Income Tax Appellate Tribunal - Mumbai
Viren Diamond Exports, Mumbai vs Assessee on 24 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "F", MUMBAI
Before Shri P.M.Jagtap, Accountant Member
and Shri Sanjay Garg, Judicial Member.
S.No. I.T.A. No. Asstt. Year.
1. 5567/Mum/2009 2005-06.
2. 5568/Mum/2009 2006-07.
3. 5628/Mum/2010 2007-08.
Viren Diamond Exports Ltd., The Income-tax Officer,
4-D, Navratna, Dr. D.D. Sathe Marg, Vs. 5(3)(3), Mumbai.
Opera House, Mumbai - 400 004.
PAN AAACV 3408Q
Appellant. Respondent.
Appellant by : Dr. K. Shivraman
Shri Paras Salva.
Respondent by : Shri A.C. Tej Pal.
Date of hearing : 24-01-2013.
Date of pronouncement : 27-02-2013
ORDER
Per P.M. Jagtap, A.M.
These three appeals filed by the assessee are directed against three separate orders passed by the learned CIT(Appeals)-5, Mumbai dated 13-08-2009, 17-08- 2009 and 08-06-2010 for assessment years 2005-06, 2006-07 and 2007-08 respectively. Since one of the issues involved in these appeals is common, the same have been heard together and are being disposed of by this single consolidated order for the sake of convenience.
2. First we shall take up the appeal of the assessee for assessment year 2005-06 which involves a solitary issue relating to addition of Rs.6,19,95,743/- made by the 2 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. AO and confirmed by the learned CIT(Appeals) on account of deposits found to be made by the assessee in the bank account treating the same as its undisclosed income.
3. The assessee in the present case is a Company which is engaged in the business of trading of cut and polished diamond, jewellery and coloured imitation stone. In the assessment originally completed for assessment year 2005-06, by an order passed u/s 143(3) on 24-12-2007, the total income of the assessee was determined by the AO at Nil after setting off the brought forward loss of the earlier years. Thereafter, on the basis of information received regarding the undisclosed investment made by the assessee in the shares of M/s Sharda Spuntex P. Ltd., the assessment for assessment year 2005-06 was reopened by the AO by issuing notice u/s 148 on 26-02-2008. During the course of reassessment proceedings, it was found by the AO that the investment of Rs.23 lakhs was made by the assessee in the shares of M/s Sharda Spuntex P. Ltd. from the current account No. 2356 maintained in the name of the assessee with Canara Bank, Khetwadi branch. Although the assessee made an attempt to disown the said account, the AO found on the basis of evidences gathered from the concerned bank in the form of the copy of account statement, copy of PAN card furnished to the bank, photo identification furnished, account opening form, name and address of the introducer, names of the authorized signatories etc. that the said bank account maintained with Canara Bank, Khetwadi branch was belonging to and operated by the assessee. He also found that besides making a payment of Rs.23 lakhs against shares of Sharda Spuntex P. Ltd. from the said account, there were huge deposits made in the said account during the year under consideration aggregating to Rs.6,19,95,743/-. In this regard, the explanation offered by the assessee was that the said payments related to issue of accommodation bills and after keeping the commission of 1%, 3 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. the balance amounts were returned back by the assessee. This explanation of the assessee was not found acceptable by the AO in the absence of any evidence produced by the assessee to support and substantiate the same. He also rejected the said explanation on the ground that investment of Rs.23 lakhs was made by the assessee from the said account in the shares of M/s Sharda Spuntex P. Ltd. which was much more than the commission of 1% claimed to be made by the assessee on accommodation bills. In the absence of any satisfactory explanation forthcoming from the assessee in respect of the transactions appearing in the current account with Canara Bank, Khetwadi branch maintained and operated by it, the AO treated the entire amount found to be deposited in the said account as undisclosed income of the assessee and addition of Rs.6,19,95,743/- was made by him to the total income of the assessee. Keeping in view this addition made on account of the entire amount found to be credited in the current account with Canara Bank, the AO did not make any separate addition on account of unexplained investment of Rs.23 lakhs made by the assessee in the shares of Sharda Spuntex P. Ltd. from the said account. Accordingly, the total income of the assessee for assessment year 2005-06 was computed by the AO at Rs.6,19,95,743/- in the assessment completed u/s 143(3) read with section 147 of the Act vide an order dated 26-12-2008.
