Income Tax Appellate Tribunal - Ahmedabad
Jt. Cit (Osd), Circle-3(1)(1),, ... vs M/S. Pradip Overseas Ltd., Ahmedabad on 16 September, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "C" BENCH
(Conducted Through Virtual Court)
Before: Shri Mahavir Prasad, Judicial Member
And Shri Amarjit Singh, Accountant Member
ITA No. 790/Ahd/2018
Assessment Year 2013-14
The Jt. CIT(OSD), M/s. Pradip Overseas Ltd.
CIR-3(1)(1), A-601, 603 Nar Narayan
Ahmedabad Vs Complex, Nr. Swastik
(Appellant) Cross Road, Navrangpura,
Ahmedbad-380009
PAN: AACCC6293J
(Respondent)
Revenue by: Shri O.P. Sharma, Sr. D.R.
Assessee by: Shri Sakar Sharma, A.R.
Date of hearing : 26-08-2021
Date of pronouncement : 16-09-2021
आदे श/ORDER
PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
This revenue's appeal for A.Y. 2013-14, arises from order of the CIT(A)-11, Ahmedabad dated 17-01-2018, in proceedings under section 143(3) of the Income Tax Act, 1961; in short "the Act".
2. The solitary ground of appeal of the revenue is directed against the order of ld. CIT(A) in restricting the addition of Rs. 14,18,89,380/- to Rs. 85,13,363/- made by the Assessing Officer on account of circular trading purchases.
I.T.A No. 790/Ahd/2018 A.Y. 2013-14 Page No 2 Jt. CIT(OSD) vs. M/s. Pradip Overseas Ltd.
3. The fact in brief is that assessee has filed return of income showing Rs. Nil income on 29th Sep, 2013. The case was subject to scrutiny assessment and notice u/s. 143(2) was issued on 5th Sep, 2014. During the year under consideration, the assessee has shown total sales of Rs. 942.93 crore and the Assessing Officer observed that there was decline in the sale during the year compared to total sales of Rs. 1618.78 crores in A.Y. 2012- 13 and total sale of Rs. 1931.82 crores in A.Y. 2011-12. On query, the assessee admitted that during the year he was indulged in circular trading transaction in order to show better turnover. The assessee has admitted that majority of its purchases were merely paper purchase transaction as it was engaged in circular trading activities wherein the bills/invoices change hands without movement of physical goods. Various proprietary concerns were floated through which the circular tradings were carried out. In the circular trading various sale bills would be issued which would be circulated amongst these fictitious concerns and finally they would end up in sales to the assessee by the last entity. The advantage taken by the intermediary were that they discounted the sale bills made by them to the first created entity and obtained loan from bank, through the bill discounting method. From the money obtained from bill discounting they would then make the payment for the last entity from whom they made purchase. From these payments made by the assessee, the entities would make the subsequent payment and the funds would finally reach the assessee. In addition to this, the assessee also obtained loans from other banks on the final purchase entries made by it from the entities. After considering the submission of the assessee, the Assessing Officer has stated that the purchases were not reliable and were paper purchases, therefore, purchases to the tune of 5% of I.T.A No. 790/Ahd/2018 A.Y. 2013-14 Page No 3 Jt. CIT(OSD) vs. M/s. Pradip Overseas Ltd.
total purchases of Rs. 2,83,77,87,618/- which worked out to the total amount of Rs. 14,18,89,380/- was disallowed and added to the total income of the assessee.
4. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has restricted the disallowance to the extent of Rs. 85,13,363/-. The relevant part of the decision of ld. CIT(A) is reproduced as under:-
"DECISION 4.3 I have gone through the facts of the case, findings of Assessing Officer in assessment order and submissions of the appellant. The A.O. alleged that the assessee had admitted that during the year it had resorted to circular trading, wherein the bills / invoices change hands without movement of physical goods and mentioned movement of invoices and funds in para 3.1 of assessment order. The A.O. treated such purchases of Rs. 2,83,77,87,618/- as not reliable and paper purchases. The A.O. concluded that the benefit derived by the assessee from, such bogus circular paper purchase bills can be around 5% and disallowed Rs. 14,18,89,380/- of purchases.
4.3.1 In assessment proceedings and before me in appellate proceedings, the appellant submitted that:
(i) In circular trading, there are no bogus / fictitious purchases / sales, but the circular trading is adhered to show better turnover.
