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ITO 25(2)(1), C-11, Bldg., Room No. 107, P.K.Bhavan, B.K.C., Bandra(E), Mumbai-51 Vs. Mr. Hitesh D. Shah, B-69, Pushpa Park, 3rd Floor, S.V.Road, Borivali(W), Mumbai-400092
June, 16th 2015
                    "" Û   
     Û , Û è    ,  è  ¢ 
                   ./I.T.A. No. 1438/Mum/2011
                   ( [ [ / Assessment Year: 2007-08)
ITO 25(2)(1),                              Mr. Hitesh D. Shah,
C-11, Bldg., Room No. 107,       / B-69, Pushpa Park, 3 Floor,
P.K.Bhavan, B.K.C., Bandra(E),   Vs. S.V.Road, Borivali(W),

è    . /   . /PAN/GIR No. BDZPS7755N

      ( /Appellant)                   :              (× / Respondent)

                    ./I.T.A. No. 1445/Mum/2011

                   ( [ [ / Assessment Year: 2007-08)
Mr.Hitesh D. Shah,                         ITO 25(2)(1),
B-69, Pushpa Park, 3rd Floor,    / C-11, Bldg., Room No. 107,
S.V.Road, Borivali(W),           Vs. P.K.Bhavan, B.K.C., Bandra(E),

è    . /   . /PAN/GIR No. BDZPS7755N

      ( /Appellant)                   :              (× / Respondent)

    è   /Revenue by               :       Shri Jitendra Kumar

[    / Assessee by                :       Shri M.Subramanian

    /Date of Hearing
                                                 :    11.03.2015

   /Date of Pronouncement                        :     09.06.2015
                                                   ITA No. 1438 & 1445/M/2011 Mr. Hitesh D. Shah

                                    / O R D E R

Per Sanjay Arora, A. M.:
       These are cross appeals, i.e., by the assessee and the Revenue, directed against
the order by the Commissioner of Income Tax (Appeals)-35, Mumbai (`CIT(A)' for
short) dated 20.12.2010, partly allowing the assessee's appeal contesting its
assessment u/s.143(3) of the Income Tax Act, 1961 (`the Act' hereinafter) for
assessment year (A.Y.) 2007-08.

2.     The principal issue arising in these appeals is the maintainability or otherwise
in law of the disallowance of the purchase by the assessee individual, a trader in
diamonds, in the sum of Rs. 2,79,17,345/-, in the facts and circumstances of the case,
and which stands modified by the first appellate authority by estimating the
assessee's income for the relevant year at 4% of the admitted sales of Rs. 636.45
lakhs, so that both the assessee and the Revenue are in appeal.

3.     The facts of the case in brief are that the Assessing Officer (A.O.), in the
course of verification proceedings under the Act, called for the details of purchases
from three parties, from whom purchases, in aggregate, at the impugned sum of Rs.
279.17 lacs stood made, in the form of confirmations along with the bank statement,
copies of returns, balance sheet, etc. The assessee failing to furnish the same, with
even the notices to the parties coming back unserved, he deputed his Inspector to
make a spot verification, and who reported unavailability of the creditors at the stated
address, the same being locked. The onus to prove its return/claim was on the
assessee, and which had not been discharged. A mere debiting of a sum to the Profit
& Loss Account as expenditure would not by itself entitle the assessee to a deduction
of the same or establish the same as genuine. He, accordingly, disallowed the said
purchases from the following three parties as under:-

                                                      ITA No. 1438 & 1445/M/2011 Mr. Hitesh D. Shah

             S.No.   Name of the party                      Purchases (Rs.)
             1       M/s. Yash Impex (Surat)                2512672
             2       M/s. Yash Impex, Opera House           10315020
             3       M/s. Gyan Exports, Surat               15089653
                                              Total:        27917345

