Jignesh Desai v. Income Tax Officer .

M. Balaganesh, A.M.:— This appeal of the assessee arises out of the order of the Learned Commissioner of Income Tax (Appeals)-10, Kolkata [in short the ld CITA] in Appeal No. 60/CIT(A)-10/W-35(2)/2014-15/Kol. dated 20.10.2016 against the order passed by the Income Tax Officer, Ward 35(2), Kolkata [in short the ld AO] under section 143(3) of the Act dated 19.02.2015 for the Asst Year 2010-11.

2. The Ground No. 1 & 7 raised by the assessee are general in nature and does not require any specific adjudication.

3. During the course of hearing, the ld AR stated that Grounds 2 & 3 raised by the assessee are not pressed. The same is reckoned as a statement from the Bar and accordingly the Grounds 2 & 3 raised by the assessee are dismissed as not pressed.

4. The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the addition made towards purchases made from M/s Mehul Traders in the sum of Rs. 3,36,451/- as bogus, in the facts and circumstances of the case.

4.1. The brief facts of this issue is that the assessee, an individual, is engaged in the business of trading in imitation jewellery. Assessee is a proprietor of M/s Shreeji Collection having its office at Mumbai and Kolkata. The return of income for the Asst Year 2010-11 was filed electronically by the assessee on 27.9.2010 declaring taxable income of Rs. 5,66,376/-. The ld AO observed that an information was received from the Investigation Wing, Mumbai that the assessee had made transactions during the financial year 2009-10 with the Hawala Dealer M/s Mehul Traders (TIN : 27260365107V) for an amount of Rs. 3,36,451/-. The above information was provided by the Investigation Wing, Mumbai, following the investigation conducted by the Sales Tax Department, Mumbai, Govt. of Maharashtra. As per the findings of the above investigation (which is based on the documents found in the search and seizure operation of the said Hawala Dealer, statement under oath of the said Hawala Dealer and further enquiry of such Hawala Dealer) the said Hawala Dealer, namely, M/s Mehul Traders, had done transactions with different parties including the assessee by way of issuing bogus bills without actual delivery of goods in lieu of commission. In view of this information, the case was reopened u/s 147 and notice u/s 148 of the Act was issued on 11.3.2014. The assessee filed his return of income on 22.4.2014 in compliance to notice u/s 148 of the Act. Further, the assessee sought for reasons recorded for reopening the assessment which was provided to the assessee vide letter dated 9.5.2014. The assessee replied that he had no hawala transactions or bogus bill transactions with M/s Mehul Traders during the financial year 2009-10 relevant to Asst Year 2010-11. Later the ld AO proceeded with the reassessment proceedings by issuing notices u/s 143(2) and 142(1) of the Act. The assessee was asked to furnish Tax Audit Report, Profit & Loss Account and Balance Sheet, bank statements, books of accounts including purchase invoices, purchase register, transport bills, road challans, stock register and sales memo/bills in support of claim of transactions made during the financial year 2009-10. All the documents called for by the ld AO were either produced or explained with reasons for non-production. On perusal of the said documents, the ld AO showcaused the assessee as to why his claim of purchase for the sum of Rs. 3,36,451/- shown to have been made from M.s Mehul Traders should not be treated as purchase made from unaccounted source. The assessee replied to the assessee by submitting the stock position which was worked out and submitted during the assessment proceedings even though the same was not maintained as part of his books of accounts. The assessee also vide reply letter dated 5.1.2015 stated before the ld AO as follows:—

This is to inform you that the details of all purchase made by me are verifiable. I do not understand how M/s Mehul Traders has denied the transactions regarding your queries for M/s Kantrodiwala Manufacturers & M/s Karri Enterprises.

After receipt of your letter my accountant has contacted the Kantrodiwala Manufacturers and he has confirmed that he has not received notice u/s 133(6) although there is no change of address. After conversation with my accountant they have sent you reply directly to you as per Xerox copy enclosed. Kindly consider the same before finalizing the assessment. M/s Karri Enterprises has made mistake in reply they were in belief that it is related to Shreeji Enterprise and there is no transation with Shreeji Enterprise after receipt of your letter my accountant contacted them and he apologized for mistake that he has given reply connected with M/s Shreeji Enterprise instead of Shreeji Collection and they have addressed letter directly to your office and the copy given to us as per Xerox copy enclosed. I shall be pleased if you consider the same while finalizing the assessment.