(ii) The appellant company has furnished circular trading sample bills and chart before Settlement Commission vide submission dated 21-12-2015 (Pg. No. 48), copy of this letter also filed with AO, summary of such circular trade transactions are as under:
Sale by POL to 1st Party Sale by 1st Party to 2nd Party Sale by 2nd Party to POL Name Of Purchase Amount Name Of Purchase Amount Name Of Amount Purchase A.M Enterprise 2633882 Balaji Enterprise 2636482 Pradip Overseas Ltd. 2639406 Jays Enterprise 3923219 Shree Balaji Trading Co. 3926259 Pradip Overseas Ltd. 3931961 Nirmal 3428637 Krishna Enterprise 3432290 Pradip Overseas 3439191 Corporation Ltd.
Balaji Impex 3699008 Shree Sai Trading Co. 3705425 Pradip Overseas Ltd. 3710638 Shri Ram 3549322 S.K Enterprise 3552811 Pradip Overseas Ltd. 355710S Enterprise Shiv Trading Co. 2744456 Shivraj Traders 2748054 Pradip Overseas 2752191 Ltd.
Venkateswara 3923517 Jay Traders 3929222 Pradip Overseas Ltd. 3936069 Trading Co.
A.M Enterprise 2399220 Shree Balaji Trading Co. 2403403 Pradip Overseas Ltd. 2408050 Vinayak 2998752 Krishna Enterprise 3002550 Pradip Overseas Ltd. 3007382 Enterprise Shri Ram Enterprise I Balaji Enterprise 3884753 Pradip Oversea: Ltd. 3890940 3879402 i I.T.A No. 790/Ahd/2018 A.Y. 2013-14 Page No 4 Jt. CIT(OSD) vs. M/s. Pradip Overseas Ltd.
TOTAL 331794151 33221249 j 33272933
(iii) The appellant sold goods worth Rs. 3,31,79,415/- in circular trading to the first party, who in-turn sold such goods to second party at Rs. 3,32,21,249/- and finally the second party sold such goods to the appellant company (POL) at Rs.
3,32,72,933/-. In these transactions the purchases value of goods increased by Rs. 93,5187- (sale by POL Rs. 3.31,79,415/- less purchases by POL Rs. 3,32,72,933/-), which is 0.28% of circular purchases by the appellant (POL).
(iv) Profit on circular transactions duly recorded and offered by appellant company (POL) at the time of making sale to inter-mediatory parties. Charges by the inter-mediatory @ of 0.28% of circular trading purchases / transactions nullified from the impact of profit duly offered on first sale, which is only paper transaction. Therefore, neither any benefit derived nor any expense booked by the appellant from such circular transactions / purchases, as alleged by the AO.
(v) Appellant submitted that identical issue of circular transaction was decided by Hon'ble Jurisdictional Tribunal in case of M/s. Arman Fashion Pvt. Ltd. vs. ITO in ITA No,2400 and 2407/Ahd/2012 (Ahmedabad). 4.3.2 The A.R. of the appellant argued that the A.O. in para 3 of assessment order has given finding that the assessee is engaged in circular trading activities, wherein the bills / invoices change hands without movement of physical goods, contrary to this in para 4 of assessment order the A.O, concluded that the purchases are not reliable and are paper purchases. The A.O. in para 3.1 of assessment order narrated that the circular trading is resorted where various sale bills issued, which circulated amongst fictitious concerns and finally they ended up in sales to the assessee by the last entity. The A.R. further stated that no benefit is derived through these circular trade transactions, it is only to show better turnover in financial accounts.
Sale by POL to 1st Party Sale by 1st Party to 2nd Party Sale by 2nd Party to POL Name Of Purchase Amount Name Of Purchase Amount Name Of Amount Purchase A.M Enterprise 2633882 Balaji Enterprise 2535482 Pradip Overseas Ltd. 2639406 Jays Enterprise 3923219 Shree Balaji Trading Co. 3926259 Pradip Overseas Ltd. 3931961 Nirmal 3428637 Krishna Enterprise 3432290 Pradip Overseas 3439191 Corporation Ltd.
