vs. ACIT ITA No. 2744/Mum/2025. 4. Subhkaran & Sons vs. DCIT ITA No. 2906/Mum/2025. 5. DCIT vs. Yardley Investment and Trading Company Pvt. Ltd. ITA No. 4725/Mum/2025. 6. Shyam Mahabirprasad Jatia vs. Income Tax Officer ITA No. 399- 401/Mum/2024. 7. Indrajit Properties Pvt. Ltd. vs. DCIT ITA No. 2139/Mum/2025. 8. Indrajit Properties Pvt. Ltd. vs. DCIT ITA No. 2340/Mum/2025 9. ACIT vs. Elecmec Engineering & Projects Pvt. Ltd. ITA No. 3055/Mum/2025. 10. Lloyds Metals and Energy Ltd. vs. DCIT ITA No. 2640/Mum/2025. 11. DCIT vs. Lloyds Metals and Energy Ltd., ITA No. 3997/Mum/2025. 15. We have given a thoughtful consideration to rival contentions in the light of judicial precedents cited before us and perused the materials on record. Undisputedly, as a result of search and seizure operation carried out in case of the assessee and other grou....
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....duced in the assessment order itself. Merely because the assessee has carried out the transactions utilizing LC facilities provided by banks and the purchase and sale transactions are back-to-back within the group, it cannot be said that the they are bogus. Moreso, when not even a single piece of evidence of introduction of cash by any of these entities to generate accommodation entries has been found either during the search and seizure operation or post search enquiry. Even, the AO is completely silent on the utilization of LC facilities for any purpose other than the purchase and sale transactions recorded in the books of account. Interestingly, though the AO has termed the purchase and sale transactions as bogus, however ultimately, he has proceeded to estimate the profits of business at 7% of sales turnover after rejecting the books of account. Such action of the AO, in a way, demonstrates that he accepts that the assessee has carried out the business transactions. Even, the AO has not provided any basis for estimation of additional income at 7% of the sales transaction. He has not stated, whether rate of 7% adopted is as per industry norms or any other reliable source. The ra....
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....ping that the payment received from one party is immediately transferred to other parties on same day. All the vendors and customers were potentially related amongst themselves on the basis of Common Key managerial person / common signatories /Common address. No credit guarantee / security obtained was from Topworth group of Companies and Uttam Galva Group of Companies. Entire purchases are backed by LC payment to vendors. d) The address of the party to whom the material had to be delivered is not available and in the absence of lorry receipts the actual movement of the goods could not be ascertained. e) There is no evidence to substantiate whether any communication in the form of e-mails, facsimile or letters sent through courier or registered post ever took place between the assessee company and its vendor and customer during the trade. f) While the assessee books a purchase of material from the concern, of say, Llyod group, then on the same day it books sale of equivalent amount of similar material from another entity of the Llyod group. While the payment for purchase is made immediately though Letter of credit and bill discounting, the sale proceeds a....
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....ransactions given in the assessment order is explained by way of an illustration, which is as under: a. First of all, company "A" (Uttam Group, Topworth Group & Llyod Group, etc.) creates a dummy company in the name of say "B" b. Now company B raises sales invoices to the company of Jatia Group (say company X) c. Company "X" made payment to company "B" through LC issued by the Bank d. Company "B" got money without selling any goods but only for generating invoices e. On the same day, Company "X" raises sale invoices (Purchase price + 2% to 4%/Rs. 100 to 150 + LC charges) to company "A" (i.e. main company Uttam Group or Topworth Group) f. Against this invoice, Company "A" makes payment to company "X" through cheque/RTGS 5.2. The transactions in question can be said to be in the nature of 'circular trading' carried out with the objective of increasing the turnover and availing bank credit facilities. Through such transactions, bank funds are made available to the entities of Llyod, Topworth and Uttam group for their use. Since the transactions are carried out using the funds of the banks and therefore, it is for t....