After receipt of your letter dated 24.12.2014, I am trying to trace Proprietor of M/s Mehul Traders but could not find them.

The ld AO concluded that the assessee was unable to prove his clam of purchase for the sum of Rs. 3,36,451/- from M/s Mehul Traders by recording the following reasons:—

(i) There was no evidence in support of actual receipt of goods claimed to have been purchased from M/s. Mehul Traders. There were challans in support of goods received from other parties but it was not in the case of Mehul Traders. Therefore, it is amply clear that the assessee's claim of purchase from M/s. Mehul Traders is only a bogus claim.

(ii) As per the Tax Audit Report filed in the course of assessment proceedings, no stock register was maintained for the relevant financial year, i.e. 2009-10, and the same was not audited. Moreover, it was mentioned at para 28(a) of Form 3CD that the assessee had not maintained quantitative details of stock during the relevant previous year, 2009-10, under Audit. The claim of the assessee about preparation of Stock extract in the course of assessment proceedings is not acceptable as the assessee has not accounted for each of the stock with supporting bills and vouchers and the assessee has also not valued the same as per actual purchase instead the assessee has taken average value of the stock. The Stock extract produced in the course of assessment proceedings is nothing but a concocted document about the stock prepared after lapse of a considerable time of almost five years just to lend credence to its claim that the purchases” made from M/s. Mehul Traders is genuine.

(iii) The assessee was unable to explain how its business relationship had been established with M/s. Mehul Traders. Further, in the course of assessment proceedings he himself has accepted vide his letter dated 05/01/2015 that he had been unable to trace the proprietor of M/s. Mehul Traders.

(iv) The payment through banking channel is not sacrosanct. It only proves that money had been transferred from one account to another account. It cannot be the only proof of purchase from M/s. Mehul Traders. The claim of purchase had to be supported by documentary evidence of actual receipt of the goods as is evident in case of purchases made from other parties during the-year by the assessee.

(v) The finding of the Sales Tax Department, Govt. of Maharashtra, that M/s. Mehul Traders had issued false bills without delivery of goods was not denied by M/s. Mehul Traders and M/s. Mehul Traders did not approach the said Department to get its name deleted from the list of bogus dealers.

(vi) There was no transaction with M/s. Mehul Traders either in the past or in future by the assessee. On being asked for the reasons for such solitary transaction with M/s. Mehul Traders, the assessee had claimed that the quality of goods supplied by M/s. Mehul Traders were not satisfactory, however, such goods were claimed to have been sold to M/s. J.D. Jewellers. On verification from M/s. J.D. Jewellers it was found that they have made transactions with the assessee during the F. Yr. 2009-10 and the quality of goods received by them from M/s. Shreeji Collection was satisfactory. Thus, the explanation of the assessee about solitary transaction with M/s. Mehul Traders was just an afterthought. Moreover, the facts discussed above clearly show that goods were actually sold to M/s. J.D. Jewellers but they were not purchased from M/s. Mehul Traders but from some other source that remains unexplained.

4.2. The ld CITA upheld the disallowance made by the ld AO by making the following observations:—

“a. There is the clear Information and factual finding that M/s Mehul Traders, Mumbai was found to be a hawala dealer, providing purchase bills (without payment of VAT) to parties, and one such party was the assessee-appellant.

b. The status of the M/s Mehul Traders, Mumbal, the alleged Seller, as on date continues to be a blacklisted one, as per the Maharashtra Sales Tax website. The appellant-assessee has also not been able to provide confirmation from M/s Mehul Traders that It has approached DC (Vigilance), Vikrikar Bhawan, Mazgaon, Mumbal [The appropriate Authority] and got its name deleted from the list of bogus dealers uploaded on the official website of the Department of Sales Tax, Government of Maharashtra. In fact the name continues to be in the list. I do not agree with the arguments of the appellant/Ld A.R. that it has no responsibility in the matter, and that such an expectation is beyond Its control. On the other hand, I find that this lack of effort by the appellant is a contributory factor in the matter of a suspicious and non-genuine transaction.

