TMI Blog2011 (6) TMI 802X X X X Extracts X X X X X X X X Extracts X X X X ..... s have been established as bogus, therefore sales are not fully verifiable - Also, it reduced the trading addition made by AO - HELD THAT:- Complete books of account were produced before learned CIT(A) which were audited. In our considered view, observations of ld. CIT (A) regarding bogus sales are not correct as assessee has made sales from its stock which has not been disturbed, sales made by assessee have been accepted. If other parties are bogus then it cannot be said that the genuine party who made sales to these parties are also bogus. Written submissions filed on behalf of the assessee are self-explanatory. In some of the branches the GP rate shown is higher and only in one branch the GP rate declared by assessee is lower, reason for the same has been explained. No defects in the books of account were found. All the purchases and sales are vouched. Therefore, we are of the considered view that there was no justification in making trading addition and sustaining partly at the end of the learned CIT(A). We hold that learned CIT(A) was not justified in restricting the trading addition - Accordingly, same is deleted Unexplained Cash Credits u/s 68 - AO treated an amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly:Calibri; mso-hansi-theme-font:minor-latin;} <![endif]--> R.K. Gupta, Judicial Member And N.L. Kalra, Accountant Member For the Appellant : Subhash Chandra For the Respondent : Vijay Goyal ORDER R.K. Gupta, Judicial Member - This is an appeal by Department and a cross-objection by assessee against the order of learned CIT(A) relating to asst. yr. 2007-08. 2. The Department is objecting in deleting the addition of ₹ 3,61,65,070 made on account of unaccounted investment in purchase from unaccounted income. In second ground the Department has taken an alternate ground that reducing the trading addition of ₹ 3,46,21,220 to ₹ 2,55,465. In last, the Department is objecting in deleting the addition of ₹ 2,68,00,000 made by AO on account of unexplained credit. 3. The brief facts of the case are that Shri Mahendra Kumar Agarwal is proprietor of M/s Mohan Lal Mahendra Kumar (MMJ), Jaipur, M/s Mohan Lal Mahendra Kumar Jewellers (MMJ), Noida, M/s Mohan Lal Mahendra Kumar Jewellers (MMJ), Delhi, and M/s A.M. Exports, Jaipur. Shri Mahendra Kumar is also partner of M/s Mohan Co. and M/s K.M. Exports. 4. The assessee has shown p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department. Its proprietor Shri Subhash Chand Jain admitted in his statement that no actual sales/purchases were carried out by M/s Silver Silver. 6. The AO further observed that sales of ₹ 14,95,45,500 were made to M/s K.M. Exports, a partnership concern where one of the partners is assessee. No books of accounts of M/s K.M. Exports were produced. The genuineness of the sales remained unproved. 7. The AO relying on the decision of Tribunal Jaipur Bench in the case of Shrikrishian Malpani has held that bogus purchases is defect in maintenance of books of accounts. The AO therefore invoked provisions of s. 145(3) and rejected books of accounts. Thus, the rejection of books of accounts was made on account of unverifiable purchases from M/s M.D.R. Jewellers, cash sales made to various concerns including some doubtful entity and on account of non-production of books of accounts of K.M. Exports to whom substantial sales were made. 8. After rejecting books of accounts the AO made addition of entire purchases of ₹ 3,61,65,070 made from M/s M.D.R. Jewellers as undisclosed investment made out of undisclosed income. 9. Detailed written submissions were filed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirmed the sales to the appellant which is reflected in his books of accounts and payment has been made by cheque, the purchases are proved. Even if it is assumed that M/s Amit Agency is a bogus billing firm then who purchased the goods from unknown source-the appellant or M/s M.D.R. Jewellers. The AO in the case of M.D.R. Jewellers has held that purchases from Amit Agency made by M.D.R. Jewellers were from unknown source and therefore, the observation of the AO that purchases of the appellant from M.D.R. Jewellers are from unknown source is wrong and perverse and without any basis. There is no evidence to prove that payment made to M/s M.D.R. Jewellers through account payee cheque has come back to the appellant in cash. The suspicion however strong cannot take place of proof as held by Hon'ble Supreme Court in the case of Umacharan Shaw Bros. v. CIT[1959] 37 ITR 271 (SC). With this it was submitted that purchases from M/s M.D.R. Jewellers cannot be held as bogus and no addition in this regard can be made. On rejection of books of accounts it was submitted that purchases, sales and expenses are fully vouched and stock register has been maintained. Except purchases fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count was closed by passing journal entries on 31st March, 2007 by crediting the amount to M/s Amit Agency. 