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....s of sales should be adopted and hence negated the stance of ld. AO who adopted higher of sales and purchase values for the purpose of estimation. In this respect, assessee submitted that it had offered much higher gross profit ratio in its trading activity as is evident from other comparable cases of genuine traders forming part of the written submission before the learned CIT(A). The working in this respect is tabulated below: GROSS PROFIT OFFERED BY VINOD JATIA GROUP, TOPWORTH GROUP, LLOYDS GROUP AND UTTAM GALVA GROUP FINANCIAL YEAR IN RESPECTIVE YEARS 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 NAME OF COMPANIES VINOD JATIA GROUP OF COMPANIES Dilshad Trading Co. Pvt. Ltd 2.57% 1.46% 1.67% 0.39% 0.37% 0.00% Makalu Trading Ltd 1.95% 1.44% 0.82% 0.58% 0.00% 0.00% Shrilekha Trading Pvt. Ltd 1.42% 0.98% 0.76% 0.38% 0.40% 0.00% Subhkaran & Sons 3.03% 2.42% 1.52% 0,72% 0.00% 0.00% Superways Enterprises Pvt. Ltd 2.81% 2.13% 1.10% ....
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....Vintrade Pvt Ltd 1.28% 1.68% 1.34% 0.98% 1.44% 1.26% Omicron Steel Traders Put. Ltd 1.28% 1.68% 1.34% 0.98% 1.44% 1.26% Ballalesh war Pipes & TubesPvt. Ltd. 1.28% 1.68% 1.34% 0.98% 1.44% 1.26% Poscho Steels Pvt. Ltd. 1.28% 1.68% 1.34% 0.98% 1.44% 1.26% TOTAL [B] 11.52% 15.12% 12.06% 8.82% 12.96% 11.34% TOTAL GP RATIO ALREDY OFFERED BY ALL GROUPS AS PERAUDITED BOOKS OF ACCOUNTS TOTAL [A] +[B] 30.65% 13.66% 34.79% 25.50% 37.389% 31.51% 5.5. Assessee thus, asserted that the profit margin disclosed by it on alleged circular transactions comes to 2.49% for the year under consideration. Ld. Assessing Officer has given credit for this profit margin while making addition on estimation basis by reducing it from the ad hoc rate adopted by him of 7%. It is thus contended that the chart showing profit margin for the all the years with profit margin reflects the real picture hence, no further addition is warranted on this account. Despite th....
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....he profit shown by the appellant or its group and non- group concerns. Thus, the rate of 7% adopted by the AO is on the higher side. In the appellate order for Ms Duli Trade Commodities pvt. ltd, the additional income is estimated at the rate of 0.5% of total sales turnover. The addition in the said case comprises/covers the additional income earned by the appellant by reinvesting the funds in the same business, the commission on accommodation entries of purchases and sales made/passed on to further the entries obtained from searched entities and any other unaccounted incomes like bill discounting income, interest received, discount income on account of suppression of GP etc." "10.10 While the appellant has got the funds from the bank through the letter of credit facility, the three group concerns (Llyods, Topworth & Uttam) also were equally benefitted with the funds. These funds were either reinvested into their businesses or transferred within their group entities or to the outside group entities They got to use the funds upto 180 days at a stretch before returning the same to the appellant. As far as appellant is concerned, its role was to facilitate the transfer of fun....
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....of such goods at the time of sale. Instead, the goods are stored at designated warehouses, and symbolic delivery is effected by way of transfer of title documents or delivery orders, which is an accepted and recognized commercial practice in the line of business. Such operational model is standard across the industry and does not, in any manner, indicate the presence of sham transactions. Thus the transactions are genuine. 18. Alternatively, it was also submitted that even if it is to be assumed that the assessee has entered into circular transaction, there is no evidence nor any findings arising out from the search proceedings to suggest that the assessee has earned extra cash which is in excess of amounts/profits already reflected in the books of accounts. On the contrary, the statements recorded of various individuals at the time of search indicate that the assessee has earned commission as its profits for providing the service of generating alleged non-genuine invoices. In this regard out attention was drawn to the statement of Shri Narsingh Vijay Dhawale, accountant of Mr. Vinod Jatia which is at paper book page No. 56 & 57, (Q. No. 13 and 14). Further, statement of S....
