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TMI Blog2022 (8) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... er parties. Therefore, the profit is required to be imputed only with respect to the bogus purchases - Therefore, the approach of the learned CIT A of estimating the gross profit of whole of the business of the assessee instead of taking profit element embedded in the bogus purchases is not correct, hence same is rejected. GP stimation @ 8.75% - what is the amount of income earned by the assessee out of the bogus purchases arising out of the circular trading? - HELD THAT:- As case involved in impugned appeal is of a listed limited company at the stock exchange, where 85.41% shares are held by non-promoters, i.e. Public and Director of the company, who is a trustee of the company, is engaged in circular trading. Further, the lower gross profit as has been depicted in the above two decisions of the coordinate benches were not at all justified looking at the gross profit ratio earned by the assessee in its regular business. Further, in those cases the bills were issued which were discounted by the purchaser for financing and in the another case it was the employee who was used for the purpose of issue of the bogus bills. Here, in this case the assessee himself is engaged in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the learned Dy. Commissioner of Income Tax, (the learned Assessing Officer) Circle 15(3)(1), Mumbai in case of Sanjivani Parenteral Ltd. (assessee/ appellant) for A.Ys. 2009-10, 2010-11 11-12. For all these three years, assessee also filed cross objection. The common issues are involved in this appeal, the parties argued them together and therefore, these are disposed off by this common order. 02. For A.Y. 2009-10, the learned Assessing Officer filed appeal in ITA No. 4153/Mum/2019 against the order passed by Commissioner of Income-tax (Appeals)-24, Mumbai [the learned CIT (A)], dated 4th March, 2019, wherein the appeal filed by the assessee against the order passed under Section 143(3) read with section 147 of the Income-tax Act, 1961 (the Act) by the Dy. Commissioner of Income Tax, was challenged and learned CIT (A) partly allowed the appeal of the assessee. Therefore, the learned Assessing Officer is aggrieved with the order of the learned CIT (A) in this ITA and assessee has filed cross objection challenging the part of additions confirmed. 03. Revenue in ITA no. 4153/Mum/2019 for A.Y. 09 10 has raised following grounds of appeal: 1. On the facts and in the cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting to Rs. 164,830,000 being 100% of purchases involved in circular trading without appreciating that all material facts and evidences with respect to purchase and sale of goods were placed to prove the circular transactions during the course of reassessment, and without appreciating that, there cannot be sale without corresponding purchases, and without considering that he was expected to tax the income flowing from the circular trading transaction, and not the transaction itself. 05. The brief fact of the case shows that assessee is a company engaged in pharmaceutical formulation business. It filed its return of income on 29th September, 2009 declaring total income of ₹4,30,02,030/-. The assessment under Section 143(3) of the Act was completed on 29th December, 2011 at a total income of ₹4,30,67,990/-. 06. Subsequently, case of assessee was reopened under Section 147 of the Act for the reason that income to the extent of ₹16,48,30,000/- being bogus purchases and ₹1,18,00,000/- being unexplained expenditure has escaped assessment. Accordingly, notice under Section 148 of the Act was issued on 29th March, 2016. Assessee submitted that on 26th Apri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he survey team asked Mr. Ashwani Khemka, to substantiate these purchases shown to have been made from DDLL, he admitted to the assessee company having entered into accommodation entry of purchase bills from DDLL for which no physical delivery was received, during his sworn statement recorded during the course of survey action. Further, you have failed to substantiate your plea that the said bogus purchases were part of turnover purposes only as corresponding bogus sales had been affected. However, no cogent documentary evidences in support of this claim were furnished. Further, you have failed to provide bill-to-bill mapping of such transactions despite considerable time interval of almost 17 months from the survey action before the ADIT (Inv.), Unit-2(2), Mumbai 2.3 During the post-survey proceedings, summons u/s.131 of the IT.Act were issued to M/s.Hercules Chem and M/s.Odyssey Chemicals to verify the sales made by the assessee company to them. However, the said parties could not be traced at the given address. Therefore, the contention of the assessee that the purchases from M/s.Dr. Datson Labs Limited were a part of circular trading activity were not substantiated by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction were also accepted by the visiting party. 2) If the purchases, as alleged are considered, then sale of the material is also under question. Logically the sale should also be removed. Also, if purchases are considered as accommodation entries, no sale can take place. The detailed chart showing movement of material on purchases to sale was also on record by the survey party. 