2. In the accounts of Amit Agency, Rajesh Sales Corpn. has shown to have made purchases of ₹ 8,68,11,610 from M/s Amit Agency but major payments were adjusted by passing journal entries. 3. M.D.R. Jewellers made payments of ₹ 1,00,47,500 to M/s K.M. Exports without any consideration which is against business prudence. The account was closed by passing journal entries. 4. By not producing the books of accounts of M/s Amit Agency and M/s K.M. Exports both Shri Kewal Chand and Shri Mahendra Kumar are thwarting the Department's efforts to unearth the true state of affairs. 5. Shri Atal Behari Agarwal proprietor of Amit Agency was not produced. 6. Shri Kewal Chand admitted that he transferred the same stock to the appellant which he purchased from Amit Agency. 7. M/s Amit Agency has not shown any considerable income except income under s. 44AF on sale of plywood products. 8. No actual payments by M/s Rajesh Sales Corpn. and M.D.R. Jewellers to M/s Amit Agency. 9. In the books of account of M/s M.D.R. Jewellers certain adjustment entries do n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the purchases made from M.D.R. Jewellers which the appellant has proved to be genuine. The appellant has no obligation to prove source of source. Further there cannot be double addition for one and same thing. The AO of M/s M.D.R. Jewellers has made addition for unverifiable purchases made from Amit Agency and others. The sales of M.D.R. Jewellers were treated as genuine and therefore, appellant's purchases cannot be held non-genuine. Further the AO has not made any addition in respect of transaction with K.M. Exports as no purchases were made. Production or non-production of books of accounts of K.M. Exports has no relevance to the addition made by the AO. The rejection of books of accounts does not give unfettered powers to the AO to make the addition arbitrarily. The AO has made addition of 100 per cent of the bogus purchases more so when the sales of the assessee have been accepted. In the case of Mohan Co. and M/s Agrasen Jewellers the addition was made @ 25 per cent of the alleged bogus purchases whereas in the case of Mahendra Kumar Agarwal addition was made for 100 per cent of the purchases. The appellant has not made any purchases from M/s Amit Agency and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT(A) considered the issue in detail and gave his finding recorded at pp. 8 to 10 as under : Contention of the Authorised Representative is considered. The appellant deals in precious and semi-precious stones, gold jewellery and bullions. The appellant has made purchases of ₹ 3,61,65,070 from M/s M.D.R. Jewellers which were in turn purchased by M.D.R. Jewellers from M/s Amit Agency. The AO has held that M/s Amit Agency is nothing but a paper concern created for issuing accommodation bills. That summons issued to M/s Amit Agency remained unserved. Shri Atal Behari proprietor, of the concern gave his statement on oath during survey conducted by the BCTT Wing on M/s Amit Agency. In his statement he has admitted that no actual sales or purchases are done in the concern and only accommodation bills are issued. In its return of income no income from business of precious/semi-precious stones and bullion has been shown. Thus, the AO could establish successfully that M/s Amit Agency is a bogus concern. However, in the present case no purchases have been made from M/s Amit Agency but from M/s M.D.R. Jewellers. The AO has not held that M/s M.D.R. Jewellers is a bogus concern. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o bearing on the book results of the appellant. Any addition if at all to be made it should be made in the hands of Rajesh Sales Corpn. or M.D.R. Jewellers, The appellant has not made any purchases from M/s K.M. Exports and therefore if books of accounts of K.M. Exports were not produced, it cannot effect the trading results as it has no relevance with the purchases made by the appellant from M.D.R. Jewellers. Simply because Shri Kewal Chand Jain and Shri Mahendra Kumar are partners in M/s K.M. Exports it does not establish that M/s Amit Agency is controlled by these two persons. M/s K.M. Exports is also an income-tax assessee. If books of accounts are not maintained by that concern appropriate action may be taken by the AO of K.M. Exports but it should not affect the book results of the appellant. Further the AO's observation that Shri Mahendra Kumar Agarwal benefited by the adjustment entries has also been proved wrong by reversing the entry in the books of accounts and making payment of ₹ 2,68,00,000 by the appellant to M/s Rajesh Sales Corpn. by account payee cheque in March, 2010. Undisputedly M/s Amit Agency is a bogus concern and transactions made through suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant. 11. After holding so, the learned CIT(A) discussed the issue in respect to rejection of books of account and held that the AO was right in rejecting the books of account. Following findings were given by learned CIT(A) in respect to this issue : Regarding rejection of books of accounts the appellant has shown sales to M/s Amit Agency and M/s Silver Silver. Both these concerns have been established as bogus concerns and therefore sales are not fully verifiable. Further sales of ₹ 14,95,45,500 to M/s K.M. Exports remained unverifiable as no books of accounts of K.M. Exports were produced. Further cash sales to different parties were also not amenable to verification. Thus, on account of unverifiable sales the rejection of books of accounts is hereby confirmed. Second ground of appeal is decided against the appellant. 