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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 ..... 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 circumstances of the case and in Law, the Ld.CIT(A), Mumbai erred in estimating the gross profit at product percentage of 8.75% on circular transactions and directing the AO to restrict the addition to Rs.1,62,531/- as against Rs. 16,48,30,000/- stating that, "whilst the assessee has indulged itself into circular trading as was accepted before the survey team, without giving any findings as to how 8.75% GP can be taken since the corresponding expenditures have already been claimed in the P&L account and further er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is a company engaged in pharmaceutical formulation business. It filed its return of income on 29th September, 2009 declaring total income of Rs.4,30,02,030/-. The assessment under Section 143(3) of the Act was completed on 29th December, 2011 at a total income of Rs.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 Rs.16,48,30,000/- being bogus purchases and Rs.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 April, 2016 that original return filed may be treated as return in response to the above notice. 07. In this case, a survey under Section 133A of the Act was carried out, wherein it was found that assessee company has obtained bogus purchases and accommodation bills of Rs.16,48,30,000/- from Dr. Daston Labs Ltd. and further there is an unexplained cash expenditure of Rs.1,18,00,000/- for manipulation of share price. The learned Assessing Officer issued show cause on 18th November, 2016 and after the reply of the assessee company, the learned Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee. 2.4 In view of the above, you are hrereby show cause as to why the said bogus purchases as tabulated above should not be disallowed and added to the total income of respective assessment years in your case. "........... 3. During the course of survey proceedings at 205, P.N.Kothari Industrial Estate, LBS Marg, Bhandup(West), Mumbai-400078, certain loose papers were numbered 1 to 4 and impounded as Annexure A-1. While explaining the contents of the said pages, Mr. Ashwani Khemka in his sworn statement stated that page No. 1 and 2 contains details of understanding had with one Mr. Bipin Shah, who had approached him in the year 2008 for helping the assessee to manipulate the share price of his shares in lieu of consideration, however the same did not go thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is duly considered, but not accepted for the following reasons: i. It needs to be mentioned that during the course of statements recorded during survey, Shri Ashwani Khemka was asked to substantiate these purchases shown to have been made from DDLL, he admitted that the assessee company having entered into accommodation entry of purchase bills from DDLL for which no physical delivery was received. However, Shri Ashwani Khemka failed to substantiate his plea that the said bogus purchases were part of turnover purposes only as corresponding bogus sales had been affected and no cogent documentary evidences in support of this claim were furnished. It may also be noted that vide question No.14, Mr.Ashwin Khemka, Managing Director of the assessee company was requested to state whether any bills/vou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 requested to confirm whether any such material had ever been received at Rabale unit as stated in the said bills and whether any purchase order ever issued for such material. In response, Shri Mahendra Kalwankar stated that no such material had ever been received by SPL at Rabale unit. For the sake of ready reference, the scanned copy of the relevant portion of the question Nos. 19 & 20, and answer thereto of sworn statement of Shri Mahendra Kalwankar is as under : "Q.19 Are you aware of a purchase party called Anjaneya Biotech P. Ltd./Anjaneya Life Sciences Ltd./Datsons Labs Ltd.? If so, what is the material supplied by such party? Ans.: I don't remember any such party. Q.20 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial ? 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 includes parties such as Sharon Bio-medicine Ltd., Benzochem Lifesciences P. Ltd., Adiatika Pharma (P) Ltd., G.M.H.Laboratories, Unijules Lifesciences Ltd., Cheryl Laboratories Ltd. Has any trading activity happened with them? Ans: All these are trading parties, whose bills are sent here for accounting purpose. The material is never received in the Rabale unit. Q.19. M all these cases, only bills and challans are available. No lorry receipts and no packing list are available. There is no proof of delivery of the matieral. Unlike manufacturing material, where GRN is created and all kinds of documentation, including Register entries and BIN cards, are done for purchase, in trading details are available. Please explain the same. Ans: As the goods are not received in factory and received at the head office, the standard procedure of purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence 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 goods by any third parties evidence even after given ample opportunities. 