c. The appellant-assessee. was unable to provide any evidence of the transportation of the goods from M/s Mehul Traders to its place of business. In any business, it is quite expected that even if the goods are handed over by hand, there has to be confirmation of handing over/taking over of goods’ as a part of the record of transactions. These are vital documents, and are a sine quanon, even If there may not be any evidence of freight or transport. In the Instant case, such vital evidence is conspicuous by its absence.

d. There is not much merit in the argument of the Ld A.R. that payments were made by account payee cheques, as these indicate documents for transfer of money, and remain mere documents without the corresponding documents/evidence relating to transfer ‘of goods. In my considered view of the matter, the evidentiary value of payments by bank therefore is enormously diminished for the case at hand, and as such these are to be treated as documents and not as evidence In the emergent circumstances.

e. I also find that there is no merit in the claim of the appellant that the Ld. AO did not conduct any independent enquiry from his side. I find that the assessee-appellant himself had stated that he was not having business relationship with the party as the goods supplied were not satisfactory and there were complaints from the customers. At any rate the onus was cast upon the appellant to clearly bring on record that the purchases were made from M/s Mehul Traders, and that there was actual delivery of goods in the case. For the case at hand, the appellant has failed to discharge such basic onus of proof of delivery.

f. The emergent circumstances, the facts of the case when coupled with the findings of the Sales Tax Department, in my considered view make it clear that M/s Mehul Traders is/was a dummy business offering only bills with no movement of goods. Also, in my considered view there is absolutely no need for the Ld. AO to establish that the money came back to the assessee, by way of cash, on account of such “bogus purchases”. This is so as the assessee has not been able to establish the identity of the party from whom the alleged purchases were made in the first instance itself.

g. Overall, I find that the Ld AO has not only depended on the findings and information made available from the Maharashtra VAT Authorities, he has reached conclusions on the basis on non-availability of proof of transport and delivery of goods and the other corroborative and suspicious findings discussed supra. In the case of ACIT v. Shri Shanti Swarup Jain [2015] 55 taxmann.com 378 (Allahabad), the Hon'ble High Court of Allahabad in order dated 01.09.2014 have observed in IT APPEAL NOS. 133 OF 2013 & 19 OF 2014 (as head noted) as follows:

IT: Where assessee-firm, engaged In business of zips for shoes etc, showed certain purchases made from ‘G’ Enterprises, In view of fact that proprietor of ‘G’ Enterprises admitted that he was running a dummy business, Assessing Officer was justified In making addition under section 69C In respect of bogus purchases

Section 69C of the Income-tax Act, 1961-Unexplained expenditure (Bogus Purchases)-Assessment Years 2008-09 and 2009-10-Assessee-firm was engaged In business of zips for shoes etc.-During assessment proceedings, Assessing Officer noted that assessee had made purchases from ‘G’ Enterprises-Proprietor of ‘G’ Enterprises admitted that he was running a dummy business and firm had not been functioning for last one year-Assessing Officer relying upon said statement, made addition to assessee's Income under section 69C In respect of bogus purchases-Whether on facts, Impugned addition made by Assessing Officer was to be confirmed-Held, yes [para 8] [In favour of revenue

Overall from the facts and circumstances emanating in the case, I find myself agreeable with the findings of the Ld AO, and therefore sustain the action of addition of Rs. 3,36,251/- under the head of “bogus purchases”, and accordingly the ground taken by the assessee-appellant stands dismissed.”

4.3. Aggrieved, the assessee is in appeal before us on the following grounds:—

“4. For that in the facts and circumstances of the case the Assessing Officer erred in holding that the purchase from Mehul Traders for Rs. 3,36,451/- was bogus. The said addition was uncalled for and the same was bad in law and thus the addition be deleted.