4. Against the order passed by the AO u/s 143(3) read with section 147, an appeal was preferred by the assessee before the learned CIT(Appeals) and after considering the submissions made on behalf of the assessee as well as the material available on record, the learned CIT(Appeals) confirmed the addition of Rs.6,19,95,743/- made by the AO on account of deposits found to be made in the current account with Canara Bank treating the same as undisclosed income of the assessee for the following reasons given in paragraph No.2.5 and 2.6 of his impugned order :
4ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. "2.5 I have considered the facts of the case. I have also perused the order of the Assessing Officer and gone through the nature of entries in bank account no. 2356 with Canara Bank, Khetwadi Branch, Mumbai. The appellant has admitted that all the documents furnished to the bank at the time of account opening belong to it. The appellant is claiming that the signature appearing on the bank account opening form is not the signature of its director. This contention of the appellant cannot be accepted because not only all documents furnished at the time of opening account belongs to the appellant, even signature on the account opening form tally with the signature of Shri Harnish B. Shah as are appearing on the return of income filed for this year. Even the appellant impliedly accepted the fact that bank account belongs to it, when it stated in the statement furnished on 23-12-
2008 before the Assessing Officer that that all the entries in this account are accommodation entries. In the statement furnished on 23-12-2008, the appellant clearly stated that it has provided accommodation entries to parties like M/s Alka Diamond Industries Ltd., M/s Javda India Impex Limited, M/s Kunal Gems, M/s Pratik Impex, M/s Master Corporation, M/s Mohit Internationals and Vanguard Jewels Limited. Thus the Assessing Officer rightly held that this bank account belongs to appellant company. 2.6 The issue that now remains is whether the claim of the appellant that all the entries in this bank account are accommodation entries, is to be accepted or not. In this bank account there are deposits of Rs.6,19,95,743/-. The appellant is claiming that its income cannot be taken more than 1% of the deposits made in this bank account. As per the appellant, the income for this year is Rs.6,19,957/- at the maximum. If this is the income of the appellant, then how can the appellant make investment of Rs.23 lacs for purchasing shares of M/s SSPL. This shows hat all the entries in this bank account are not accommodation entries. The appellant, in the appellate proceedings has not come forward to identify which entry in the bank is accommodation entry and which entry in this bank account are not accommodation entry. In the statement furnished before the Assessing Officer on 23-12-2008, the appellant only stated that most of the entries are in the nature of accommodation entries (refer 4th line of para 1 of statement). Thus the Assessing Officer has rightly rejected the claim of the appellant that the nature of the entries in this bank account is in the nature of accommodation entries. As the Appellant has not explained the source of deposits in the bank accounts, these deposits are unexplained and hence deemed income of the Appellant as per the provisions of section 68 of the 5 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. income tax act. The action of the Assessing Officd is upheld. This ground of appeal is not allowed."
Aggrieved by the order of the learned CIT(Appeals), the assessee has preferred this appeal before the Tribunal.
5. The learned counsel for the assessee mainly raised two contentions in support of the assessee's case on the issue under consideration. Firstly, he submitted that the amounts found to be deposited in the current account with Canara Bank maintained in the name of the assessee were received against accommodation bills and, therefore, the said amounts cannot be entirely treated as undisclosed income of the assessee. He contended that only the profit earned by the assessee on issue of accommodation bills can be added as income in the hands of the assessee which may be estimated at 1% or 2% of the amounts deposited. Without prejudice to this main contention and as an alternative, he argued that even if the stand of the assessee of having received the amount in question against the accommodation bills and having earned commission of 1% or 2% therefrom is not found acceptable, what can be treated as income of the assessee on the basis of transactions reflected in the relevant bank account is only the peak credit as worked out after taking into consideration all the deposits and withdrawals. In support of this contention, the learned counsel for the assessee relied on the decision of the coordinate bench of this Tribunal in the case of Surendra M. Khandhar vs. ACIT 76 ITD 121 and that of Hon'ble Delhi High Court in the case of CIT vs. D.D. Gears Ltd. 211 Taxman 8.