12. The learned CIT-Departmental Representative who appeared on behalf of the Department first placed reliance on the order of AO. Some portion of the order of the AO was read also. Reliance was placed on the decision of Hon'ble Supreme Court in case of Kachwala Gems v. Jt. CIT[2007] 288 ITR 10/158 Taxman 71. Regarding reducing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee that sales made to M/s K.M. Exports remained unverifiable as no books of account of M/s K.M. Exports were produced. If by any reason no books of account of other party were produced then no adverse inference can be drawn against assessee as sales were made through proper banking channel. 15. In respect to sales made to M/s Amit Agency and M/s Silver Silver, the learned CIT(A) has drawn adverse inference that these two parties have been established as bogus concerns, therefore sales made to these parties by assessee are also not verifiable. There is no reason to hold that the sales made by assessee are not verifiable as assessee has made sales through proper banking channel. Books of account have been produced and no defect was found in maintaining the books of account by the assessee. Onus lay upon assessee has been duly discharged. It was further submitted that this is not the case of the Department that M/s Amit Agency and M/s Silver Silver have given any statement against the assessee that they have not made purchases from the assessee. It was further submitted that learned CIT(A) has also drawn adverse inference that assessee has made cash sales to different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,27,47,036 remained unverifiable. Therefore, the adverse inference was drawn for rejecting the books of account and making the addition in the gross profit as mentioned above. This order was passed by the AO on 31st Dec., 2009. In the case in hand, the assessment was also completed on 31st Dec., 2009. Therefore, it cannot be said that the facts in case of M/s M.D.R. Jewellers were not ascertainable and were not verifiable. Simultaneously assessments were going on in both the cases i.e. in case of assessee and in case of M/s M.D.R. Jewellers. In view of the above facts and circumstances, we are of the considered view that the AO was not justified in holding that the assessee has used its own unaccounted money for showing the purchases made from M/s M.D.R. Jewellers. 17. Though the learned Departmental Representative has placed reliance on the order of AO but how the order of the learned CIT(A) is defective could not be explained. The learned CIT(A) has given a categorical finding after giving opportunity to the AO who was present during the appellate proceedings then only has concluded that no addition can be made on account of investment from unaccounted money. In view of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aipur the declared GP rate of 0.76 per cent is slightly lower than 0.95 per cent shown in the immediate preceding year. The sales have increased from ₹ 42.9 crores to 63.8 crores. The profit rate on sale of bullion is better with 0.66 per cent as compared to 0.14 per cent declared in the immediate preceding year. However, in the jewellery the GP rate has come down from 1.92 per cent to 0.76 per cent. In MMJ, Delhi the declared GP rate of 0.50 per cent on sales of ₹ 4.02 crores is definitely lower than 11 per cent on sales of ₹ 30.7 lacs. The reason was that in the immediate preceding year mainly it was sale of jewellery. The sale of bullion was only of ₹ 85,000. This year the position is reversed as there is no sale of jewellery and entire sale is of bullion only. 22. The AO has applied GP rate arbitrarily without any basis. In MMJ, Jaipur the AO applied GP rate of 3 per cent though in the immediate preceding year it was only 0.95 per cent. The sales have increased by 25 per cent as compared to last year. Last year sale of jewellery was ₹ 3.9 crores which has come down to ₹ 98 lacs. The margin in gold jewellery is always higher than the bullio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions and perusing the material on record, we find that assessee deserves to succeed on the ground against upholding the rejection of books of account. Complete books of account were produced before learned CIT(A) which were audited. All the purchase vouchers and sale bills were