“5. For that in the facts and circumstances of the case the Assessing Officer failed to appreciate that without purchase of diamonds it was not possible for the assessee to sell the diamonds or hold the same in its closing stock. Thus the said addition of Rs. 3,36,451/- was uncalled for and the same was bad in law and thus the addition be deleted.”

4.4. The ld AR argued that the assessee's turnover from his imitation jewellery business was Rs. 56.34 lacs and had reported gross profit of Rs. 10.59 lacs which works out to 18.8% of turnover. He buys the goods from various parts of the country and sells in Kolkata. The entire purchases have been accepted as genuine except the purchases made from M/s Mehul Traders in the sum of Rs. 3,36,451/-. The ld AO does not dispute the purchases made from M/s Mehul Traders but instead only says that it is made by the assessee from unaccounted source. The findings given by the Sales tax department, if any, which is the triggering factor for reopening of the assessment, is either furnished to the assessee or no where reproduced in the assessment order. Even the reasons recorded for reopening the assessment does not contain the said findings of sales tax department. The assessee had prepared the stock statement and had furnished the same before the ld AO as the assessee cannot afford a full time accountant to maintain the stock registers on a day to day basis, eventhough the entire details of the stocks coming in and going out are available in the form of purchase and sale invoices. The said stock statement was furnished to the ld AO by collating the information available in various purchase and sale invoices and just presented the same in the form of a statement. The assessee had linked the details of each sales made with the respective purchases party wise and furnished a statement to the ld AO. The purchases made from M/s Mehul Traders were sold to M/s J.D. Jewellers. The ld AO even made enquiries with M/s J.D. Jewellers in this regard behind the back of the assessee and concluded that the sales made to M/s J.D. Jewellers are genuine. Then how can the purchases made from Mehul Traders be doubted. Both the ld AO as well as the ld CITA did not bother to make any enquiries with M/s Mehul Traders and proceeded to frame the assessment and confirm the same respectively merely by the information received from Investigation Wing, Mumbai which was originally triggered from the findings of the sales tax department at Mumbai. He also argued that the entire quantitative details of purchases, sales and closing stock with their respective values were also furnished before the ld AO. Infact the purchases made from M/s Mehul Traders were lying in closing stock in part, which was accepted by the ld AO. Without making the purchases, how could there be any sales and closing stock.

4.5. In response to this, the ld AO stated that the tax auditor had stated that the assessee had not maintained the stock register in tax audit report. The assessee had produced the transport challans to prove the genuineness of its purchases except purchases made from M/s Mehul Traders.

4.6. In defence, the ld AR also explained that M/s Mehul Traders had delivered the articles personally to the assessee and hence there is no question of transport bills and road challans for the same. Since the transaction was made for the first time with Mehul Traders, and moreover the assessee is an established player in this field of business, the said party M/s Mehul Traders had come to the office premises of the assessee and displayed his articles for placing the order and accordingly delivered the goods personally to the assessee. This business model carried out by the assessee cannot be doubted or disputed by the ld AO.

4.7. We have heard the rival submissions and perused the materials available on record including the paper book filed by the ld AR comprising of bill for purchase made from M/s Mehul Traders (enclosed in Pages 33 to 35 of Paper Book); bank statements showing payments against the purchases (enclosed in Pages 36 to 41 of Paper Book); purchase register reconciled with accounts for purchase figure (enclosed in Pages 42 to 44 of Paper Book); Ledger account of Mehul Traders as on 31.3.2010 (enclosed in Page 45 of Paper Book); audited accounts for the year ended 31.3.2010 (enclosed in Pages 46 to 50 of Paper Book); statement showing sales made from the respective purchases (enclosed in Pages 51 to 56 of Paper Book) and sales bills related to sales made out of respective purchases (enclosed in pages 57 to 68 of Paper Book). We find at the outset, the entire details relevant to total purchases and sales together with the respective bills and evidences were duly submitted by the assessee before the lower authorities. The purchases made from M/s Mehul Traders in the sum of Rs. 3,36,451/- is also included in the total purchases given above. We find that out of the purchases made from M/s Mehul Traders, the following closing stock was lying as on 31.3.2010:—

Particulars Qty in pieces Value Pendant Sets 154 7,840 Mang Tika 900 20,700 Pendant 1878 25,580 54,120