6. The learned DR, on the other hand, submitted that the stand taken by the assessee of having received the amounts in question against issue of accommodation bills for commission is not supported by any evidence. He submitted that if the assessee had received such commission only to the extent of 6 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. 1% or 2% of the amounts found to be deposited in the bank account, it would not have been possible for the assessee to make investment of Rs.23 lakhs in the shares of Sharda Spuntex P. Ltd. from the said account. As regards the alternative contention of the learned counsel for the assessee that the addition on account of transactions reflected in the current account with Canara Bank could be made only to the extent of peak credit, he submitted that the benefit of peak credit theory can be allowed only if the assessee is able to establish that the withdrawals made from the bank account were available to make further deposits.
7. We have considered the rival submissions and also perused the relevant material on record. It is to be noted at the outset that no argument has been raised on behalf of the assessee before us to dispute the position that the current account No. 2356 with Canara Bank, Khetwadi branch maintained in the name of the assessee is actually belonging to it. In any case, sufficient evidence was brought on record by the AO in support of his case on this issue which, in our opinion, was sufficient to establish that the said bank account was maintained by and belonging to the assessee company. As regards the contention raised by the learned counsel for the assessee that the amounts found deposited in the said bank account were received by the assessee against issue of accommodation bill for commission, we find that there is no evidence whatsoever brought on record by the assessee to support and substantiate the same. Moreover, as rightly held by the authorities below as well as reiterated by the learned DR at the time of hearing before us, the investment of Rs.23 lakhs was made by the assessee in the shares of Sharda Spuntex P. Ltd. from the said account which was more than the commission of 1% to 2% stated to be received by the assessee by issuing accommodation bills. We, therefore, find no merit in the contention raised on behalf of the assessee of having 7 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. issued accommodation bills and having received only 1% or 2% commission from the issue of such accommodation bills.
8. As regards the alternative contention raised by the learned counsel for the assessee based on peak credit theory, we are of the view that there is some merit in this contention raised by him. In our opinion, if there are entries showing deposits made in the bank account and also withdrawals made from the said account, the addition that is required to be made on such transactions has to be worked out by applying a peak credit theory. However, we find merit in the submission made by the learned DR that in order to avail the benefit of peak credit theory, the onus is on the assessee to establish that the withdrawals made from the bank account were available for making the further deposits. For example, if the amount of Rs.23 lakhs withdrawn from the bank account was admittedly utilized for making investment in the shares of Sharda Spuntex P. Ltd., the same cannot be taken into consideration for working out the peak credit. In the decision of the Tribunal in the case of Surendra M. Khandhar (supra) cited by the learned counsel for the assessee, it was held that for working of the peak credit, it was for the assessee to prove that the withdrawals were not utilized for other expenses or investments and were available for subsequent deposit in the said bank account and benefit of peak could be given only when the recycling of funds was proved. Keeping in view the said decision of the coordinate bench of this Tribunal in the case of Surendra M. Khandhar (supra) and having regard to all the facts of the case, we restore this issue to the file of the AO for the limited purpose of working out the peak credit of the transactions of deposits and withdrawals reflected in the bank account of the assessee with Canara Bank and restrict the addition to the extent of peak credit so worked out. The AO shall afford sufficient opportunity to the assessee of being heard on this issue.
8ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010.
9. In the result, the appeal of the assessee for assessment year 2005-06 is treated as partly allowed for statistical purposes.
10. Now we shall take up the appeal of the assessee for assessment year 2006- 07, which involves a solitary issue relating to addition of Rs.2,73,36,016/- made by the AO and confirmed by the learned CIT(Appeals) on account of deposits found to be made in the bank account of the assessee treating the same as its undisclosed income. As this issue involved in assessment year 2006-07 as well as all the facts relevant thereto are similar to that of assessment year 2005-06 which has already been decided by us, we follow our decision rendered in assessment year 2005-06 and restore this matter to the file of the AO for the limited purpose of working out the peak credit with the similar directions as given in assessment year 2005-06. The AO is also directed to reduce the peak credit of the earlier years from the peak credit of the year under consideration so as to avoid double addition of the same amount as held by the coordinate bench of this Tribunal in the case of Surendra M. Khandhar (supra) cited by the learned counsel for the assessee.
11. The appeal of the assessee for assessment year 2006-07 is accordingly treated as partly allowed for statistical purposes.