i Balaji Impex 3699008 Shree Sai Trading Co. 3705425 Pradip Overseas Ltd. 3710638
Shri Ram 3549322 S.K Enterprise 3552811 Pradip Overseas Ltd. 3557105
Enterprise I
Shiv Trading Co. 2744456 Shivra] Traders 2743054 Pradip Overseas Ltd. 2752191
Venkateswara 3923517 Jay Traders 3929222 Pradip Overseas Ltd 3936069
Trading Co,
A.M Enterprise 2399220 Shree Balaji Trading Cc. 2403403 Pntiip Overseas Ltd. 2408050
Vinayak 2998752 Krishna Enterprise 3002550 Pradip Overseas Ltd. 3007382
Enterprise
Shri Ram 3879402 Balaji Enterprise 3884753 Pradip Overseas Ltd, 3890940
Enterprise
TOTAL 33179415 33221249 33272933
4.3.3 From the above facts of the case, submissions of the appellant and findings in assessment order following facts emerges:
(i) The transactions of purchases and sales made by appellant are in the nature of circular trade transactions, where the appellant offered profit in the sale transactions and purchased the same goods through circular trade at some higher value. The appellant furnished sample bills / invoices, where the goods are travelled as sale by the appellant (POL) and received back as purchases by the appellant (POL): In these transactions the purchases value of goods increased by Rs. 93.518/- (sale by POL Rs. 3,31,79,415/- less purchases by POL Rs.
3.32,72,933/-) which is 0.28% of circular purchases by the appellant (POL).
I.T.A No. 790/Ahd/2018 A.Y. 2013-14 Page No 5Jt. CIT(OSD) vs. M/s. Pradip Overseas Ltd.
(ii) The appellant vide letter dated 15.03.2016 furnished above explanations and workings. The para is reproduced hereunder:
".........................................
During the year circular trade transactions are adhere to show better turnover. In this connection detailed explanation were also filed to the Hon'ble Settlement Commission vide letter 21-12-2015 and copy of the same filed with your office on 22-12-2015. Such turnover is part of raw material inward and finally shown as sale of finished goods. However, there is no element of any losses as the transactions are made on meager profits."
iii) On the identical issue of circular transaction, Hon'ble Jurisdictional Tribunal vide order dated 10.05.2013 in the case of M/s. Arman Fashion Pvt. Ltd. vs. ITO in ITA No.2400 and 2407/Ahd/2012 (Ahmedabad) made following findings:
6. The learned CIT(A) after thoroughly examining the issue arrived at the following decision:-
9. DECISION It is an undisputed fact that all purchase parties are assessed to tax and sale appellant has been shown in their trading accounts. Wrong classification of debit balance in their books as loan instead of debtors cannot be a ground for disallowance in the case of appellant. Moreover, if A. 0. doubted purchases from two parties, than the entire purchases should have been disallowed.
There is no basis for accepting 75% of amount as genuine and treating 25% of the amount as bogus purchases in respect of the same party. Besides doubting the purchases, the A- O. also doubted the sales made by the appellant as mentioned on page -7 (6th line) of the assessment order, reproduced on page 8 of this order. Moreover it is noticed that M/s. Raman Fabrics Pvt. Ltd., a purchase party has similar address as the sale party M/s. Bani Thani Fashions Pvt. Ltd. The only difference is in Shop NO, which is 128E, Sanghvi Tower in the case of purchase party and 128B, Sanghvi Tower in the case of sale party. Another sale party M/s. Nakoda Textile Industries Ltd. has the address 128D, Sanghvi Tower. The appellant's address relate to few parties and almost the entire amount of purchase as well as sales is outstanding nor only on 31.03.2009 but also on 31.03.2010. Both the Sundry debtors and creditors on 31.03.2009 are Rs. 10.92 crores each. There are only two parties in Sundry creditors. In respect of both these parties 25% disallowance has been made by A.O. There are five parties in Sundry debtors. The appellant has claimed that payments have been made/received in respect of these creditors/debtors in A. Y. 2012-13. Therefore, it is not a case where purchase parties don't exist or have denied having transactions with appellant.
The appellant vide letter filed on 09.08.2012 admitted that it was a case of circular transactions. The said letter is reproduced herein under:..............,......,.........
................... it is apparent that both the purchases and sales in this case are bogus and only book entries for purchase/sale have been made. Such transactions may be for the purpose of giving bogus entries to other concerns to help them evade tax or just circular transaction whether the group to generate a fake healthy balance sheet to deceive financial institutions or for some other purpose.