3) Our client strongly refute the contention/statement by Shri Kannan K. Vishwanath, Managing Director. The said statement must have been given under duress and would like to request you to give our client an opportunity to cross examine him on the said transaction before you. At this stage we would like to re iterate that a copy of account duly signed and confirmed by them is also submitted in your office which confirms this transaction. In the light of above, it can be easily concluded that statement given by him is not correct and given by him is not correct and given under duress We are enclosing the said chart containing details of purchases and sales again for your verification with a request to re-confirm the same again with these parties. 4.5 The above submission of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed u/s.131 of the 1.T.Act. Such personnel of the assessee company in their sworn statements during the survey action have clearly admitted of having not received the purchase material from DDLL during F.Ys.2008-09 to 2010-11. Shri Mahendra Kalwankar, Head of Quality Assurance and Director of the company, was recorded u/s.131 of the Act at the business premises of the assessee company's manufacturing unitat R-40, TTC Rabale Industrial Estate, Navi Mumbai-400 701. Shri Mahendra Kalwankar is responsible for signing the purchase order issued by assessee company in respect of material purchases by assessee company at Rabale unit. During the survey action, vide Q.No.19, Shri Mahendra Kalwankar was requested to furnish the details of any purchase material received from DDLL. In response, Shri Mahendra Kalwankar stated that he did not remember any such party by name DDLL. Further, vide Q.No.20, shri Mahendra Kalwankar was shown the set of bills founds in the accounts department at Rabale unit regarding purchase of material from M/s.Anjaneya Biotech P. Ltd. for F.YS.2008-09 and 2009-10 containing the receiver's signature of SPL on the same. Accordingly, Shri Mahendra Kalwankar was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Are the purchases in the nature of raw material for manufacturing or trading? Ans: The purchases are in the nature of trading. Only on one occasion they have given us material for manufacturing in FY2009-10 for Rs.22,93,200/-. I am submitting the ledger copy for the same as Annexure-1. Remaining transactions are trading activity. Q.17 I am showing you a set of bills found in the accounts department at this unit pertaining to M/s.Anjaneya Biotech P. Ltd. (Vishwam, 8/B, Postal Colony, Chembur, Mumbai) for FY.2008-09 and 2009-10. Kindly confirm the same. They mention the delivery of material Quinine Sulphate, Quinine Bisulphate and Quinine HCL and address to SPL at its head office at Bhandup (W). There is no receiver's signature on the bills. Has such material ever been received here? Was any PO ever issued for such material ? How was the entry in the accounts made for the same ? Ans.: No, and no such material has never been received here. The bills were sent to me from the head office (Mr. Hitesh Khona) and I have entered the transactions in the accounts. Q.18 There are some other parties in the trading account ledger which I am showing to you currently. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace with supporting bills/vouchers. Further, the assessee has failed to furnish one to one correspondence between all purchases and sales. Therefore, the contention of the assessee that the purchases from M/s. Dr. Datson Labs Limited were a part of circular trading activity is not acceptable. 4.8 The assessee company in his reply dated 06.12.2016 in response to show cause notice issued has refuted the statement of Shri Kannan Vishwanath, Managing Director of DDLL recorded under oath u/s.131 of the Act on 23.06.2014 and assessee company contended in its reply that he must have been given the statement in unduress and requested to cross examine him. It is certainly an afterthought as after lapse of 30 months from the date of statement recorded such claim was being made. 4.9 The assessee company has also failed to furnish with conclusive documentary evidence the details of the parties to whom they have actually sold and delivered these materials. Thus, the assessee company in its submission has failed to prove the genuineness of the transactions made from the mentioned parties. 4.10 The first and foremost, the assessee has failed to establish genuineness of delivery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Appellate Tribunal [2002] 125 Taxman 763 (Raj) it was held as under: If the transaction were genuine and if the parties had migrated somewhere else, their latest addresses should have been supplied and burden was on the assessee to prove the genuineness of the transactions, when the assessee claimed that the purchases were genuine. It was true that no loan had been taken from those parties. The case before the Assessing Officer was that the assessee claimed some purchases from some parties, whom he could not produce or those parties were not available when the summons under section 131 issued. Therefore, the initials dispute was with regard to genuineness of the transaction regarding purchase of wool from the parties, the assessee had failed to discharge the onus to prove the genuineness of the transactions, mere mentioning of section 68 did not affect the addition made when transaction were found bogus. 