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TMI Blog2021 (9) TMI 976X X X X Extracts X X X X X X X X Extracts X X X X ..... ale during the year compared to total sales of Rs. 1618.78 crores in A.Y. 2012-13 and total sale of Rs. 1931.82 crores in A.Y. 2011-12. On query, the assessee admitted that during the year he was indulged in circular trading transaction in order to show better turnover. The assessee has admitted that majority of its purchases were merely paper purchase transaction as it was engaged in circular trading activities wherein the bills/invoices change hands without movement of physical goods. Various proprietary concerns were floated through which the circular tradings were carried out. In the circular trading various sale bills would be issued which would be circulated amongst these fictitious concerns and finally they would end up in sales to the assessee by the last entity. The advantage taken by the intermediary were that they discounted the sale bills made by them to the first created entity and obtained loan from bank, through the bill discounting method. From the money obtained from bill discounting they would then make the payment for the last entity from whom they made purchase. From these payments made by the assessee, the entities would make the subsequent payment and the fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3710638 Shri Enterprise Ram 3549322 S.K Enterprise 3552811 Pradip Overseas Ltd. 355710S Shiv Trading Co. 2744456 Shivraj Traders 2748054 Pradip Ltd. Overseas 2752191 Venkateswara Trading Co. 3923517 Jay Traders 3929222 Pradip Overseas Ltd. 3936069 A.M Enterprise 2399220 Shree Balaji Trading Co. 2403403 Pradip Overseas Ltd. 2408050 Vinayak Enterprise 2998752 Krishna Enterprise 3002550 Pradip Overseas Ltd. 3007382 Shri Ram 3879402 i Enterprise I Balaji Enterprise 3884753 Pradip Oversea: Ltd. 3890940 TOTAL 331794151 33221249 j 33272933 (iii) The appellant sold goods worth Rs. 3,31,79,415/- in circular trading to the first party, who in-turn sold such goods to second party at Rs. 3,32,21,249/- and finally the second party sold such goods to the appellant company (POL) at Rs. 3,32,72,933/-. In these transactions the purchases value of goods increased by Rs. 93,518/- (sale by POL Rs. 3,31,79,415/- less purchases by POL Rs. 3,32,72,933/-), which is 0.28% of circular purchases by the appellant (POL). (iv) Profit on circular transactions duly re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise 3884753 Pradip Overseas Ltd, 3890940 TOTAL 33179415 33221249 33272933 4.3.3 From the above facts of the case, submissions of the appellant and findings in assessment order following facts emerges: (i) The transactions of purchases and sales made by appellant are in the nature of circular trade transactions, where the appellant offered profit in the sale transactions and purchased the same goods through circular trade at some higher value. The appellant furnished sample bills/invoices, where the goods are travelled as sale by the appellant (POL) and received back as purchases by the appellant (POL): In these transactions the purchases value of goods increased by Rs. 93,518/- (sale by POL Rs. 3,31,79,415/- less purchases by POL Rs. 3,32,72,933/-) which is 0.28% of circular purchases by the appellant (POL). (ii) The appellant vide letter dated 15.03.2016 furnished above explanations and workings. The para is reproduced hereunder: "......................................... During the year circular trade transactions are adhere to show better turnover. In this connection detailed explanation were also filed to the Hon'ble Settlement Commission vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted that it was a case of circular transactions. The said letter is reproduced herein under:..............,......,......... ................... it is apparent that both the purchases and sales in this case are bogus and only book entries for purchase/sale have been made. Such transactions may be for the purpose of giving bogus entries to other concerns to help them evade tax or just circular transaction whether the group to generate a fake healthy balance sheet to deceive financial institutions or for some other purpose. Ethical aspects of such an' exercise can be debated and there may be adverse consequences under other acts/rules for such conduct. However, as for Income Tax Act is concerned, what is required to be seen is the correct amount of taxable income generated from such transaction. As noticed (supra) the total sales of appellant are on Rs. 18.23 crores. Since GP is only 0.04%, purchases are also of almost equal amount, if the appellant has given bogus entries to others, appropriate commission income for giving bogus entries need to be estimated as taxable income of the appellant. In case appellant has only indulged in circular transactions, then there may n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the assessee had made purchases were assessed to tax and were disclosed in their trading account. (ii) The parties from whom the assessee had made purchases had only wrongly classified in their books of accounts as loan instead of showing the balance due to the assessee as receivable from the assessee as debtors. (iii) In such circumstances, the transactions of the purchases and sales made by the assessee need not be doubted. (iv) However, during the year the assessee had a turnover of Rs. 18.23 Crores with gross profit at 0-04% and net profit at 0.02%. During the subsequent assessment year, the turnover declared was nil and had shown negligible administrative expenses of Rs. 46,187/- and had outstanding debtors and creditors. From these facts it could be inferred that both the purchases and sales are bogus and only book entries. Such transactions are generally made to extend bogus entries to other concerns in order to help them to evade tax or it could be a circular transaction to generate a healthy balance sheet to deceive financial institutions or for other purposes. (v) From the above facts, the income of the assessee could not be to the extent of 25% of unverifiable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was engaged in circular trading wherein the bills/invoices changed hands without movement of physical goods. The Assessing Officer has treated such purchase of Rs. 2,83,77,87,618/- as not reliable and disallowed 5%of such purchases which worked out to Rs. 14,18,89,380/- and added to the total income of the assessee. During the course of assessment and appellate proceedings the assessee explained the complete modus operandi of circular trading transaction which was carried out to show better turnover. Without reiterating the facts as elaborated in this order, it is undisputed fact that assessee would make payment to the entity from whom it made purchases, who in turn would make consequent payment and the funds would finally reach back to the assessee. In circular trading the payments were made through cheques and profit on circular trading was disclosed by the assessee in its return of income. In the earlier assessment year, the assessee has gone to Settlement Commission and furnished the circular trading/sample bills and chart which was discussed by the ld. CIT(A) in his findings as supra in this order. The complete particulars of circular transaction in the table of transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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