12. Now we shall take up the appeal of the assessee for assessment year 2007- 08, ground No. 1 of which involves the similar issue as involved in the appeals of the assessee for assessment years 2005-06 and 2006-07 relating to the addition of Rs.37,10,901/- made by the AO and confirmed by the learned CIT(Appeals) on account of deposits found to be made in the bank account of the assessee treating the same as its undisclosed income. Following our decision rendered in assessment years 2005-06 and 2006-07 on the similar issue, we restore this matter to the file of the AO with the same directions as given in assessment years 2005-06 and 2006- 9 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010.
07. Ground No.1 of the assessee's appeal for assessment year 2007-08 is accordingly treated as partly allowed for statistical purposes.
13. In ground No.2, the assessee has challenged the action of the learned CIT(Appeals) in upholding the order of the AO rejecting the books of account of the assessee while in ground No.3, the assessee has disputed the trading addition made by the AO and confirmed by the learned CIT(Appeals) by applying a higher GP rate of 4%.
14. During the course of assessment proceedings, it was noticed by the AO that the assessee has not maintained the stock of diamonds according to the numbers but the same is maintained according to the weight. He also found that although stock record was maintained separately by the assessee in respect of rough diamonds, cut and polished diamonds and polished semi-precious stones, the inventory of stock was not maintained according to the quality of diamonds. According to the AO, in the absence of these records maintained by the assessee, the valuation of opening and closing stock shown by the assessee was not verifiable. In order to verify the correctness of the purchases and sundry creditors, letters were issued by the AO to 10 parties which were returned by the postal authorities unserved. He, therefore, required the assessee to produce the said 10 parties for examination along with the books of account and stock register maintained by them which the assessee failed to comply with. The AO, therefore, held that the purchases shown by the assessee were not fully verifiable. Keeping in view these defects pointed out by him as well as the low GP rate disclosed by the assessee which the assessee failed to explain satisfactorily, book results as disclosed by the assessee were rejected by the AO and the income of the assessee was computed by him by applying a gross profit rate of 4% which resulted in trading addition of Rs.14,43,342/-. On appeal, the learned CIT(Appeals) upheld the 10 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. action of the AO in rejecting the books of account and also confirmed the trading addition made by the AO for the following reasons given in paragraph No. 2.5 to 2.7 of his impugned order :
"2.5 I have considered the facts of the case. There exist factors in the present case that are sufficient to reject books of account of the appellant. As stated by Assessing Officer, appellant has not maintained proper and complete details of opening stock, purchasers, sales and of closing stock. The appellant has maintained these details only carat wise. No details are maintained on the basis of quality, quantity and on the basis of clarity. Therefore, it cannot be verified whether appellant has correctly valued the stock. The appellant has also not produced 10 parties, who have failed to file any reply to Assessing Officer in response to letters issued under section 133(6) of the income tax act. In fact in all cases lettes were received back unserved. The appellant did file income tax returns and confirmations of these parties but failed to produce these parties. The appellant has not also explained why it could not produce these parties. Hence, Assessing Officer has rightly invoked provisions of section 145 of the income tax act and rejected books of account.
26. Even after rejecting books of accounts, Assessing Officer has to estimate business income on basis of available information. In the case of M/s G. Kapoor Jewellers Private Limited, declared GP rate is 10.86%. In the case of the appellant declared GP is only 1.03%. Since GP rate declared by the appellant is too low, the Assessing Officer is justified in holding that GP rate of 4% is reasonable in the case of appellant.
2.7 The appellant is claiming that in the past such low GP rate was accepted. Principle res-judicata does not apply to income tax proceedings as held in the case of Raja B Kamakhaya Narain Singh 53 ITR 663. Evert assessment year is an independent assessment year. Further, there is no finding that GP rate in earlier year after scrutiny. Facts that appellant declared low GP rate and the same was accepted without enquiry by department does not mean that the same rate must be accepted by the department in subsequent year also. Accordingly, no relief can be provided to the appellant. The action of the Assessing Officer in making of addition of Rs.14,43,342/- to the income of the appellant is upheld. This ground of appeal is not allowed.11
ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010.