4.13 In Sanjay Oilcake Industries vs. Commissioner of Income Tax [2009] 316 ITR 274 (Guj), it was held as under: Thus, it is apparent that both the commissioner (Appeals) and the Tribunal have concurrently accepted the finding of the Assessing officer that the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following reasons: (a) Merely because, the so called payment was made through banking channel, cannot establish that the transactions are genuine. There are several judgments delivered on this issue, wherein it is clearly mentioned that the transactions through banking channel in itself cannot be sacrosanct and make the transaction genuine. b) The Hon'ble ITAT, Jaipur in the case of M/s. Kachwala Gems vs. JCIT ITA No 134/JP/2002 dated 10.12.2003 affirmed by the Hon'ble Supreme Court in the case of M/s. Kachwala Gems vs. JCIT (2006) 206 CTR (SC) 585, 288 ITR 10 (SC) has held that even payment by account payee cheque is not sufficient to establish the genuineness of purchases. c) In the most recent judgment delivered on 07.01.2015 by the Hon'ble Bombay High Court in the case of Shri Naresh Pahuja 54 taxmann.com 258, it has been held that mere routing of a gift through a banking channel would not by itself establish that gift was genuine. The Headnote of the above cited judgment is reproduced hereunder; Section 68, read with section 254 of the Income-tax Act, 1961 Cash credits (gift) Assessment year 1995-96 Assessing Officer made addition in income of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the assessee failed to do in the instant case. (d) Payment by account payee cheque is not sacrosanct, as discussed above. 4.18 As the assessee could not discharge the onus. Therefore, the assessee did not fulfill the burden of proof on its part as well, that the purchases made from DDLL are indeed genuine purchases, Further, it is to be pointed out here that the assessee has not furnished any conclusive evidence to support its claim of the purchases made from the DDLL and hence, could not discharge the burden of proof cast upon it. The contention of the assessee in his submission primarily relates to sales having been effected and hence the alleged purchases cannot be doubted, which too has not been proven to be circular as discussed. 4.19 Taking into account the above facts and circumstances, the only fair conclusion that can be arrived in this case is that the assessee was indeed a beneficiary of the accommodation bills issued by the DDLL wherein there was not any actual / physical delivery of goods from the mentioned parties. An accommodation bill is obtained for introducing unaccounted goods into the accounting system. After considering the entire submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in stock price, if any, is attributable to good market scenario and good results declared by the company and there were never any allegation in the life time of the company by Securities and Exchange Board of India (SEBI). During scrutiny proceedings, the assessee submitted that: Understanding with Mr. Bipin Shah: During the survey proceedings loose paper containing understanding with Mr. Bipin Shah was found. However, our client would like to place on record that was only and understanding which was never effectively carried out. Also, there are no evidences on record to prove that share prices were actually manipulated. Increase in stock price, if any, is attributable to good market scenario and good results declared by the company. There is not an iota of evidence to conclude that price was manipulated by the company and there are never any allegation in the life time of the company by the watch dog of stock market namely, Securities and Exchange Board of India (SEBI), 5.3 The assessee's contention is not acceptable in view of above discussion. Thus, it is clear that there is unexplained expenditure to the tune of Rs. 1,18,00,000/- by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant in the books of Aanjaneya Biotech Private Limited; h. Copy of MVAT Returns of Aanjaneya Biotech Private Limited and VAT paid challans; i. Fresh certificate of incorporation evidencing change of name from Aanjaneya Biotech Private Limited to Dr. Dastons Labs Limited J. A few Survey documents that the Appellant had evidencing impounding of documents; 5.2.4 The Appellant was specifically queried as to which documents were not placed on records of the AO and formed the additional evidences before this office. Later on, the Appellant vide letter dated September 27, 2017 segregated and submitted certain documents which were admitted as additional evidence and sent to the AO for his Remand Report. The documents submitted are as under: j. VAT confirmation certificate from Dr. Datsons Lab Limited (formerly known as Aanjaneya Biotech Private Limited) indicating that they were registered under the MVAT Act 2005 k. Confirmation from Aanjaneya Biotech Private Limited as to entering in of transactions with Your Appellant l. Copy of VAT Returns filed by Aanjaneya Biotech Private Limited m. Fresh certificate of incorporation for change of name n. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs on website of MVAT. Based on this information, Income Tax department had disallowed purchases in IncomeTax Assessment. 5.2.8 It is important to note that the AO has not brought any such finding that the selling party was declared as Suspicious dealer by the MVAT department. On the same lines, it is not a case of the AO that the Appellant was called upon by the MAVT Department to pay MVAT in place of the selling party as no set off (input credit) of the Appellant was withdrawn 5.2.9 Next point that is worth noting is that there may be a case wherein an Assessee may just obtain bills of purchases in order to inflate the purchases and thereby reduce the taxable income without accounting for corresponding sales. The Appellant has duly submitted the manner of disposal of goods and also profit on each transaction. All these transactions are verified by the AO as recorded by the AO in paragraph 5.6 of the Remand Report. 