produced. Purchases made from M/s M.D.R. Jewellers were verifiable as partner of M/s M.D.R. Jewellers appeared before the AO for necessary test check. Books of accounts of M/s M.D.R. Jewellers were produced before the AO. The sales made by M/s M.D.R. Jewellers have been accepted by its AO while passing order under s. 143(3), copy of the same is placed on record. Therefore, in our considered view, no adverse inference can be drawn in respect to purchases made from M/s M.D.R. Jewellers. Thereafter, the learned CIT(A) observed that M/s Amit Agency and M/s Silver Silver have been established as bogus firms, therefore, sales made to these parties remained unverifiable. In our considered view, these observations of learned CIT (A) are not correct as assessee has made sales from its stock which has not been disturbed, sales made by assessee have been accepted. If other parties are bogus then it cannot be said th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee are verifiable and the AO has not pointed out any instance of purchase over and above the prevailing market price. The sales are supported by Invoices and the AO has not pointed out any instance of sale at lower price. The resulted figure of the formula i.e. (sales + closing stock) minus (opening stock + purchases + direct expenses) is gross profit. When all the components of the formula are verifiable then the resulted figure cannot be doubted. Hon'ble Rajasthan High Court in the case of Malani Ramjivan Jagannath v. Asstt. CIT [2007] 207 CTR (Raj) 19 : [2009] 316 ITR 120 (Raj) has held as under : '10. In the face of these undisputed facts and circumstances, the Tribunal in our opinion could not have interfered with the order of CIT(A). In doing so, it had ignored all admitted facts noticed by us above, in the face of which there was no occasion for the AO to have resorted to estimate method. The gross profit is primarily result of excess of sales over purchases, opening stock, closing stock, the unsold stock at two terminals is only balancing factor. Admittedly out of this four components of trading results, there could not have been any ground for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of GP 2005-06 46,36,61,747 23,77,445 0.51 2006-07 42,94,24,685 40,92,438 0.95 2007-08 63,86,61,874 48,50,999 0.76 M/s Mohan Lal Mahendra Kumar Jewellers, Delhi Year Turnover Gross profit % of GP 2005-06 10,90,51,036 2,35,081 0.22 2006-07 30,74,808 3,38,309 11.00 2007-08 4,02,21,839 2,02,513 0.50 M/s Mohan Lal Mahendra Kumar Jewellers, Noida Year Turnover Gross profit % of GP 2005-06 2006-07 59,52,77,454 2,34,402 0.04 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover in the market. (ii) During the year the assessee has sold manufactured gold jewellery of approx. ₹ 98 lacs whereas in previous year the assessee has sold gold jewellery of ₹ 3.94 corers which includes in the abovementioned total turnover. As it is a fact that margin in gold jewellery is more which is about 3-5 per cent than margin in bullion, therefore, the GP rate was higher in previous year because of more sale of jewellery included in previous year in comparison to this year. If margin on gold jewellery sale is excluded from the bullion margin during the year then GP rate will be higher on bullion during the year. (iii) It is submitted that the assessee is dealing in gold/silver bullion in which prices are fluctuating day-to-day or even hours to hours in a day. Further the assessee has to take delivery of goods from the bank (supplier) at a fixed rate mutually decided within a period of time. In such case the assessee has to take delivery of goods from such supplier at fixed rate decided. Therefore in such types of transactions there may be a loss to the assessee, because the assessee has to deliver goods to the buyer at market price which may be lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utted on the facts mentioned in the above explanation but acted arbitrarily and made wild estimated of 1 per cent gross profit without assigning any logic or tangible reason. (d) No comparative case was given in support of his finding. Even if the estimation is made, it cannot be based on wild guess, but it should be based on some material. Reliance is placed on the following decisions : (i) Dhakeswari Cotton Mills Ltd. v. CIT[1954] 26 ITR 775 (SC); (ii) Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC); (iii) Omar Salay Mohamed Sait v. CIT[1959] 37 ITR 151 (SC). Therefore trading addition confirmed by CIT(A) deserves to be deleted. 