      In appeal, the assessee pleading for shortage of time during the assessment
proceedings to adduce the relevant details, and furnishing fresh addresses of the
creditors, the matter was remanded back to the file of the AO for verification.
Summons were issued at the new addresses, which again came back unserved, and
which were explained by the assessee as on account of the addresses given by them to
their bank as incomplete. Inquiries by the AO found that many bank accounts were
opened for the same address in the names of different concerns. Cash was withdrawn
from these bank accounts, to provide accommodation entries to different parties,
including the assessee. The money paid to the creditors, viz. M/s. Gyan Exports and
M/s. Yash Impex, stood ultimately withdrawn from the bank in cash. Thus, this was
done through the process of layering to avoid detection. The impugned purchases
were thus clearly bogus, liable for disallowance. In the view of the learned CIT(A)
the investigation carried out by the AO had sufficiently proved the appellant to be
providing accommodation entries to different parties through layering. So, however,
there was no justification for disallowance of the entire purchases from these parties
inasmuch as, admittedly, the corresponding sales had been made, and at a profit.
Besides, stock register stands maintained. The disallowance of the purchases, as made
by the AO, would result in the assessee's profit rate to be to the tune of 50%. In his
view, therefore, the facts and circumstances warranted a rejection of the assessee's
books of accounts as unreliable, and estimation of income, which he made at 4% of
the sales, i.e., by adopting the profit rate as applied in the case of one, Shri Nilesh
Suryakant Jinadra (PAN: ACOPI 1344A) vide order u/s. 144 dated 29.12.2009.
Aggrieved both the assessee and revenue are in appeal.

4.    We have heard the parties, and perused the material on record.
4.1   The issues arising for our consideration are:

                                                     ITA No. 1438 & 1445/M/2011 Mr. Hitesh D. Shah

        (a) whether any adjustment to the assessee's returned income on account of
        purchases is to be made, or the assessee has proved the same; and where not
        (b) which of the two, i.e., the course followed by the AO or the ld. CIT(A)
        is superior in the facts and circumstances of the case, and is to be therefore
        adopted, including the quantification aspect.

       As would be apparent from the forgoing narration of events, which are not in
dispute, the purchases under reference, rather than being proved as genuine, stand
disproved by the Revenue. Without doubt, therefore, an adjustment to the returned
income on that account would have to be made. Though, strictly speaking, as
explained in several decisions, as in VISP (P) Ltd. vs. CIT [2004] 265 ITR 202
(M.P.); Indian Woolen Carpet Factory vs. ITAT and Others [2002] 260 ITR 658
(Raj.); CIT vs. La Medica, 250 ITR 575 (Del.), etc., this would warrant a
disallowance of the impugned purchases, we do not consider the same as appropriate
in the facts and circumstances of the case. This is as the Revenue has itself found the
transactions to, despite payment through the banking channel, as not representing any
purchases of goods, but only accommodation entries. That is, the inference of the
purchase being not genuine and bogus, while the corresponding sales, duly recorded
in the books, including stock record, being so, which assumption underlies the
disallowance of purchases, is not valid. For all we know the assessee may himself be
only providing accommodation entries to another. The impugned purchases, it needs
to be appreciated, work to nearly 50% of the total purchases. The inference of the
assessee books, thus, as not yielding correct income, is unmistakable, and follows as
a natural corollary, resulting in their rejection, invoking section 145(3) of the Act.
       The Revenue has not, as we observe, taken its investigation to its logical end.
What is the normative profit/value addition in the relevant trade? What is the purpose
underlying undertaking such nefarious activities, as, for example, saving on taxes? A
trader would normally resort to inflation of an expense (as purchases), to suppress the
additional profits, scaling the book profit down to a normative level, while in the
present case the assessee has disclosed an abysmally low profit only 0.67% (gross)
and 0.16% (net) of sales.

                                                   ITA No. 1438 & 1445/M/2011 Mr. Hitesh D. Shah

      We, accordingly, are of the clear view that the rejection of accounts and the
estimation of income is the only proper course to be followed in the facts and
circumstances of the case. The questions (a) & (b), posed above, are answered