This closing stock of Rs. 54,120/- was accepted by the ld AO as genuine together with the other closing stock of articles. We are also in agreement with the arguments of the ld AR that without making the purchases, how could there be sales and closing stock. It is not in dispute that the assessee had produced the details of each and every sale by linking it with the respective purchases made. Accordingly the purchases made from M/s Mehul Traders had been sold to M/s J.D. Jewellers. Infact the ld AO had even verified the factum of sales made to M/s J.D. Jewellers with the said party behind the back of the assessee wherein it was accepted by them and the ld AO gives a finding to this effect in his assessment order. Moreover, we find that the ld AO had not disputed the purchases made by the assessee from M/s Mehul Traders. He only disputes the fact that the same is made from unaccounted source. In this regard, the relevant operative portion of the ld AO's order is reproduced below:—

6.4. In view of the above discussions, the impugned purchases from M/s Mehul Traders for the sum of Rs. 3,36,451/- is treated as purchase made from unaccounted source of the assessee and the same is added to the total income for the Assessment Year 2010-11.

We find from the perusal of the bank statements of the assessee, that the payments for purchases have been made by account payee cheque on 22.8.2009 vide cheque no. 83428 drawn on Axis Bank from A/c No. 201010200004589 for Rs. 3,36,451/-. The said bank account is the disclosed bank account of the assessee which is duly reflected in his balance sheet and the return of income. Hence there is no question of treating the same as purchase made from unaccounted source. We are also in agreement with the explanation offered by the assessee for not producing the transport bills with road challans in respect of purchases made from Mehul Traders. It is normal business practice that the new customer would display his goods to an established player and hand over the goods in person to the established player like assessee. This would be even more logical in the line of business in which assessee is engaged in (i.e. imitation jewellery).

We find that the entire reassessment has been triggered only based on the information received from Investigation Wing, Mumbai, which in turn had obtained information based on the findings of the sales tax department at Mumbai. The relevant findings of the sales tax department were not furnished to the assessee. The ld AO also had not bothered to make independent enquiries with M/s Mehul Traders to ascertain these facts. We find that the reliance placed by the ld CITA on the decision of the Hon'ble Allahabad High Court in the case of ACIT v. Shanti Swarup Jain reported in (2015) 55 taxmann.com 378 (Allahabad) dated 2.9.2014 is not applicable to the facts of the instant case. The facts in the said case are as below:—

The assessee was engaged in the business of zops for shoes etc. During the assessment proceedings, the Assessing Officer noted that the assessee had made the purchases from ‘G’. The Assessing Officer treated the said purchases as bogus after examining ‘R’ i.e. proprietor of ‘G’, whose statements were recorded, wherein he admitted that he was running a dummy business and firm had not been functioning for last one year. Accordingly, certain addition was made to assessee's income by rejecting the books of accounts of the assessee and income determined on estimate basis.

In the instant case, no enquiries were made by the ld AO from M/s Mehul Traders and no statements were recorded from him to prove any business relationship with the assessee as bogus. Moreover, the books of accounts have not been rejected by the ld AO in the instant case. As stated earlier, the purchases from Mehul Traders were infact not at all doubted by the ld AO as is evident from the language used by the ld AO in his concluding paragraphs as reproduced supra. He only doubts the fact that the said purchases were made from unaccounted source of the assessee which has been assailed and proved the contrary. Hence the decision of Hon'ble Allahabad High Court is factually distinguishable and hence does not advance the case of the revenue. We deem it fit not to discuss the various case laws relied upon by the ld AR in the instant case for the sake of brevity. In these facts and circumstances and in view of our aforesaid findings, we do not have any hesitation in directing the ld AO to delete the addition made in the sum of Rs. 3,36,451/- towards purchases from Mehul Traders. Accordingly, the grounds 4 & 5 raised by the assessee are allowed.

5. The Ground No. 6 raised by the assessee is with regard to chargeability of interest u/s 234A/B/C/D of the Act which is only consequential in nature and does not require any specific adjudication.

6. In the result, the appeal of the assessee is partly allowed.