26. The above written submissions filed on behalf of the assessee are self-explanatory. In some of the branches the GP rate shown is higher and only in one branch the GP rate declared by assessee is lower, reason for the same has been explained which could not be controverted by the Department by bringing any positive material. No defects in the books of account were found. All the purchases and sales are vouched. Therefore, we are of the considered view that there was no justification in making trading addition and sustaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the month of October onwards there were only receipts to the tune of ₹ 3,99,74,265 and on 31st March, 2007 a journal entry was passed. Mahendra Kumar Agarwal's current account was credited by ₹ 2,68,00,000 and Rajesh Sales Corporation's account was debited by the same amount. The AO has observed that out of receipts of ₹ 3,99,74,265, ₹ 2.68 crores was transferred to the current account of the assessee and balance ₹ 1,31,74,265 was carried forwarded to the next financial year. In the books of M/s Rajesh Sales Corpn. the same amount was credited to M/s Mohanlal Mahendra Kumar Jewellers and debited to M/s Amit Agency through a journal entry, Shri Kewal Chand Jain explained that the entry passed by M/s Rajesh Sales Corpn. was with a view to adjust accounts of both the parties with their consent. From the statement of account of M/s Amit Agency in the books of assessee it was seen by the AO that there was an opening credit balance of ₹ 2,17,96,260 against which corresponding sales of the same amount were made and there was no outstanding balance. Considering the fact that journal entry was passed by assessee by debiting the account of M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s received from Shri Mahendra Agarwal but money was received from Rajesh Sales Corporation. In s. 68 the words used are where any sum is found credited in the books of an assessee In this connection the word sum is of paramount importance. The words any sum cannot be taken as parallel to any entry . The provisions of s. 68 are deeming provisions and therefore, onus is on the Department to prove that any sum was credited to the books of the assessee. The assessee has made only a journal entry by debiting Rajesh Sales Corporation and crediting the assessee's current account wrongly and this wrong entry was rectified later on. It is not a real credit and therefore, does not come within the preview of unexplained cash credit but a mere accounting entry. Hon'ble Rajasthan High Court in the case of CIT v. Hazarimal Milapchand Surana[2003] 262 ITR 573/[2002] 125 Taxman 115 (Raj) has held that mere book entry does not create income. Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT[1971] 82 ITR 363 has also held that mere accounting entry would not give rise to income unless income has resulted in real terms. 36. The AO in his comments on the wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or odd can be added as unexplained cash credit under s. 68 of the Act. Thereafter the CIT(A) discussed the issue in detail at pp. 14 to 16 and gave following finding : Rajesh Sales Corpn. made payment of ₹ 3,99,74,265 to the appellant in the proprietary concern of M/s Mohanlal Mahendra Kumar Jewellers and this payment received by the appellant is undisputed. On 31st March, 2007 a journal entry has been made in the books of accounts of the appellant by debiting M/s Rajesh Sales Corporation and crediting the current account of Shri Mahendra Agarwal by the aforesaid balance amount of ₹ 2.68 crores resulting no amount payable to Rajesh Sales Corpn. in the books of accounts of the appellant as on 31st March, 2007. In the logical sequence in the books of accounts of Rajesh Sales Corpn. the entry should have been made by crediting the account of the appellant and debiting the partner's current account by the aforesaid sum of ₹ 2.68 crores. However, in the books of accounts of Rajesh Sales Corpn. the appellant's account was correctly credited but it was debited to M/s Amit Agency. This entry has been made in the books of accounts of M/s Rajesh Sales Corpn. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acs. The same payment has been shown by the appellant in his books of accounts also. The journal entry has no consequence as far as application of s. 68 is concerned. In order to attract the provisions of s. 68 of IT Act it is primary condition that the appellant should have received amount in his books which obviously should have been paid by the creditor. If such credit is considered as unexplained then only it can be a case of making addition under s. 68 of IT Act as unexplained cash credit. Since there is no such credit of sum at all, there can be no question that whether such credit is satisfactory or unsatisfactory because this question will arise only when there is credit of sum in the books of accounts of the appellant. In fact there is no such credit of ₹ 2.68 crores as amount received in the books of accounts of the appellant. With this discussion it is clear that the AO was factually incorrect and wrong in making aforesaid addition of ₹ 2.68 crores under s. 68 of IT Act. The AO is hereby directed to delete the same. The above findings find support from the decision of Hon'ble jurisdictional High Court in the case of CIT v. Hazarimal Milapchand Surana[2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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