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TMI Blog2022 (8) TMI 192X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A) is justified in restricting the disallowance of Rs.11,47,32,742/- made by the A.O on account of bogus purchase from 100% to 5% of such bogus purchases without appreciating the facts that the assessee failed to prove the bona fide of purchases made from seven bogus parties which were proved to be non-existent in the physical inquiries conducted during the course of assessment? 2) Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in restricting the disallowance from 100% to 5% of such bogus purchases without appreciating that bogus purchase could not be restricted to certain percentage when the entire transaction was found as bogus as upheld by the Hon'ble Guj High Court and Apex Court in the case of N.K Proteins (Industries) Ltd. Vs. ACIT TA No.242/2003 dated 20/06/2016 and SLP(C) CC No.963/2017 dated 16/01/2017?" 3. Brief facts qua the issue are that assessee filed its return of income on 31.10.2014 declaring total income of Rs.26,69,863/-. The case of assessee was selected for complete scrutiny. Accordingly, a notice u/s 143(2) of the Act was issued on 24.09.2015 and duly served upon the assessee. Further a notice 142(1) of the Act wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer, the assessee carried the matter in appeal before Ld. CIT(A) who has restricted the addition at @ 5% of unverifiable purchases observing as follows: "8.8 In interest of principles of uniformity and consistency the same decision is taken in the instant appeal. The AR has also raised this as alternative plea. Accordingly, a disallowance of 5% of impugned unverified purchases of Rs.14,56,72,642/- is made. The disallowance amounts to Rs.73,28,630/-. The grounds of appeal are partly allowed." 5. Aggrieved, the Revenue is in appeal before us. 6. Before us, Ld. CIT-DR for the Revenue argued that these parties relate to Rajendra Jain Group cases who used to provide accommodation entries/bogus purchase entries therefore, original addition @ 100% of bogus purchases made by the Assessing Officer should be sustained. 7. On the other hand, Ld. Counsel for the assessee contended that out of seven parties only two parties belong to Rajendra Jain Group cases. He further submitted that assessee has submitted bills, vouchers and all transactions were through banking channel hence the entire addition on account of unverifiable purchases should be deleted. 8. We have heard both the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, wherein he had admitted that his family members are managing various entities which are providing accommodation entries. During the course of search, blank cheque book signed by dummy partners / directors /proprietor of entities were found and seized. It was informed that assessee is one of the beneficiaries of bogus purchase form three following entities managed by Bhanwarlal Jain Group. The assessee has shown following purchased from the said parties: Name of the Party Amount Parvati Export 2,00,06,398/- Mahalaxmi Gems Pvt Ltd 2,28,37,445/- Mayur Export 5,56,500/- 4,34,00,343/- 5.On the basis of such information, the Assessing Officer (AO) formed opinion that income of the assessee of Rs.4.34 crore has escaped from assessment and that he was satisfied that it is a fit case for reopening under section 147 of the Act. The assessee in response to notice under section 148, filed his reply dated 28.04.2014, stating therein that return of income filed on 26.09.2007 may be treated return in response to notice under section 148 of the Act. The assessee demanded copy of reasons recorded. The copy of reasons recorded was provided to the assessee. The assessee fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he has taken prior approval of higher authorities as required under section 151 of the Act. Therefore, reopening of assessment under section 147/148 of the Act is void and need to be quashed. No independent enquiry is conducted by AO before issuing notice under section 148 of the Act. The AO purely acted on the information received from the Investigation Wing. The AO was required to form his own opinion that income has escaped assessment. The AO has not applied his mind to the information the basis and the material of the so-called information. The AO acted on vague information. During the original assessment, the assessee furnished all details related to the transactions of all three concern. The AO has no new material or information for reopening. The assessee disclosed true and material things and the return of income and there is no escapement of income of the assessee. The re-opening of the assessment is based on third party information, which was recorded during the search action in their places. The initiation under section 148 of the Act is bad in law being based on statement of third party. The AO has not mentioned any tangible material to prove his contention. On addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld.CIT(A) concluded that in holding assessment as invalid for the above reason without going into merit would be amount to gave undue benefit to the assessee for technical mistake or omission by AO and the principle of equity do not allow this, without considering the grounds on merit. 9. On merit, the ld.CIT(A) after discussing the submission of assessee held that AO has not discussed about any details of books of accounts, documents, stock register produced by assessee during the assessment. The AO neither examined nor found any defect in the document to discredit the same. The assessee has produced day to day stock register, details of purchase and sale. The purchases made during the year are sold during the year as seen from the trading account. If the impugned purchases are treated as bogus, then the stock in hand will become negative from 26.06.2006 onwards and no sale is possible in absence of purchases. The AO relied on the statement of Bhanwarlal Jain recorded by Investigation Wing against, copy of purchase bill, copy of bank statement, showing payment, day to day stock register, incoming and outgoing diamonds and daily stock tally, confirmation of the impugned partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than 5%. However, in the present case, the assessee has merely shown Gross Profit Rate only at 0.78% of turnover, accordingly, the ld.CIT(A) was of the view that disallowance of 12.5% of impugned purchases/bogus purchases would be reasonable to meet the end of justice, hence the disallowance was restricted to 12.5% of the impugned purchase. 