4.2   As regards the quantification, the ld. CIT(A) has applied the rate of 4%, i.e., as
found reasonable in another case. This, in our view, is not proper without allowing
proper opportunity to the Revenue to present its case in the matter. The reason is
simple. The Revenue had all along proceeded on the basis of the assessee being
called upon to discharge the burden of proving its claim qua the impugned purchases.
The onus in the case of estimation of income, on the other hand, shifts to the AO,
who is to take all the relevant material and information into account, and which
would require extension of proper opportunity. It needs to be appreciated that it is
only on account of the painstaking efforts of the Revenue, at considerable
expenditure on time and resources, that it came to light that the purchases were only
managed transactions, concealed through the process of layering, i.e., `A' transfers to
`B', who in turn does to C, to D, and so on, with the final beneficiary D (say)
withdrawing the money in cash for payment to the A, the source. This is done to, as
stated, avoid detection. The ld. CIT(A) on therefore having found the assessee's
purchases as only accommodation entries and, further, his books as unreliable, ought
to have sought the A.O's indulgence in the matter of estimation of income, which can
by no means be regarded as a mechanical task, with the law enjoining the assessing
authority to make a best estimation upon gathering of all the relevant information. Or,
he could have in the alternative undertaken the exercise himself. How all he does,
however, is to adopt the ratio found suitable in another case, without even showing
the basis of comparability, which is exactly the Revenue's grievance, which we find
as justified. We, therefore, only consider it fit and proper to restore the matter with
regard to the estimation of income back to the file of the AO for adjudication afresh,
by issuing definite findings of fact, and after allowing proper opportunity to the
assessee to meet the Revenue's case. We decide accordingly.

                                                     ITA No. 1438 & 1445/M/2011 Mr. Hitesh D. Shah

5.     The second issue, which arises in the Revenues' appeal, is qua the addition of
Rs. 20,31,025/- made by the AO invoking section 41(1) of the Act, i.e., on account of
cessation of liability in respect of the following two parties:

      Sr. No. Name of the party                                   Purchases (Rs.)
      1.        M/s. R.Sharda Impex Pvt.Ltd.                           15,82,365/-
      2.        M/s. KNY Jewels                                         4,48,660/-
                                                     Total             20,31,025/-

The assessee failing to provide the relevant details, viz. the period from which the
amount was outstanding, the AO caused inquiry through his Inspector, who found
that a concern by the name, M/s. Desire Jewels Pvt. Ltd., exists at the stated address,
common for both the parties. He inferred the parties and, consequently, the credits as
bogus, adding the same as income u/s. 41(1). The ld. CIT(A) was of the view that the
AO had not proved the factum of the cessation of the liability; unless he does so he
could not bring the amount to tax u/s. 41(1). Reliance in this context was placed by
him on the decision by the Tribunal in Dy. CIT vs. Allied Leather Finishers Pvt. Ltd.
[2009] 32 SOT 549 (Luck). He had, he continued, in any case, estimated the income
at 4% of the sales, so that there was no warrant for a separate addition u/s. 41(1).

6.     We have heard the parties, and perused the material on record. The case of
both the parties before us remains the same, i.e., as before the first appellate
authority, whose line of reasoning, we are afraid, we are unable to appreciate. The
concern, Desire Jewels Pvt. Ltd., was existing at the given address for the last 4-5
years (and which would have only increased by the time the matter travelled before
the ld. CIT(A)), and was not aware of these two concerns, and which it would
normally, nay, most certainly, be the case, i.e., had the said firms existed thereat. No
material stands brought on record to establish the existence of these parties, which
becomes extremely suspect and doubtful under the circumstances. The assessee itself
was not aware of their present addresses, i.e., assuming these as genuine business
concerns, who had changed their addresses. Even no fresh addresses were furnished,
nor, in fact, the name/s or particular/s of the person/s operating the said concerns,
                                                    ITA No. 1438 & 1445/M/2011 Mr. Hitesh D. Shah