Ethical aspects of such an' exercise can be debated and there may be adverse consequences under other acts/rules for such conduct. However, as for Income Tax Act is concerned, what is required to be seen is the correct amount of taxable income generated from such transaction. As noticed (supra) the total sales of appellant are on Rs.18.23 crores. Since GP is only 0.04%, purchases are also of almost equal amount, if the appellant has given bogus entries to others, appropriate commission income for giving bogus entries need to be estimated as taxable income of the appellant. In case appellant has only indulged in circular transactions, then there may not be any taxable income in the hands of appellant except what has been shown in the return of income. However, if AO's view is accepted that purchases are not verifiable, even then it will be a case of net profit estimation.
13. Appellants declared business is trading in textiles. In the case of M/s. Opulent Jewels Pvt. Ltd., A.Y. 2007- 08, wherein 25% of unverifiable purchases were added my predecessor held that it was a case of giving bogus entries and estimated a net profit of 15% on purchases as income for giving accommodation entries or purchases / sales.....................
14. Considering the facts of the case and the decisions relied upon by appellant, the estimation of income in this case may be between what is shown in the return of income to 1.5% of turnover depending upon whether it is a case of circular transactions, unverifiable purchase or bogus entries. In case of giving accommodation entries the profit estimation in diamond cases referred to supra has been at 1.5% while for textile case the ITAT Ahmedabad has taken a percentage of 0.125%. Since rate of commission for giving entries in textile trade are bound to be lower than the rates for diamond trade, estimate has to be closer to 0.125% and not 1.5%. Alternatively, if it is case of unverifiable purchases in textile business, then the estimate of net profit for a turnover of this size may be between 0.5% to 1%. The present case falls in neither of the categories. It is a case of circular transactions to show a fake healthy balance sheet. However, the appellant cannot escape the provisions of Section 4QA(2)a/40A(2)b even in case of circular transactions within group concerns. Therefore a reasonable estimate c* profit is required even in that case in view of Section 40A(2)a/40A(2)b. Considering all these facts a net profit of 0.5% is estimated on turnover of Rs.13.23 crores. Therefore, addition is sustained to extent of Rs.9.12 lakhs."
7. " None appeared on behalf of the assessee while as the learned DR vehemently supported the order of the learned AC sno prayed that the same may be sustained.
8. We have carefully perused the materials placed before us and also heard the arguments advanced by the learned DR. Further, perusing the order of the learned CIT(A) we find that the learned CIT(A) after deliberating the issue has made the following findings:-
I.T.A No. 790/Ahd/2018 A.Y. 2013-14 Page No 6Jt. CIT(OSD) vs. M/s. Pradip Overseas Ltd.
(i) All the parties from whom the assessee had made purchases were assessed to tax and were disclosed in their trading account.
(ii) The parties from whom the assessee had made purchases had only wrongly classified in their books of accounts as loan instead of showing the balance due to the assessee as receivable from the assessse as debtors.
(iii) In such circumstances, the transactions of the purchases and sales made by the assessee need not be doubted.
(iv) However, during the year the assessee had a turnover of Rs.18.23 Crores with gross profit at 0-04% and net profit at 0.02%. During the subsequent assessment year, the turnover declared was nil and had shown negligible administrative expenses of Rs.46,187/-and had outstanding debtors and creditors. From these facts it could be inferred that both the purchases and sales are bogus and only book entries. Such transactions are generally made to extend bogus entries to other concerns in order to help them to evade tax or it could be a circular transaction to generate a healthy balance sheet to deceive financial institutions or for other purposes.
(v) From the above facts, the income of the assessee could not be to the extent of 25% of unverifiable purchases.
Further, drawing support from the other decisions of the ITAT Ahmedabad Benches, net profit could be estimated at 0.05% on the total turnover of Rs.18.23 Crores,
9. The above findings of the learned CIT(A) is quite reasonable. Further, either parties did not produce any materials on record to dislodge the findings of the learned CIT(A). In these circumstances, we do not have any hesitation to confirm the order of the learned CIT(A). Consequently, the appeal of the revenue as well as the cross appeal of the assessee, both are dismissed."
