Gujarat High Court
The Principal Commissioner Of Income ... vs Kfc Exports Pvt. Ltd on 21 January, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/213/2024 ORDER DATED: 21/01/2025
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 569 of 2023
With
R/TAX APPEAL NO. 213 of 2024
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THE PRINCIPAL COMMISSIONER OF INCOME TAX 1, AHMEDABAD
Versus
KFC EXPORTS PVT. LTD.
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Appearance:
MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1
MR TEJ SHAH(5743) for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
Date : 21/01/2025
COMMON ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Senior Standing Counsel Mr.Varun K. Patel for the appellant and learned advocate Mr.Tej Shah for the respondents.
2. Both these Tax Appeals are arising out of the Judgment and Order passed by the Tribunal in ITA Nos.2463/Ahd/2018 and 2464/Ahd/2018 for Assessment Year 2010-11 in case of KFC Industries Private Limited and KFC Exports Page 1 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined Private Limited respectively.
3. The Tribunal has passed a common Order in both the Appeals which were filed at the instance of Revenue against the separate Orders dated 31.10.2018 passed by the Commissioner (Appeals) arising in the matter of Assessment Order passed under Section 143(3) read with Section 147 of the Income Tax Act, 1961 (for short 'the Act').
4. The Tax Appeal No.569 of 2023 pertains to the Order passed by the Tribunal in ITA No.2463/Ahd/2018 and was admitted by this Court vide order dated 17.10.2023 on the following substantial questions of law in case of KFC Industries Private Limited:
"(a) Whether, on the facts and circumstances of case and in law, the Page 2 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined ld.ITAT has erred in deleting the addition of Rs.51,78,64,090/- made u/s.
68 of the Act on account of bogus purchases?
(b) Whether, on the facts and circumstances of the case and in law, the learned ITAT has erred in disregarding judgment of this Hon'ble Court in the case of N.K.Industries Ltd vs. DCIT [2016] 72 taxmann.com 289 (Gujarat), as confirmed by the Hon'ble Supreme Court by order dated 16.01.2017 passed in Special Leave to Appeal (C) CC No. 769 of 2017?"
5. Tax Appeal No.213 of 2024 is pending for admission wherein, following similar two questions are proposed by the Revenue in case of KFC Exports Private Limited arising out of the ITA No.2464/Ahd/2018:
"(a) Whether in the facts and circumstances of the case and in law, Page 3 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined the learned ITAT has erred indeleting the addition of Rs.52,21,66,403/- made u/s 68 of the Income Tax Act, 1961 on account of bogus purchases?
(b) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred indisregarding judgment of this Hon'ble Court in the case of N. K. Industries Ltd. vs DCIT [2016] 72 taxmann.com 289 (Gujarat), as confirmed bythe Hon'ble Supreme Court by order dated 16.01.2017 passed in Special leave to Appeal (C) CC No. 769 of 2017?"
6. As both the Appeals are arising from the common Order dated 22.03.2023 passed by the Tribunal, the same are heard together.
7. The brief facts of the case are as under :
7.1. In both these Tax Appeals, the assessee has claimed to have shown the sales to parties namely M/s.KGN Industries Limited Page 4 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined and M/s.KGN Enterprise Limited. It was discovered during the course of survey proceedings dated 24th January, 2015 in case of M/s. KGN Industries Limited that the said assessee was a paper company and engaged in providing the accommodation entries based on the statements recorded of Ex-CEO namely Shri Jethalal Jivabhai Hiranai and CEO/Company Secretary namely Shri Deepak Vrajlal Rawal of the said Company.
7.2. The assessee in the present case did not produce complete books of accounts to substantiate the sales and purchases shown by it in the financial statement. Therefore, the Assessing Officer proposed to make the amount of sales shown by the assessee as unexplained cash credit under Section 68 of the Act.Page 5 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025
NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined 7.3. It has also found by the Assessing Officer that the assessee was engaged in providing accommodation entries by carrying out circular transactions and assessee also claimed to have shown purchases from the company namely M/s.Biotar Industries Limited. 7.4. It was a case of the respondent- assessee that it was engaged in circular transactions which was admitted before the VAT Department in the course of survey conducted in the case of M/s.Biotar Industries Limited and therefore, it was contended that whatever amount was received by it, was transferred to M/s.Biotar Industries Limited against the purchases and the assessee was not beneficiary of the funds received by it against the sale of goods to M/s.KGN Industries Limited/KGN Enterprise Limited.