5.2.10 Further, the AO has not challenged the sales made by the selling party. This means that when the AO has not disputed the sales transactions disclosed by the supplier in its books, who is an income tax assessee, then it cannot be assumed that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of survey on them. In fact, the very basis of conducting survey on the Appellant was information received from Dr. Daston Labs Limited. Therefore, unilaterally concluding that the purchases were bogus because no delivery of goods took place is unrealistic. If this view is adopted, even sales made in the process were also not genuine. Therefore, in my opinion what was required to be done by the AO was adopting a pragmatic approach to tax such circular transactions. What is taxable under the Income-tax Act 1961 would be the income and not receipt. 5.2.13 Overall Gross Profit comparison of the Appellant (including other transactions as well as circular trading transactions) of various years is as under: Year Sales Gross Profit Gross Profit % 31.03.2009 1,038,763,531 72,976,744 7.03% 31.03.2010 1,391,678,464 160,410,018 11.53% 31.03.2011 1,440,962,506 142,809,317 9.91% 5.2.14 As for circular tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91% 124,925,800 121,289,600 3,636,200 F.Y. 2010-11 (A.Y. 2011-12) 06.04.2010 to 18.04.2010 4.76% 18,283,650 17,413,000 870,650 Average Profit (III) 4.76% 18,283,650 17,413,000 870,650 Total Average (I) + (III) 6.22% 323,666,950 303,532,600 20,134,350 5.2.15 Above table indicates that, the sales and purchases are entered in a pre determined pattern with a regulated price band. Moreover, there cannot be such a huge variation in profitability percentage in the same period for the same product as can be seen from the pattern of profit going up and down unless there is a clear artificial mechanism introduced. 5.2.16 In light of the above, I conclude that whilst the Appellant has indulged itself into circular trading as was accepted before the survey team, the AO except alleging that the purchases are bogus has not brought on record as to why the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assified 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 purchases. Further, drawing support from the other decisions of the ITAT Ahmadabad Benches, net profit could be estimated at 0.05% on the total turnover of Rs. 18.23 Crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, in any case the Appellant Company had no role to play in such arrangement as the Company being an artificial juridical person cannot enter into any such deal on its own, and therefore no action lies against it. The AO was explained that in any case there is no cash expenditure involved at end of the Company. The AO made addition of Rs.1,18,00,000 treating it as unexplained cash expenditure. 5.3.2 On a perusal of the impugned order, I find that the AO has not given his calculation to arrive at the figure of Rs. 1,18,00,000. The matter was sent on remand, but the AO has not given any comments on this issue. 5.3.3 Before this office, the appellant filed the detailed submissions which have been taken on record. The same are not repeated here for the sake of brevity. 5.3.4 The AR of the Appellant placed on record copy of the agreement, which was available with the AO, duly signed and sealed by the Survey Team, between the Managing Director, Mr. Ashwin Khemka and Bipin Shah dated September 6, 2008. The crux of this agreement is that, Bipin Shah would help the raise funds to the tune of Rs. 10 crore either through preferential allotment or rights issue over the period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumed that the screen management charges were paid for six months, the same could not exceed Rs.9,00,000 (Rs.1,50,000 per month 6). On the contrary, the AO has made an addition of Rs. 1,18,00,000 without providing any calculation of the same. 5.3.8 I have considered the facts of the case and the details and documents produced before me. On a perusal of the impugned assessment order, the AO has made an addition of Rs. 1,18,00,000 based on the agreement without giving any rationale as to the addition. Separately, the agreement was executed between Mr. Ashwin Khemka and Bipin Shah; and the Appellant was not a beneficiary to it except that its share price would have or were intended to have been increased to meet the projections. In reality, basis the data submitted by the Appellant, such share prices were never reached on the stock exchange. Further, the Appellant could not also benefit with the increased price as it was not permitted to buy its own shares. Also, there has not been any increase in capital either by way of preferential allotment or rights. This all concludes that the Appellant has not been directly or indirectly benefitted by the agreement in question. 