4.11 The onus is on the assessee to prove that the purchases were genuine by producing the parties and related evidences The onus to prove the correctness and genuineness of any claim made by the assessee is the assessee itself as it is held in the case of CIT vs. Calcutta Sales Agency Ltd. 19 ITR 191. In this regard, it is also pertinent to mention that while dealing with the concept of burden of proof, onus of proving is always on the person who makes the claim and not on the Revenue. The Hon'ble Supreme court in the case of CIT VS Durgaprasad More 82 ITR 540 and Sumati Dayal Vs. CIT 214 ITR 801 has held that the apparent must be considered real until it is shown that there are reason to believe that the apparent is not real and that taxing authorities are entitled to look into surr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 apparent sellers who had issued sale bills were not traceable. Those goods were received from the parties other than the person who had issued bills for such goods. Though the purchases are shown to have been made by making payment thereof by account payee cheque, the cheque have been deposited in bank accounts ostensibly in the name of the apparent seller, thereafter the entire amounts have been withdrawn by bearer cheques and there is no trace or identity of the person withdrawing the amount from the bank account. In the light of the aforesaid nature of evidence, it is not possible to record a different conclusion, different from the one recorded by the commissioner (Appeals) and the tribunal concurrently holding that the apparent sellers were not genuine, or were acting as conduit between the assessee firm and the actual sellers of the raw materials. Both the commissioner (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee as income from undisclosed sources holding that gifts received by assessee from one 'K' were not genuine Commissioner (Appeals) as well as Tribunal upheld findings of Assessing Officer On rectification application, Tribunal held that there was no error apparent on record after recording that mere routing of a gift through a banking channel would not by itself establish that gift was genuine - Whether, therefore, finding of facts recorded by Tribunal could not be interfered with - Held, yes" d) The Hon'ble Supreme Court, following the earlier decision in CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78, noted that where the conclusion of the Tribunal was not unreasonable or perverse or based on no evidence, no question of law as such would arise for consideration. The Hon'ble Court further observed thus: "25. ...The doubtful nature of the transaction and the manner in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmodation 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 and documents produced by the assessee, it is crystal clear that the assessee did not purchase the goods from DDLL. Further, summons u/s. 131 of the IT.Act, 1961 were again issued during scrutiny proceedings to sale parties as per addresses given by assessee. However, as per the Inspector's report the said parties could not be traced. Hence, assessee's contention that purchases made are a part of circular trading does not hold ground. 4.20 In view of the above discussion, the disallowance on account of bogus purchases of Rs. 16,48,30,000/- is being made to the total income of the assessee company. 4.21 The penalty proceedings u/s 271(1)(c) of the IT Act, 1961 are being initiated separately for filing inaccurate particulars of income leading to concealment of income Manipulation of share price: 5. With regard to manipulation of share price, during the course of survey proceedings at 205, P.N. Kothari Industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company for manipulation of share price and the same needs to be disallowed as per the provisions of section 69C of the 1.T.Act, 1961." 08. Aggrieved by the order of the learned Assessing Officer assessee preferred the appeal before the learned CIT (A), who passed an order as per paragraph no. 5.1 to 6 as under:- "5.1 I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. 5.2 Ground No. 1- Addition of Rs.16,48,30,000 as Bogus Purchase 5.2.1 The matter relates to the goods with respect to which no physical delivery has taken place. On this point, the AO as well as the Appellant have agreement. The AO's version is that these are bogus purchases; whereas the Appellant right from the day of survey has been conceding that it entered into circular transactions; and the profit on each transaction is offered for taxation. 5.2.2 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns with Your Appellant l. Copy of VAT Returns filed by Aanjaneya Biotech Private Limited m. Fresh certificate of incorporation for change of name n. Complete Chart showing details of purchases, sales, Gross Profit made on each of the transaction, and percentage of Gross Profit o. Mapping of Sales vis-à-vis purchases p. Returns of Central Excise showing trading turnover made q. Copies of bank statements showing details of receipts from debtors and payments made to creditors indicating the same amounts being received and disbursed under the circular trading: r. Agreement with Bipin Shah to arrange funds for expansion of the Company for which he was to be paid professional fees. It was further mentioned that share prices were to be raised to Rs.60 to enable the financers issue credit line to the Company, however, the share prices were never raised to that extent. Various BSE price trends indicating movement of shares is submitted. 5.2.5 From the documents submitted, I find that the transactions of purchase from Aanjaneya Biotech Private Limited have been confirmed by the said Company, and even the AO, during Remand Proceedings, has not raised any adverse inferen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions disclosed by the supplier in its books, who is an income tax assessee, then it cannot be assumed that the purchases are bogus more so when the transaction has been supported by proper documentary evidences and payments are made to suppliers through proper banking channels. This view is supported by ACIT v. M/s Jaybharat Textiles & Real Estate Ltd. Appeal No. 5163/Mum2013 (Mum) ITAT). Hon'ble ITAT observed that in response to the notices issued under 133(6) to the suppliers whom AO doubted to have be bogus one appeared before the AO and confirmed effecting sales to assessee. Further, the AO also enquired the directors of these companies and on perusal of statement recorded from directors there is nothing on record to suggest that sale and purchase transaction between the assessee and these companies are non