9911796707
TMI Blog2011 (6) TMI 802X X X X Extracts X X X X X X X X Extracts X X X X ..... - 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 Rs. 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 Rs. 3,46,21,220 to Rs. 2,55,465. In last, the Department is objecting in deleting the addition of Rs. 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 purchases of Rs. 3,61,65,070 from M/s M.D.R. Jewellers. In response to the summons issued under s. 131 to M/s M.D.R. Jewellers, partner Shri Kewal Ghana Jain attended and produced the books of accounts. On examination of stock register of gold bar and silver bars it was seen that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks 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 Rs. 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 learned CIT(A) which are discussed by learned CIT(A) at pp. 3 to 7 of his order as under : "The AO held that the appellant made purchases from M/s M.D.R. Jewellers but since M/s M.D.R. Jewellers supplied the goods to the assessee shown as purchase from M/s Amit Agency, a bogus concern and therefore the purchases from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from M/s M.D.R. Jewellers all other purchases have been accepted. Cash sales are supported by cash memos and the rate mentioned is verifiable from market quotations. Complete addresses of the parties are neither required nor it is possible to make verification of addresses in cash memo. In the trade of bullion and jewellery goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 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 not appear which were appearing in the appellant's books. That these entries were made with the consent of the appellant. M.D.R. Jewellers claimed to have reversed the entry pertaining to reduce Rs. 4,90,00,000 in the subsequent financial year. 10. No actual payments were ever made to M/s Amit Agency by various concerns controlled by Mahendra K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 therefore is not concerned with the alleged dubious transactions in the books of M.D.R. Jewellers and Rajesh Sales Corpn. in respect of Amit Agency and K.M. Exports. The AO of M.D.R. Jewellers has not made any addition for the alleged dubious transaction of M.D.R. Jewellers with M/s Amit Agency and K.M. Exports. Shri Mahendra Kumar Agarwal is not beneficiary to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. In the case of M/s M.D.R. Jewellers its AO made trading addition after rejecting books of accounts on account of unverifiable purchase from M/s Amit Agency. In the appellant's case it is not the finding of the AO that any purchases made by the appellant are unveriflable. However, as the purchases made from Amit Agency by M/s M.D.R. Jewellers could not be proved by partner of M/s M.D.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 such bogus concern may not be genuine. But as the prevailing practice in the market and investigation carried out in the cases of such bogus entry providers, the right course of action with the AO is only to reject the books of accounts and then estimate the gross profit. As the M.D.R. Jewellers is an identifiable concern being assessed on income from the same business of precious/semi-precious stones an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n established as bogus concerns and therefore sales are not fully verifiable. Further sales of Rs. 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 the trading addition which was made by the AO, alternatively it was submitted that in earlier year the assessee was shown 20 per cent gross profit whereas now the gross profit were shown at 3 per cent only, therefore, there was no justification at the end of the learned CIT(A) in reducing the trading addition made by AO on an alternate ground. 13. The learned counsel of the assessee reiterated the contentions raised b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 parties which were also not amenable to verification. It was further submitted that in business of bullion the cash sale has to be made, therefore, this is not a case of rejection of books of account. This is not the case of the Department that assessee has made sales on cash at a lower rate to avoid tax burden. Therefore, no books of account can be rejected on this account. Reliance was placed on various case law in this respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents 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 facts and circumstances, we hold that learned CIT(A) was justified in deleting the additions. It is worth mentioning that there is no material before the AO to hold that assessee has invested in the purchase its own unaccounted income. The Hon'ble Supreme Court in the case of Sreelekha Banerjee v. CIT[1963] 49 ITR 112 has held that the suspicion howsoever strong cannot take the place of evidence. We order accordingly. 18. Now we will take up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent on sales of Rs. 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 Rs. 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 Rs. 3.9 crores which has come down to Rs. 98 lacs. The margin in gold jewellery is always higher than the bullion. In the case of MMJ, Delhi last year the assessee was dealing almost in gold jewellery only and therefore GP rate was 11 per cent. This year there is no sale of jewellery. However, the AO without any basis has estimated GP rate of 1 per cent. With this it was submitted that the gross profit addition made by the AO is not justified. 23. After considering the order of AO and contentions, the learned CIT(A) gave following findings : "Contention of the Authorised Representative is considered. After rejecting books of accounts the AO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the genuine party who made sales to these parties are also bogus. Further, the learned CIT(A) has drawn inference that books of account of M/s K.M. Exports were not produced and, therefore, sales made to that party remained unverifiable. 25. Again we see that assessee has produced its books of account and sales have been accepted, payment has been received through proper banking channel. No material was brought on record that sales made to these parties were under-invoiced or assessee has not received any amount from these parties. Therefore, in our considered view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09] 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 Revenue to arrive at different result. So far as closing stock is concerned, inventories of existing stock were not found to be incorrect by the AO i.e. that position of stock as shown in the account books was not incorrect. There being no dispute about the sales and purchases, non-maintenance of stock register lost its significance so far as arriving at gross profit is concerned. Therefore, the CIT(A) was right in his reasoning about admitted state of affairs. Resorting to estimate of GP rate was founded on no material. It was merely a case of making certain additions on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exports, Jaipur