4.3.4 Considering above facts of the case, submissions of the appellant and findings in assessment order, I am of considered view that the transactions are in the nature of circular purchases and there is no space to hold that the purchases are not reliable and paper purchases. The appellant rightly said that the profit on sale transactions is offered by appellant company (POL), but during the year the appellant has shown negative gross profit and net loss in return of income. Therefore, this is not a case of estimation of net profit on circular purchases but this is a case, where the appellant has incurred expenses for circular purchases / transactions @ 0.28%. Accordingly, I estimate disallowance @ 0.30'% of circular trading purchases of Rs. 2,83,77,87,618/- being charges to inter-mediatory not for the purpose of business. The addition is sustained to the extent of Rs. 85,13,363/- and the appellant get relief of Rs. 13,33,76,017/-. This ground of appeal is partly allowed."
5. During the course of appellate proceedings before us, the ld.
Departmental Representative has supported the order of Assessing Officer and submitted that ld. CIT(A) has incorrectly relied on the facts and issues pertaining to the earlier year on the basis of report submitted by the assessee before the Settlement Commission. On the other hand, ld. counsel has contended that Assessing Officer has not considered the complete submission of the assessee and made the addition unreasonably without giving any reason. The ld. counsel has also submitted that ld. CIT(A) has rightly adjudicated the issue as the facts are identical to the earlier year for which assessee has made submission before the Settlement Commission.
6. Heard both the sides and perused the material on record. During the course of assessment, the assessee has admitted that it was engaged in circular trading wherein the bills/invoices changed hands without movement of physical goods. The Assessing Officer has treated such purchase of Rs.
I.T.A No. 790/Ahd/2018 A.Y. 2013-14 Page No 7 Jt. CIT(OSD) vs. M/s. Pradip Overseas Ltd.
2,83,77,87,618/- as not reliable and disallowed 5%of such purchases which worked out to Rs. 14,18,89,380/- and added to the total income of the assessee. During the course of assessment and appellate proceedings the assessee explained the complete modus operandi of circular trading transaction which was carried out to show better turnover. Without reiterating the facts as elaborated in this order, it is undisputed fact that assessee would make payment to the entity from whom it made purchases, who in turn would make consequent payment and the funds would finally reach back to the assessee. In circular trading the payments were made through cheques and profit on circular trading was disclosed by the assessee in its return of income. In the earlier assessment year, the assessee has gone to Settlement Commission and furnished the circular trading/sample bills and chart which was discussed by the ld. CIT(A) in his findings as supra in this order. The complete particulars of circular transaction in the table of transaction given in the finding of ld. CIT(A) demonstrated that assessee had sold goods worth Rs. 3,31,79,415/- in circular trading through first party who in turn sold such goods to the second party at Rs. 3,32,72,933/- and the last party has sold back to the assessee at Rs. 3,32,72,933/- ultimately the difference in the first sale and the last sale was of 0.28% of circular purchases made by the assessee. The ld. CIT(A) has also referred the decision of the ITAT Ahmedabad on the identical issue of circular transaction in the case of M/s. Arman Fashion Pvt. Ld. vs. ITO vide ITA 2400 and 2407/Ahd/2012. The ld. CIT(A) has also discussed in his finding that this was not a case of estimation of net profit on circular purchases but this was a case where the assessee had incurred expenses for circular purchases/transaction @ 0.28% and estimated the disallowance @ 0.30% of I.T.A No. 790/Ahd/2018 A.Y. 2013-14 Page No 8 Jt. CIT(OSD) vs. M/s. Pradip Overseas Ltd.
circular trading purchases. The ld. CIT(A) has also explained in his finding regarding analysis of the transaction made by the assessee that these transactions were carried out in order to show better turnover in financial accounts. The Revenue could not controvert the facts reported by the ld. CIT(A) with any relevant material. Therefore, looking to the above facts and finding, we do not find any infirmity in the decision of ld. CIT(A) in estimating the disallowance @ 0.30% of circular trading purchases of Rs. 2,83,77,87,618. Accordingly, this appeal of the revenue is dismissed.
7. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 16-09-2021
Sd/- Sd/-
(MAHAVIR PRASAD) (AMARJIT SINGH)
JUDICIAL MEMEBR ACCOUNTANT MEMBER
Ahmedabad : Dated 16/09/2021
आदे श क त ल प अ े षत / Copy of Order Forwarded to:-
1. Assessee
2. Revenue
3. Concerned CIT
4. CIT (A)
5. DR, ITAT, Ahmedabad
6. Guard file.
By order/आदे श से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण,
अहमदाबाद