5.3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... graphs of the findings of the learned CIT A. He submitted that in paragraph number 5.2.13 the overall gross profit ratio of the assessee for three different financial year was compared which is in the range of 11.53% 7.03%. He also referred to paragraph number 5.2.14 wherein the gross profit ratio with respect to circular trading was also mentioned. He also specifically refereed to the finding of the ld CIT (A) where the transactions were held to be genuine. He submitted that for assessment year 2009 10 the average profit ratio is 8.66%, 2.91% for subsequent year and 4.76% for assessment year 2011 12. He further referred to paragraph number 5.2.16 17 wherein the learned CIT A held that entire sales of the assessee cannot be taxed as income of the appellant and only the net profit can be taxed. He further submitted that the learned CIT A adopted 8.75% as the net profit ratio after holding that the books of accounts of the assessee are not reliable because of the wide variance, and considering the benchmarking of profit @ 8% u/s 44AD. He therefore submitted that to that extent i.e. in deleting addition of 100 % made by the learned AO, no infirmity can be pointed out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suspicious‟ or bogus dealer‟ declared by VAT department. Further it was held that sales made by the assessee, corresponding to the tainted purchase, is not disputed by AO in the remand report. He therefore concluded that when the sales affected by the suppliers are accepted in their hands and purchases made by assessee from them has also gone into the sales of the assessee, the whole transaction cannot be held to be bogus. However he held that when the assessee himself has admitted before the survey team that it is a circular transaction, then in that case, what is taxable Under the act is the income and not the receipt. Thereafter, he tabulated the gross profit earned by the assessee for these three years and held that such gross profit cannot be accepted as in a circular trading transaction there is a predetermined sale price and purchase price. He also noted that there is a wide variance in the gross profit earned by the assessee which is 8.66% for this year, he estimated the gross profit of the assessee at 8.75%, taking support of 8% net profit prescribed u/s 44AD of the act, he estimated gross profit of the assessee of the whole business considering 8.75% as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that merely because the supplier has confirmed the above transaction in its VAT return, same have become genuine, when the employees of the assessee and director is stating on oath that it is merely a circular trading transaction and there is no movement of goods with the bill. 016. Further if a bogus supplier is not caught by Vat authorities, wherein the purchaser himself is saying that it is a bogus purchase, does not matter at all for estimating the income embedded in such bogus purchases of the assessee. As the Bogus supplied was not declared as Bogus by VAT authorities, ld CIT (A) accepted the transaction of Circular Trading as Genuine. 017. Learned CIT A also held that the payments have been made through banking channel and purchases have gone into sales of the assessee and therefore purchases made by the assessee from those bogus suppliers cannot be held to be non genuine. Transaction through banking channel, quantitative details of purchases and sales are the basic traits of circular trading, is not appreciated by the learned CIT A. Therefore, We do not find any justification or evidence available with learned CIT A to hold that the purchases from the sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Director of the company, who is a trustee of the company, is engaged in circular trading. Further, the lower gross profit as has been depicted in the above two decisions of the coordinate benches were not at all justified looking at the gross profit ratio earned by the assessee in its regular business. Further, in those cases the bills were issued which were discounted by the purchaser for financing and in the another case it was the employee who was used for the purpose of issue of the bogus bills. Here, in this case the assessee himself is engaged in this activity. Therefore we reject the argument of the learned authorised representative for adopting such a low gross profit. 021. As we have the guidance available of the honourable High Court as well as the other coordinate benches that how much profit should be imputed to bogus purchases transactions, we deem it fit and proper that profit is required to be estimated only on the amount of bogus purchases. The quantum of the profit as generally estimated in the cases of bogus purchases should be at the rate of 12.5% of such purchases. Accordingly we reverse the order of the learned CIT A and direct the learned assessing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee could not have benefited by the price rigging in the shares of the assessee company the beneficiaries would have been the shareholders at the most promoters. There was also no evidence available of incurring of the expenditure except the agreement. Therefore the addition was deleted. We find that in the present case there existed some agreement between the director of the company with some other party where the other party would help raise the funds to the assessee to preferential allotment or write issue over the period of 12 months. In order to achieve the above object, the other party will move the stock market prices to make it a breach ₹ 60 ₹ 80 within six months. The modus operandi was to acquire 12 15 lakh shares from the market and promoter would be providing funds to the tune of Rs 1 Cr to manipulate market prices. The whole name of this price rigging mechanism was given as screen management charges . We are not concerned with the mechanism as well as the people involved in that. It is for the other regulator to look into this. We are just supposed to know whether assessee has incurred any expenditure or not and consequently addition is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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