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TMI Blog2017 (11) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 3% for the Assessment Years 2008-09, 2010-11, 2011-12 and 2013-14. The Revenue filed appeals against the order of the Ld.CIT(A) for the Assessment Years 2007-08, 2008-09 and 2011-12 in restricting the purchases treated as non-genuine to 4% and 3%. 3. Briefly stated the facts are that, the assessments for the Assessment Years 2007-08, 2008-09, 2010-11, 2011-12 and 2013-14 were reopened u/s. 147 of the Act based on the information received from DGIT(Investigation), Mumbai that the assessee is one of the beneficiaries of bogus purchases made by certain entities operated/managed by Rajendra Jain group, Surendra Jain group, Bhanwarlal Jain group and Dharmichand group which are only the bogus concerns. During the course of search, in the cases of Shri Rajendra Jain, Shri Surendra Jain, Shri Bhanwarlal Jain and Shri Dharmichand jain they have admitted in the statement taken on oath u/s. 132(4) of the Act that they have indulged in providing accommodation entries and also admitted that these are paper companies with no real business transactions. It was also admitted by them that they are engaged in business of bill shopping through all the concerns due to which they do not have any ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t rough and cut and polished diamonds for the other clients who do not want to show import in their own books. Further these concerns issued bills accommodation entries in a commission to various parties who normally purchases diamonds in cash from undisclosed parties and need bills to show purchases against sales in their account. Further these concerns also provide accommodation entries to unsecured loan against cash. Therefore, the Assessing Officer concluded that the transactions made by these entities managed by Shri Rajendra Jain, Shri Surendra Jain, Shri Bhanwarlal Jain and Shri Dharmichand jain groups are only providing accommodation entries to the beneficiaries and assessee is one among such beneficiaries. Therefore, the Assessing Officer concluded that the material was debited against various suppliers have entered into stock register and the assessee has shown corresponding sales against the said purchases debited and this could only mean that the diamonds were brought by the assessee from the gray market without bill and to adjust these transactions into the Books of Accounts, assessee has obtained bills from Shri Rajendra Jain, Shri Surendra Jain, Shri Bhanwarlal Jain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val submissions, perused the orders of the authorities below. In this case the assessments were reopened based on the information from the DGIT(Investigations), Mumbai that assessee is a beneficiary from the entities operated by Shri Rajendra Jain, Shri Surendra Jain, Shri Bhanwarlal Jain and Shri Dharmichand Jain wherein the search took place and it was found that Shri Rajendra Jain, Shri Surendra Jain, Shri Bhanwarlal Jain and Shri Dharmichand Jain were providing only accommodation entries and there were no actual sale transactions and the assessee could not prove the movement of goods from the suppliers to the assessee. In the absence of delivery challans, proper stock records and based on the depositions of the suppliers that they have provided only accommodation bills, the Assessing Officer has rightly concluded that the assessee has obtained only bogus bills and assessee might have purchased goods in gray market. The Assessing Officer estimated the Gross Profit Margin on such purchases at 12.5% by reducing Gross Profit rate already shown by the assessee for the Assessment Years 2008-09, 2010-11, 2011-12 and 2013-14 and for the Assessment Year 2007-08 the entire purchases were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its judgment by confirming the decision of the ITAT which has estimated the disallowance at 12.5% of the disputed bogus purchases to meet the ends of justice. The head-note of the decision is reproduced as under- "Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of Profits [Bogus purchases] - Assessment year 2006-07 - Assessee was engaged in business of trading in steel on wholesale basis - Assessing Officer having found that some of alleged suppliers of steel to assessee had not supplied steel to assessee but had only provided sale bills, held that purchases made from said parties were bogus - He, accordingly, added entire amount of purchases to gross profit of assessee - Commissioner (Appeals) having found that assessee had indeed made purchases, though not from named parties but other parties from grey market, sustained addition to extent of 30 per cent of purchase cost as probable profit of assessee - Tribunal however, sustained addition to extent of 12.5 per cent - Whether since purchases were not bogus but were made from parties other than those mentioned in books of account, only profit element embedded in such purchases could be added to asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also pertinent to mention here the relevance of the Board's Instruction No-2/2008 dated February 22, 2008 wherein it has laid down a guideline in the form of benign assessment procedure for assessee's engaged in diamond manufacturing and/or trading, wherein it has stated that: - A........ B. If an assessee has shown a sum equal to or higher than 6% of its total turnover from such business as his income under the head profits and gains of business or profession for a particular assessment year, the assessing officer shall except he's the trading results. C........................... 5.2.2 Keeping in view the above instruction of the Board, on the one hand and the formula laid down in the case of Sumi Seth by Gujarat High Court and the profits disclosed in this line of business, to meet the ends of Justice, I find it reasonable if 4% of the amount of so-called bogus purchases are brought to tax. I accordingly direct the Assessing Officer to charge 4% of the bogus purchases reported over and above the income returned in place of disallowance made under section 69C of the Act. This addition is clear of the profits disclosed by the appellant during the year. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the diamonds purchased from the grey market are cheaper than the diamonds sourced from genuine dealers. Subsequently there is an element of discount in the case of cash purchased in the grey market. The A.O. therefore computed the additional G.P earned by the appellant has 8% of the purchase cost. Accordingly, disallowance/ addition of Rs..63,90,742/- was made to the returned income 4.3. In the appellate proceedings the Ld.AR submitted that the appellant was engaged in the business of trading in polished diamonds and manufacturing of jewellery. The appellant had requested the A.O. to furnish the copies of documents relied upon by him for treating the purchases as bogus and to also allow cross examination of the alleged parties. Neither of the request were granted by the A.O. The appellant had furnished detailed chart showing name of parties, date of purchase, quantity in carats, amount in rupees and details of exports made against each purchases. Stock book reflecting the purchases were also produced. Ledger accounts in respect of the purchases and copy of invoices for the purchase and corresponding sales were also furnished. It was contended that the initial burden on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange of 1.5 to 4.5% and in trading in the range of 1 to 3%. The appellants business is of trading in polished diamonds in respect of the impugned purchases. Thus, a margin of 4% is considered to be appropriate. 10. On a careful consideration of the totality of facts and circumstances and the findings of the Ld.CIT(A), we do not see any valid reason to interfere with the findings and the decision arrived at by the Ld.CIT(A) in estimating the Gross Profit at 4% of the bogus purchases as against 8% estimated by the Assessing Officer. Thus, we uphold the order of the Ld.CIT(A) for all these Assessment Years i.e. 2010-11, 2011-12 and 2012-13." 10. As could be seen from the above that the Coordinate Bench while sustaining the order of the Ld.CIT(A) also considered the report of Task Group for Diamond Sector submitted to Department of Commerce, wherein it was submitted that net profit in diamond manufacturing is in the range of 1.5% to 4.5% and in trading it is in the range of 1% to 3%. The assessee before us submitted that he is into 100% exports of trading of cut and polish diamonds. The Task Group for Diamond Sector submitted to Department of Commerce also suggests that the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in the case of Joint Investment Private Limited in ITA.No. 117/15 dated 25.02.2015 held that by no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that entire tax exempt income is to be disallowed. 17. Further, we find that considering the above two decisions the Coordinate Bench in the case of Sanghavi Exports International P. Ltd v. ACIT in ITA.No.3405/Mum/2015 dated 10.07.2017 held that disallowance should not be more than the dividend income by observing as under: - 4. We have perused the Assessment Order and find that the assessee earned exempt income of Rs. 1,70,000/- only during this Assessment Year and the Assessing Officer by invoking the provision of Section 14A made disallowance at Rs. 54,66,813/-. The Hon'ble Delhi High Court in the case of Joint Investment Private Limited in ITA.No. 117/15 dated 25.02.2015 held that by no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that entire tax exempt income is to be disallowed. Similarly, Punjab and Haryana High court in the case of PCIT v. Empire Package Private Limited in ITA.No. 415/2015 held that disallowance should not exceed exempt income. In the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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