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NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined 7.5. The Assessing Officer disregarding the contention of the assessee, made addition of the entire purchases as bogus purchases relying upon the decision of this Court in case of N.K.Industires Limited versus DCIT reported in 2016 72 taxmann.Com 289 [Gujarat].
7.6. Being aggrieved, the assessee preferred Appeals before the CIT (Appeals) contending that all the ledger accounts and other sales and purchases registers were filed which were not considered by the Assessing Officer at the time of framing the assessment and the assessee was engaged in circular transactions and therefore, the purchases made by the assessee could not have been treated as unexplained cash credit under Section 68 of Page 7 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined the Act.
7.7. It also appears that the assessee, without prejudice to the contention raised before the CIT (Appeals), also submitted that the assessee has earned income by providing accommodation entries at the rate of 0.02% of the sales amount recorded in the books of accounts and therefore, addition should be restricted accordingly.
7.8. The CIT (Appeals), after considering the submissions made by the assessee, came to the conclusion that there was no movement of the goods but the assessee has only entered into a circular transaction of sales and purchase and therefore, the CIT (Appeals) restricted the addition of difference between the sales and purchases in both the cases as Page 8 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined the assessee has not done any real business and therefore, the expenses claimed by the assessee were disallowed.
7.9. Being aggrieved by the order passed by the CIT (Appeals), restricting the addition of the difference between sales and purchase and disallowance of the expenses claimed by the assessee, the Revenue preferred an Appeal before the Tribunal and the Tribunal dismissed the Appeal by observing as under in ITA No.2463/Ahd/2018 which was followed in ITA No.2464/Ahd/2018 for upholding the order passed by the CIT (Appeals):
"12. We have heard the rival contentions of both the parties and perused the materials available on record. The admitted position is that the assessee in the present case was engaged in providing the accommodation entries by Page 9 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined way of carrying out the circular transaction of bogus purchases and sales. This fact has not been doubted by the revenue in the appeal filed before us. What has been challenged by the revenue as evident from the revised grounds of appeal is this that the bogus purchases should be treated as par with the unexplained cash credit under section 68 of the Act. The provision of section 68 reads as under:
68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
12.1 Admittedly, in the given case, the Page 10 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined explanation offered by the assessee about the sum found credited in the books of accounts i.e. received on account of bogus sale and immediately transferred against the bogus purchases after retaining Commission, was not found unsatisfactory by the AO. The only source of the income was the commission from the bogus transactions of sales and purchases. Thus, to our understanding the provisions of section 68 of the Act cannot be attracted. In holding so, we draw support and guidance from the judgment of Hon'ble Bombay High Court in case of PCIT vs. Alag Securities (P.) Ltd reported in 117 taxmann.com 292 where it was held as under:
20. We are in agreement with the view taken by the Tribunal. In a case of this nature Section 68 of the Act would not be attracted.
Section 68 would come into play when any sum is found credited in the books of the assessee and the assessee offers no explanation about Page 11 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined the nature and source thereof or the explanation offered by the assessee is not in the opinion of the Assessing Officer satisfactory. In such a situation the sum so credited may be charged to income tax as the income of the assessee of the relevant previous year. But that is not the position here. It has been the consistent stand of the assessee which has been accepted by the First Appellate Authority and affirmed by the Tribunal that the business of the assessee centered around customers/beneficiaries making deposits in cash amounts and in lieu thereof taking cheques from the assessee for amounts slightly lesser than the quantum of deposits, the difference representing the commission realized by the assessee.
The cash amounts deposited by the
customers I.e., the beneficiaries
had been accounted for in the
assessment orders of these
beneficiaries. Therefore, question
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NEUTRAL CITATION
C/TAXAP/213/2024 ORDER DATED: 21/01/2025
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of adding such cash credits to the income of the assessee, more so when the assessee was only concerned with the commission earned on providing accommodation entries does not arise.