even in the remand proceeding, whereat, again, verification exercise was undertaken
by the Revenue. The inference of their being bogus becomes, under the
circumstances, unmistakable. The assessee claims of having paid the amount in f.y.
2008-09. How, one wonders, such a claim could be entertained under the
circumstances? Why was the said (or such a) claim not made before the AO, who
show-caused the assessee in the matter vide notices served on 27.11.2009 and
11.12.2009    (refer para 6.1 of the assessment order). Rather, this would be the first
thing that an assessee or any reasonable person would state or clarify. Needless to
add, there is nothing to show the existence of any dispute, stated to be the reason for
the payments being outstanding for long and, further, of the same having been since
resolved. A genuine claim would result in serious steps being undertaken by the
parties against the assessee, who is solvent. The inference of the liability being non-
existent or bogus, which is a finding of fact, is unmistakable.
       The ld. CIT(A), without disputing the same, nevertheless, considers the AO to
have not proved cessation or remission of liability. He, in our view, misleads himself
when he states so. Where is the question of remission or cessation of a liability which
is non-existing or bogus? Just as the purchases for the current year have been found
as bogus, i.e., as not actually representing purchases, so that they could not lead to
any actual liability, the same could equally be the case for the relevant year, i.e., the
year of the purchase/expense resulting in the said liability. A liability could also be
non-existing where, though representing an actual expenditure, was since paid,
though not reflected in the books of account. In either case, it has nothing to do with
the profit or the income for the current year, unless of course it is found or is proved
to have been paid out of books during the current year, which is nobody's case. This
emphasizes or underlies the fallacy in the approach of the ld. CIT(A). In fact, the
tribunal in the case of Muni Rai v. ACIT (in I.T.A. Nos. 29 & 30/Pat/2012
dated 28/5/2015),relying on the decision of the case of CIT vs. Devi Prasad
Vishwanath Prasad [1969] 72 ITR 194 (SC) and CIT vs. Manick Sons [1979] 74 ITR
1(SC), clarified that the argument that because income has been estimated, rejecting
the books of account, no addition on account of unexplained credit could be made, is
both factually and legally untenable. The same would extend to a credit on account

                                                    ITA No. 1438 & 1445/M/2011 Mr. Hitesh D. Shah

of a brought forward trade liability as well. The same has, in any case, nothing to do
with the current year's income, having been found as bogus or non-existing.
       Further, it may be argued that how could the addition be made for the current
year when a trade liability has been found as bogus, so that it does not represent an
actual liability in the first place. The argument, impressive at first blush, is without
merit. This is as the same having been claimed and allowed as an actual liability on
being `incurred', in fact, accepted for the subsequent year/s as well, it is not open for
the assessee to turn around and claim that it was never a liability, so that it cannot be
brought to tax for the year for which it is actually found as not so. That is, you
accepted my lie, now your hands are tied, as famously observed by the apex court.
The principle of approbate and reprobate would apply. In fact, the liability being thus
required to be considered as genuine as at the close of the immediately preceding
year, i.e., at the end of the beginning of the current year, while found as not existing
as at its end, is precisely the reason for it being liable to be considered as having
ceased to be so during the current year, bring it within the charge of section 41(1);
ceasure or existence of a liability as on a particular date being essentially a matter of
fact. The decision in the case of Allied Leather Finishers Pvt. Ltd.(supra) would thus
have no bearing in the facts of the case. We may, on the contrary, place reliance on
the decisions by the tribunal, as in the case of Kalyani Maan Singh v. ITO [2013] 37
CCH 0259 (Mum-Trib) and ITO v. Sajjan Kumar Didwani (in ITA Nos.
7716/Mum/2012, etc., dated 28/5/2014), explaining the issues involved in the
application of section 41(1) in some detail, while also dwelling on case law. We,
accordingly, have no hesitation in confirming the action of the AO. We decide
accordingly, and the Revenue succeeds.

7.     The last issue raised in the Revenue's appeal is the disallowance u/s. 40(a)(ia)
made in view of the non-deduction of tax on professional fees at Rs. 1,15,817/-. The
ld. CIT(A) has, upon examination of the asessee's accounts, found the assessee to
have deducted tax at source on the said amount, stated to be brokerage, allowed to
one, Shri Mayur M. Jhaveri, on 15.03.2007, at Rs. 5987/-. The said finding having
not been rebutted by the Revenue in any manner, we are unable to see any basis for
the Revenue's appeal, which fails on this ground. We decide accordingly.
                                                    ITA No. 1438 & 1445/M/2011 Mr. Hitesh D. Shah

8.     In the result, the assessee's appeal is partly allowed and the Revenue's appeal
is partly allowed and partly allowed for statistical purposes.

                Order pronounced in the open court on June 09 , 2015
                      Sd/-                                              Sd/-
       (Joginder Singh)                              (Sanjay Arora)
     Û è / Judicial Member                         è / Accountant Member
 Mumbai;  Dated : 09.06.2015

../Sharwan. PS

   /Copy of the Order forwarded to :

1.     / The Appellant
2.    × / The Respondent
3.      () / The CIT(A)
4.       / CIT - concerned
5.     ,   ,   / DR, ITAT, Mumbai
6.    [  / Guard File

                                                     / BY ORDER,

                                            /  (Dy./Asstt. Registrar)

                                     ,  / ITAT, Mumbai

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