genuine. On the contrary suppliers have submitted copies of their audited books of accounts wherein they have considered the sales made to assessee in their books and tax returns. Further, the assessee produced purchases and sales bills and other documentary evidences in support of purchases effected by it from all suppliers and it is also not in dispute that pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From the charging pattern, it is very apparent that the purchases are made at a fixed rate for a few months and the sales are made at fixed rate for a few months and Gross profit of exact percentage is derived for particular period. It is pertinent to observe that name of the product is Quinine Sulphate throughout the impugned assessment year; and the Gross profit made initially was 1.96%, which rose to 16.67%, which declined in 9.09%, again rose to 16.67%, which fell down to 2.91% in financial year 2009-10 (Assessment Year 2010-11) throughout, which rose to 4.76% in financial year 2010-11 (Assessment Year 2011-12). Such unrealistic movement fetching exactly the same percentage of profit from period to period in a systematic way leads to an inference that the purchases as well as sales were made under a particular pre-determined scheme. The profitability movement is tabulated for the sake of brevity as under: Period % of Profit Total Sales Total Purchase Gross Profit F.Y. 2008-09 (AY 2009-10) 17/05/2008 to 23/08/2008 1.96% 65,254,500 63,975,000 1,279,500 05/09/2008 to 29/09/2008 16.67 19,680,000 16,400,000 3,280,000 02/10/2008 to 24/11/2008 9.09% 64,053,000 58,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Pvt. Ltd., v. ITO ITA No.2400 and 2407/Ahd/2012 wherein it was held that, "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 not be any taxable income in the hands of appellant except what has been shown in the return of income. However, if AO's view is accepted that purchases are not verifiable, even then it will be a case of net profit estimation." It was further held that: (i) All the parties from whom 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the above, I hereby direct the AO to restrict the addition to Rs. 1,62,531 only. This ground of appeal is partly allowed. 5.3 Ground Nos. 2 & 3 - Addition of Rs.1,18,00,000 as unexplained cash expenditure 5.3.1 Brief facts of the case are that, during the course of survey, a lose paper was found wherein the survey team observed that an understanding with one Bipin Shah was reached for manipulating stock prices. The Appellant explained to the survey team that no such understanding was ever implemented, and none of the Appropriate Authority like Stock Exchange or SEBI charged the Appellant with an allegation of price manipulation in the Stock Market. The AO alleged that market price during this period had rose by around 50% to which the Appellant explained that market price is driven by the market forces and the Appellant Company had no role to play. The Appellant argued that the understanding did not take final shape, and was not acted upon. It was also submitted 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the share prices did not rise to the level of Rs. 60 to 80 per share. 5.3.6 Further, it was submitted that there was no increase in capital as was agreed between the Managing Director and Bipin Shah. Moreover, the Appellant Company could not be the beneficiary of this price mechanism as the Company could not buy its own shares due to restrictions under the Companies Act 1956. 5.3.7 The Appellant further submitted that even if it was 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upported the order of the learned assessing officer. 012. Learned authorised representative supported the order of the learned CIT - A for deletion of addition and further submitted that even the additions confirmed by the learned CIT - A cannot be sustained in view of the audited books of accounts and acceptable gross profit ratio of the assessee. The learned authorised representative took us to the various paragraphs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5% of gross profit as a reasonable addition. The learned CIT - A considered the submission of the assessee and in paragraph number 5.2.5 that the transactions of purchases from the above party have been confirmed by the said company and also corroborated by VAT payments and returns. In the remand proceedings the AO did not controvert this. The learned CIT - A also held that the seller was not a "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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t business of an assessee, for estimating the profit of an absolutely bogus transactions carried out by the assessee of circular trading transaction. We do not find any justification for taking support of net profit ratio prescribed Under Section 44AD of 8% for estimating the gross profit of the assessee at the rate of 8.75%. 015. The learned CIT - A has also grossly erred in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were taken and the director of the company also confirmed that the transactions are bogus in the form of circular trading and further the profit declared by the assessee itself is higher then those profit ratio. Further the case involved in impugned appeal is of a listed limited company at the stock exchange, where 85.41% shares are held by nonpromoters, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT - A noted that the learned assessing officer has made the addition merely on the basis of the agreement without giving any reason for the addition. Further the agreement was executed between Mr Ashwin Khemka and One Mr Bipin Shah and the assessee company was not at all a beneficiary. He further held 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 Rs. 60 - Rs. 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 pric ..... X X X X Extracts X X X X X X X X Extracts X X X X
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