Year Turnover Gross profit % of GP 2005-06 2,11,28,22,537 42,85,764 0.20 2006-07 4,98,16,10,475 35,84,906 0.07 2007-08 27,58,67,117 5,52,401 0.20 (a) MMJ Noida and A.M. Exports (gross profit better than last year and no defect in books of account except cash sales and sales to M/s K.M. Exports by MMJ, Noida). The declared gross profit for the current year is better than previous year in the case of MMJ, Noida and A.M. Exports. The current year's gross profit in the case of MMJ, Noida and A.M. Exports was 0.10 per cent and 0.20 per cent respectively as against GP rate of previous year 0.04 per cent and 0.10 per cent respectively. The learned AO has estimated the profit by applying the GP rate of 1 per cent and made the addition of Rs. 1,79,06,388 and Rs. 22,06,270 for the trading results of M/s MMJ, Noida and A.M. Exports respectively. Thus, trading addition of Rs. 1,79,06,388 + 22,06,270 = Rs. 2,01,12,658 is arbitrary, without basis and on wild estimates. (b) M/s Mohan Lal Mahendra Kumar Jaipur (gross profit slightly low than last year and no defect in books of account except cash sales, sales to Amit Age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading result declared by M/s MMJ, Jaipur may be accepted. The learned AO has not rebutted the facts mentioned in the above explanation but acted arbitrarily and made wild estimated of 3 per cent gross profit without assigning any logic or tangible reason. (c) MMJ, Delhi (gross profit lower than last year and no defect in books of account except cash sales, turnover increased and shifted from jewellery to bullion) It is submitted that during the year the assessee has shown GP rate of 0.50 per cent on total turnover of Rs. 40.22 corers in comparison to 11 per cent on turnover of Rs. 30.74 lacs in previous year. The reasons for low GP rate are as under : (i) During the year the assessee is dealing in bullion whereas in previous year he was dealing in gold jewellery business; since the nature of business is changed during the year therefore GP rate cannot be compared with that of previous year. (ii) 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment assessment and should not act totally arbitrarily, but there is necessarily some amount of guesswork involved in a best judgment assessment. In this case the AO resorted to best judgment of the assessee on the following grounds : The assessee has not maintained the quantitative details/stock register. There was no evidence to verify the closing stock, the genuineness of purchase was not proved without any doubt. The learned CIT(A) and Tribunal held that the books were rightly rejected and only reduced the GP rate adopted by the AO and the High Court rejected the appeal of the assessee. On appeal, the Hon'ble Supreme Court has held that on the facts there was no arbitrariness in this case in resorting to best judgment assessment. It was assessee himself who was to blame as it did not submit proper accounts. 28. After going through the ratio of this decision, we find that the ratio of this decision is not applicable on the facts of the present case at all as in the case in hand, the assessee has maintained proper books of account including quantitative details/stock register. The closing stock was verifiable, the genuineness of purchases was proved. Therefore, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of entry as an afterthought. That for two years Rs. 2.68 crores remained with the assessee and he could not rectify the entry. The accounts were audited and returns were filed. As the books of accounts of the current year were open and therefore, adjustment was made. During the year a survey was conducted on 2nd Sept., 2009 and adjustment entry was passed after the date of survey. In any case passing of rectification entry does not take away the basic nature of the transaction. That credits were transferred to the current account of Shri Mahendra Kumar for which no explanation was offered. The AO has further observed that M/s Rajesh Sales Corporation has not passed such rectification entry as informed by Shri Kewal Chand Jain vide his letter dt. 29th Dec., 2009. Further explanation of the assessee that it was not a real credit was not accepted by the AO as it was factually incorrect. Rs. 2.68 crores was not in the nature of journal entry but a consolidated entry of various bank credits which were transferred to the current account of Shri Mahendra Kumar. With this the AO made addition of Rs. 2.68 crores as unexplained cash credits. 34. It was contended before learned CIT(A) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agency was to be settled. The AO has drawn inference that the assessee's undisclosed income was introduced by way of journal entries. Actual issue is not of proving identity, genuineness and creditworthiness of Rajesh Sales Corporation. That what is apparent is not real in this case. Further, the submission of the Authorised Representative that mere accounting entry cannot generate income was not correct. M/s Rajesh Sales Corpn. has paid Rs. 2.68 crores to the assessee which has been ultimately settled with accounting entries. The payment received from M/s Rajesh Sales Corpn. has been clandestinely appropriated with the help of journal entries. The assessee's submission that he had passed reverse entry in his books of accounts will not take away the real impact of the original journal entry passed by Rajesh Sales Corpn. and the assessee simultaneously. Rajesh Sales Corpn. vide letter dt. 29th Dec., 2009 has further confirmed that they have not passed any corresponding reverse entry in their books. 37. In the final submission, the Authorised Representative has submitted that the wrong journal entry passed was later on reversed. The assessee has paid the outstanding amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it is absolutely clear that there is no credit which can be said as unexplained for the amount of Rs. 2.68 crores in the books of accounts of the appellant for which the addition has been made by AO under s. 68 of IT Act. In fact, in appellant's books there is debit entry of Rs. 2.68 crores debiting to Rajesh Sales Corpn. The AO is not found correct in making observation that any payment was due to M/s Amit Agency as appellant has not made any purchases directly from M/s Amit Agency. On the contrary sales were made by the appellant to M/s Amit Agency. Further, introduction of undisclosed income in the books cannot be made by passing journal entry because from journal entry cash cannot be introduced in the books. Further, the AO has not pointed out the introduction of undisclosed assets in the books of assessee corresponding to this journal entry. With this discussion it is clear that the AO has not understood the accounting sequence of aforesaid adjustment entry and wrongly considered the same as unexplained credit which was factually incorrect. Subsequently on being realized that there was wrong adjustment entry it was reversed by way of rectification entry on 30th Sept., 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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