11.Aggrieved by the order of ld.CIT(A), both the parties have filed cross appeals. The assessee has challenged the validity of reopening as well as sustaining the addition to the extent of 12.5% only. Likewise, the Revenue has assailed the order for sustaining addition to the extent of 12.5% only. We have noticed that there is typing mistake in the ground no. 2 of revenue's appeal wherein the assessing officer has mentioned the additions of '5%' instead of '12.5%'. 12.We have heard the submission of ld.CIT-DR for the Revenue and the ld.Authorised Representative(AR) of the assessee. We have also gone through the various documentary evidences furnished by assessee. The ld.CIT-DR for the Revenue supported the order of AO. The ld.CIT-DR submits that Investigation Wing, Mumbai made a search on Bhanwarlal Jain Group. During the search and after se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO has not made any independent investigation. The AO reopened the case of the assessee on the basis of third party information without making any preliminary investigation. The AO received vague information about providing accommodation entry by Bhanwarlal Jain Group. No specific information about the accommodation entry obtained by assessee was received by AO. There is no live link between the reasons recorded qua the assessee. Therefore, the re-opening is invalid and all subsequent action is liable to be set aside. 15.On account of additions of bogus purchases, the ld.AR submits that in the original assessment, the assessee filed its complete details of purchases to prove the genuineness of expenses. The AO accepted the same in the assessment order passed under section 143(3) on 10.03.2009. During re-assessment, the assessee again furnished complete details about the genuineness of purchases. The assessee filed confirmation purchases invoices, accounts of the parties, bank statement of assessee showing transaction to the banking channel. The AO has not made any comment on the documentary evidence furnished by assessee. The AO solely relied upon the statement of third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and have gone through the order of the lower authorities. We have also deliberated on each and every case laws relied by both the parties. We have also examined the financial statement of all the assessee(s) consisting of computation of income and audit report. We have also gone through the documentary evidences furnished in all cases. Ground No.1 in assessee's appeal relates to the validity of reopening. The ld AR for the assessee vehemently argued that the AO reopened the case of the assessee on the basis of third party information, and without making any preliminary investigation, which was vague about the alleged accommodation entry by Bhanwarlal Jain Group. And that there was no specific information about the accommodation entry availed by the assessee. There is no live link between the reasons recorded qua the assessee. We find that the assessee has raised objection against the validity of the reopening before the AO. The objections of the assessee was duly disposed by AO in his order dated 09.02.2015. The assessee raised ground of appeal before ld CIT(A) while assailing the order of AO on reopening. The ld CIT(A) while considering the ground of appeal against the reopenin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was carried by the AO. The AO has not disputed the sale of the assessee. The AO made no comment on the evidences furnished by the assessee. We further find that ldCIT(A), while considering the submissions of the assessee accepted the lapses on the part of the AO and noted that no sale is possible in absence of purchases. The Books of the assessee was not rejected by the AO. The ldCIT(A) on further examination of the facts and various legal submissions find that Ahmedabad Tribunal in Bholanath Poly Fab Private Limited (supra) held that in the such cases the addition of bogus purchases was sustained to the extent of 12%, on the observation that the assessee may have made purchases from elsewhere and obtained the bills from impugned supplier to inflate Gross Profit Rate. The ld CIT(A) by considering the overall facts, concluded that the 100% disallowance of purchase is not justified. We also find that the ld.CIT(A) also considered the decision of jurisdictional High Court in Mayank Diamonds Pvt. Ltd. (supra) and compared the fact of the present case with the facts in Mayank Diamonds Pvt Ltd (supra) and noted that assessee in that case was also engaged in the trading of polished diam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue leakage. Therefore, considering overall facts and circumstances of the present case, we are of the view that disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage. In the result the ground No. 2 of appeal raised by the assessee is partly allowed and the grounds of appeal raised by revenue are dismissed." 9. Since the issue raised in Revenue's appeal is squarely covered by the order of Co-ordinate Bench, in the case of Pankaj K Choudhary (supra) and there is no change in facts and law and the Revenue as well as assessee are unable to produce any documents to controvert the aforesaid findings of Co-ordinate Bench, in the case of Pankaj K Choudhary (supra). We find no reason to interfere in the said order of Co-ordinate Bench, therefore respectfully following the binding order of Co-ordinate Bench we allow Revenue's appeal partly with same direction. 10. In the result, Revenue's appeal is allowed partly. 