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....sh. In our view, at the time of making the addition, the AO has merely proceeded on a presumptive basis by stating that the assessee might have received cash, without bringing any concrete, corroborative or even circumstantial evidence on record to substantiate such an assumption. Such reasoning of the revenue authorities is based purely on conjectures was also accepted by the Ld. CIT(A). In our considered view, such conjectural reasoning cannot form the basis for a sustainable addition under the Act. On this proposition, reliance is being placed up on the decision of the Hon'ble Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. v. CIT (26 ITR 775) (PBP 144), wherein, it was held that although, the AO is not restricted by the strict and technical rules of the evidence and pleadings, he cannot proceed to make an addition purely on a guess work without any reference to material or tangible evidence. 22. After evaluating the entire records, we also found that the payer of the alleged amount has not been identified throughout the assessment proceedings. It is strange that the AO has alleged that the receipt of excess consideration to the extent of 5% of the turnov....
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....ction, the profit declared in the books of accounts covers the commission portion and that no further addition is warranted especially in absence of any evidence of cash payments. 25. Therefore, considering the totality of the facts and circumstances of the present case and also considering the decisions of the Coordinate Benches of the Tribunal as discussed by us above, we allow the grounds of appeal raised by the assessee and direct the AO to delete the additions. 26. Since, we have deleted the additions by considering the merits, therefore there is no need to adjudicate the other grounds raised by the assessee as the same become academic in view of our above detailed findings." 6. The very basis adopted by ld. CIT(A) of resorting to the estimation of additional income by applying the rate of 0.50% has been meritoriously dislodged by the decision of the Coordinate Bench in the aforesaid case of M/s. Duli Trade Commodities Pvt Ltd. We further note that all the aspects of additions made in the present case have been elaborately dealt by the Coordinate Bench in the case of Duli Trade Commodities Pvt Ltd. (supra), including inter alia, the following: ....
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....d in case of assessee and Subhkaran & Sons (Supra) stand at par. Secondly, the decision of learned First Appellate Authority in case of M/s. Duly Trade & Commodities Pvt. Ltd., based on which learned First Appellate Authority reduced the estimation of additional income to 0.5%, was considered by the Coordinate Bench in case of that assessee and 0.5% income estimation made by learned First Appellate Authority was deleted on merits. The other decisions cited by learned counsel for the assessee are in similar lines, hence we do not propose to deal with them in detail. Thus, in ultimate analysis of the factual position, we are fully convinced that issue in dispute is squarely covered by the decision of the Coordinate Benches in case of Subhkaran & Sons and others (Supra). Thus, respectfully following the consistent view of the coordinate Benches in identical nature of dispute, we hold that estimation of additional income even at 0.5% of sales turnover is unsustainable. Hence, we direct the AO to delete the addition. 20. The next issue arising for consideration is deletion of disallowance of indirect expenses and depreciation. Since the AO treated the trading activities of the assess....
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....t case, LC and other similar charges are paid to the Banks. The banks have issued the letter of credit and disbursed the amount, assumingly, after due diligence. It is for the banks to judge whether their funds were misused or otherwise and whether the provisions of RBI Act were violated by the appellant. The payment is made to the banks and is not penal in nature. Therefore, it cannot be concluded to be in violation of law. Considering the overall facts of the case, I hold that the income from circular trading is disclosed by the assessee and therefore the related expenditure can be allowed as deduction. The depreciation of Rs 75,068/- and Indirect expenditure of Rs 12,50,72,010/- cannot be upheld. The AO is directed to delete the same." 21. We have considered rival submissions and perused the materials on record. The entire basis for disallowance of depreciation and indirect expenses by the AO is because, he treated the purchase and sale transactions of the assessee as bogus. However, in the forgoing paragraphs, we have held that there is no reason to suspect the genuineness of the purchase and sales transactions of the assessee and deleted the addition made by the AO by treat....
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....ent of loan, the lender companies had sufficient balance at their hands. Thus, upon consideration of these facts, learned First Appellate Authority deleted the addition. 25. We have considered rival submissions and perused the materials on record. We have also applied our mind to the decisions of the coordinate Benches in respect of group companies involving identical issue. Learned First Appellate Authority while deleting the addition as noted the following facts:- 1. The identity of the creditor is known. 2. Most of the loans stand repaid in the same year or in subsequent year. 3. The amount received by the assessee includes the repayment of advances made in the earlier years. 4. The transactions are made through banking channel and there is no finding of cash being introduced in the bank account before the loan transactions. 26. The Department has miserably failed to dislodge the aforesaid findings of learned First Appellate Authority. The AO has failed to examine the factual position correctly as he has not taken into account the advances given by the assessee to the lender parties as also the fact that major part of the unsecured loans....