2018 (3) TMI 730 - AT - Income Tax

Genuineness of the transactions of purchase and sale of diamonds - Held that - Undisputedly the trading in diamond has been claimed by the assessee only during the year under consideration. It is also not disputed that the assessee has made 5 purchases and 7 sales transactions only with two parties each for purchases and sales. To verify the genuineness of the transactions and particularly in view of the facts that the assessee has claimed loss of ₹ 54,43,913/- to be set off against the short term capital gain the AO conducted the enquiry and investigation through ADIT, Surat as these two parties namely M/s Makoda Exim Pvt. Ltd. and M/s Pulkit Impex Pvt. Ltd. were stated from Surat. Even the notices issued u/s 133(6) were received back with the postal remarks the parties were not available at the given address. AO issued commission u/s 131(b) to the ADIT investigation, Surat to verification the genuineness of the transactions of purchase and sale of diamonds. In its report the ADIT has stated that none of the parties from whom the assessee has claimed to have purchased the diamonds were available at the addresses given by the assessee. AO has given its finding on the basis of the report of the ADIT that these parties are not found at the given address and therefore, there was none existence of the parties. CIT(A) has confirmed the action of the AO when the assessee has failed to file any evidence to controvert the facts as reveals in the investigation carried out by the AO. Additional evidence in support of the claim that these parties have shifted their addresses and therefore, they were not found at the given address. The assessee has also sought to produce PAN and return of income filed by these two parties to show the identity and existence of these parties. The assessee has also sought to produce the bank statement of these parties showing the entries of the payments made by the assessee. Thus, the additional evidence sought to be produced by the assessee are very much relevant for adjudication of the issue and most of these evidences are independent and not created by the assessee or the other parties except the confirmation and letter of change of address. The considered view that the matter requires to be reconsidered and adjudicated after carrying out proper verification in respect of the additional evidence filed by the assessee.

Summary

Issues Involved:
1. Opportunity of hearing not granted to the assessee
2. Disallowance of loss for ?54,43,913/-
3. Adhoc 15% disallowance in purchases for ?61,45,937/-

Issue 1: Opportunity of hearing not granted to the assessee
The appeal by the assessee was directed against the order of CIT(A) for the assessment year 2014-15, citing that the opportunity of hearing was not granted. The CIT(A) did not consider that the show cause for addition was issued after the assessment was already completed, which the assessee argued was against the principles of natural justice. The issue of opportunity of hearing was a key contention raised by the assessee.

Issue 2: Disallowance of loss for ?54,43,913/-
The disallowance of loss was another ground of appeal by the assessee, challenging the CIT(A)'s decision to hold the claim of loss on unverifiable purchases as bogus. The assessee argued that there was a lack of control over suppliers after several years, payments were made through banking channels, and the nexus of purchase and sales justified the inclusion of the loss in profits. The CIT(A) was criticized for not having a valid basis for disallowing the loss, forming a significant part of the appeal.

Issue 3: Adhoc 15% disallowance in purchases for ?61,45,937/-
The confirmation of the adhoc addition at 15% of total purchases by the CIT(A) was disputed by the assessee. The grounds for contesting this disallowance included the lack of rejection of books of account under section 145 and the estimation basis used for the disallowance. The assessee argued that the adhoc addition was unjustified, emphasizing the need for proper consideration before confirming such disallowances.

The Tribunal considered the submissions from both parties, focusing on the genuineness of the transactions involving diamond trading. The AO's investigation revealed discrepancies in the purchase and sale transactions, leading to the addition of ?61,45,937/- as the transactions were deemed bogus. The assessee later filed additional evidence to support the genuineness of the transactions, including PAN cards, income tax return acknowledgments, and bank statements of suppliers. The Tribunal admitted the additional evidence, emphasizing the relevance for adjudication. The matter was set aside for readjudication by the Assessing Officer to consider the additional evidence and conduct further verification if necessary.

In conclusion, the appeal by the assessee was allowed for statistical purposes, highlighting the importance of proper verification and consideration of evidence in tax assessments.