11. Now, we shall adjudicate assessee's Cross Objection No. 13/SRT/2020, wherein the grounds raised by assessee are as follows: "1. On the facts and circumstances of the case and law, the Ld. CIT(A) erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions are that they relate to bogus purchases. The matter discussed by the AO in the assessment order was related to bogus purchases therefore ld CIT(A) corrected unintentional mistake committed by AO that is, corrected the mistake of quoting wrong section. We note that just to quote "wrong section" while making an assessment order does not vitiate the findings of the entire assessment order. The ld CIT(A) has co-terminus power as that of assessing officer and to correct the mistake of section as per the substance discussed in the assessment order does not mean enhancement of assessment without giving notice to the assessee. That is, when the substance of the transactions, as discussed in the assessment order by the assessing officer are in the nature of bogus purchases, then it would not mean enhancement of assessment, and just because ld CIT(A) made correction in the section in accordance with the substance discussed in the assessment order does not vitiate the appellate order. For this, reliance can be placed on the judgment of the Hon`ble Supreme Court in the case of Navinchandra Mafatlal v CIT [1955] 27 ITR 245, 261, affirmed, [1961] 42 ITR 53 (SC), wherein it was held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to various persons as per Note 9 to the balance sheet which stands at Rs.81.49 crores as on 31.03.2015. These persons appear to be related to the assessee-company and also no interest receipt in respect of these long term loans given was shown. Therefore, applicability of section 2(22)(e) of the Act was necessarily required to be verified which was not done during the course of assessment proceedings. 20. Further, ld PCIT noticed that there was gross disproportions between the figures of foreign exchange rate fluctuation loss and fluctuation gain vis-à-vis the corresponding export and import. Therefore, the correctness of the loss claimed on this account was required to be verified for thoroughly which was not done during the course of assessment proceedings. 21. In response to the aforesaid show cause notice, assessee filed written submission and contended therein that order of the AO is neither erroneous nor prejudicial to the interest of Revenue as Section 2(22)(e) apply in the hands of shareholder who received loan whereas in this case the assessee-company had given the loan and advances to those persons who are not shareholders of its. Further, in respect of issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld PCIT and other materials brought on record. We find merit in the submissions of ld DR for the Revenue, as he pointed out that parties to whom loan and advances were given, whether they were shareholders or creditors, is not clear, therefore contention of the ld Counsel can not be accepted that assessee has given loan not to the shareholders but creditors, as the assessing officer did not make inquiry to this effect. Moreover, about the issues raised by ld PCIT, assessing officer has not raised any question by way of issuing notice under section 142(1) of the Act nor assessee has replied to it during assessment stage. Therefore, it is a complete failure on the part of the assessing officer, as he did not apply his mind. The ld PCIT observed that long term loans were given by the assessee-company to various persons who appear to be related to the assessee-company and also no interest receipt in respect of these loans was shown. Therefore, provision of Section 2(22)(e) of the Act attracted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther in individual capacity or in addition to voting power s a Karta of HUF or on behalf of a mine Shareholding pattern in the holding company is of utmost importance. Similarly, ascertaining the profit ratio in concern where shareholder is a member or partner to have substantial interest is also equally important. iii. It should be confirmed that company making payment of loan/advance is a closely held company and its shareholders holding 10% or more voting power should also old substantial interest in such concern. iv. In case loans/advances including ICD/Deposits etc are made to shareholders/concerns in which shareholders have substantial interest or made on behalf of shareholders, then investigation should be made to ascertain the incidence of "Deemed Dividend" v. The closely held company should have accumulated profits which includes reserves and also include proportionate profit of the profit of the whole year. vi. All the factual details i.e. shareholding pattern of closely held company status of recipient of loan/advance i.e. beneficial shareholder either in individual capacity or as a member/partner of a concern, quantum of accumulated profits should be clearly men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the AO has allowed claim of the assessee in a slipshod manner without conducting any inquiry, then in the case of no inquiry, the assessment order is not only erroneous but also prejudicial to the interest of revenue. The order of assessment has to be a speaking order and when the fact of others view has not been mentioned and the claim of expenses pressed by the assessee has been allowed without making any inquiry, then the order must be held as erroneous and prejudicial to the interest of revenue. Hon'ble High Court has also considered ratio of earlier decisions viz. decisions of Hon'ble Apex Court in the case of Rampyari Devi Sarogi vs CIT (1968) 67 ITR 84(SC), Tara Devi Aggarwal vs. CIT (1973) 88 ITR 323 (SC) and the decision in the case of Malabar Industrial Company Ltd vs. CIT, 243 ITR 83 (SC) and decisions of Hon'ble Jurisdictional High Court of Delhi in the case of Gee Vee Enterprises vs. ACIT (supra) while passing the order in favour of the revenue in the case of CIT vs. Nagesh Knitwears Pvt. Ltd. (supra). Therefore, based on these facts and circumstances, we uphold the order passed by ld PCIT under section 263 of the Act, dated 22.03.2019 and dismiss the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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