15. The learned counsel for the assessee submitted that although stock of diamond was not maintained by the assessee number-wise, the same was maintained quality-wise and the verification of the value of opening and closing stock shown by the assessee was possible on the basis of stock record so maintained. He submitted that the confirmation of all the 10 parties were filed by the assessee before the AO but the said parties could not be produced before the AO for examination as they were not on good term with the assessee due to delay in settlement of their dues. He contended that the defects pointed out by the AO in the books of accounts thus were not material enough to justify the rejection of book results and the learned CIT(Appeals) was not justified in upholding the action of the AO in rejecting the book results. As regards the GP rate of 4% applied by the AO, the learned counsel for the assessee relied on the decision of the Tribunal in the case of Sundaram Gems P. Ltd. (ITA No. 6356/Mum/2007 dated 14th May, 2010) and submitted that the GP rate of 2.82% shown in the said case by the assessee engaged in the same business was accepted by the Tribunal. He also submitted that if any trading addition is found to be sustainable by the Tribunal, the same be telescoped with the addition to be made on account of peak credit of the transactions reflected in the bank account of the assessee.
16. The learned DR, on the other hand, strongly supported the orders of the authorities below on this issue. He submitted that specific and material defects were pointed out by the AO in the books of account and other record maintained by the assessee which were sufficient to justify the rejection of book results. He also invited our attention to paragraph No. 8 of the assessment order to show that even though the GP rate in the comparable case disclosed by the assessee was found to be 10.86%, the AO was fair and reasonable to apply the GP rate of only 12 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. 4% after taking into consideration all the relevant facts of the assessee's case including the turnover, capital base etc.
17. We have considered the rival submissions and also perused the relevant material on record. It is observed that the value of opening stock and closing stock disclosed by the assessee was found to be unverifiable by the AO in the absence of qualitative and quantitative details of diamonds maintained by the assessee.
Similarly, the purchases shown by the assessee were found to be not fully verifiable by the AO as a result of returning back of the notices sent to the 10 suppliers and the failure of the assessee to produce the said parties for examination along with their books of account, stock record etc. Having regard to these specific defects pointed out by the AO coupled with the fact that the GP declared by the assessee was very low at 1.03% which the assessee failed to satisfactorily explain, we are of the view that the action of the AO in rejecting the book results was fully justified and the learned CIT(Appeals) was right in upholding the same. As regards the GP rate of 4% applied by the AO, the learned counsel for the assessee has relied on the decision of Sunderam Gems P. Ltd. (supra) to contend that GP rate of 2.82% shown in the said case from the similar business was accepted by the Tribunal. It is, however, observed that the action of the AO in rejecting the book results in the said case was found to be unsustainable by the Tribunal and, therefore, there was no occasion for the Tribunal to decide the issue relating to reasonability of GP rate declared by the assessee. Moreover, the turnover of the assessee in the said case was Rs.33.10 crores while the turnover of the assessee in the present case for the year under consideration was only Rs.4.86 crores. In this regard, it is pertinent to note that in the comparable case of M/s V. Kapoor Jewellers P. Ltd. cited by the AO, the GP rate disclosed by the assessee was 10.86%. However, keeping in view that the turnover of the assessee in the said 13 ITA Nos.5567,5568/Mum/2009, ITA No. 5628/Mum/2010. case was only 1.71 crores as against Rs.4.85 crores of the assessee, the AO applied a GP rate of 4% on the ground that when the turnover increases, GP rate decreases. Having regard to all these facts, we are of the view that the GP rate of 4% applied by the AO was fair and reasonable and the learned CIT(Appeals) was fully justified in confirming the trading addition made by the AO by applying the said GP. In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) on this issue. The AO, however, is directed to consider the alternative claim of the assessee as made by the learned counsel for the assessee before us of allowing the benefit of telescoping of trading addition with the addition to be made on account of peak credit after verifying the relevant facts.
18. In the result, all the three appeals of the assessee are partly allowed for statistical purposes.
Order pronounced on this 27th day of February, 2013.
Sd/- Sd/-
(Sanjay Garg) (P.M. Jagtap)
Judicial Member Accountant Member
Mumbai,
Dated: 27th February, 2013.
Wakode
14
ITA Nos.5567,5568/Mum/2009,
ITA No. 5628/Mum/2010.
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, F-Bench.
(True copy)
By Order
Asstt. Registrar,
ITAT, Mumbai Benches, Mumbai.