12.2 It is also important to note that the assessee being engaged in the circular transactions/one of conduit in accommodation entries can be made subject to tax based on real income theory. It is for the reason that the assessee was not the beneficiary of the amount received by it on the sales made to the KGN Industries Ltd. As such the amount of sales received by the assessee was utilized against the purchases from M/s Biotor Industries Ltd. We have also perused the extract of the bank statement reproduced by the learned CIT- A in his order on page 10 of his order and find that whatever amount was received by the assessee against the sales was utilized immediately for the purchases. The learned DR at the time of Page 13 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined hearing has also not controverted the observations of the learned CIT-A qua the utilization of sales amount against the purchases.
12.3 Thus, in view of the above, we hold that there cannot be any addition under section 68 of the Act in the given facts and circumstances for the bogus purchases shown by the assessee. What best can be added in the given facts and circumstances is the real income which has been earned by the assessee. To determine the real income, there is no standard formula prescribed under the provisions of law. However, we note that the different Hon'ble Courts in such facts the circumstances have adopted the basis of estimating the income based on some percentage. In holding so we draw support and guidance from the judgment of Hon'ble Bombay High Court in case of PCIT vs. Alag Securities (P.)Lta reported in 117 taxmann.com 292 where it was held as under:
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NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined
21. Coming to the percentage of commission, Tribunal had already held 0.1% commission in similar type of transactions to be a reasonable percentage of commission. Therefore Tribunal accepted the percentage of commission at 0.15% disclosed by the assessee itself. This finding is a plausible one and it cannot be said that the rate of commission was arrived at in an arbitrary manner.
The same does not suffer from any error or infirmity to warrant interference, that too, under section 260A of the Act.
12.4 In the given facts and circumstances, the principles laid down in the above case directly applies to the case on hand. The assessee is just acting as a middleman and carrying out the circular transactions. Thus, at the mos commission income can be brought to tax.
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NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined 12.5 Before parting, it is important to note that the revenue has made the reference to the Judgment of Hon'ble Gujarat High Court in the case of NK Industries Ltd vs. DCIT reported in 72 taxmann.com 289 wherein the gross profit at the rate of 25% on the bogus purchases was adopted to determine the income of the assessee. However, the facts of the case on hand are different from the facts of the case of NK Industries (supra). The assessee being NK Industries Ltd was not engaged in circular transaction by way of providing accommodation entries for commission. In that case, the assessee was one of the beneficiary of the accommodations entries which were provided by the other parties whereas in the case on hand the assessee is middleman and engaged in the circular transaction. Thus, in our humble understanding we are of the view that the principles laid down by the Hon'ble Gujarat Han Court in the case of NK Industries (supra) cannot be applied in the given facts and circumstances. Page 16 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025
NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined 12.6 In the view of the above and after considering the facts in totality, we do not find any reason to interfere in the finding of the learned CIT-A. At the time of hearing the id DR has not brought anything on record contrary to the finding of the Id. CIT-A. Accordingly, we uphold the same and direct the AO to delete the addition made by him. Hence, the ground of appeal of the revenue is hereby dismissed." 8.1. Learned Senior Standing Counsel Mr.Varun Patel for the appellant-Revenue submitted that both the CIT (Appeals) and the Tribunal could not have restricted the addition of difference between the sales and purchase and disallowed the expenses but as admitted by the assessee of earning commission of 0.02% on sales, the CIT (Appeals) and the Tribunal ought to have made addition of 0.02% Page 17 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined on both sales and purchases as both sales and purchases made by the assessee are nothing but facility of providing accommodation entries to two different parties and therefore, the addition ought to have been made at 0.02% on the total amount of sales and purchases. 8.2. It was submitted that the aforesaid submission is made in alternative to the contention raised before the Tribunal that the entire purchases are required to be added under Section 68 of the Act as the amount paid by the assessee for the non-genuine purchases are required to be disallowed being an unexplained cash credit under Section 68 of the Act.
9. Considering the submissions of learned Senior Standing Counsel Mr.Varun K. Patel Page 18 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined appearing for the appellant, it is pertinent to note that addition under Section 68 of the Act can be made where any sum is found credited in the books of accounts maintained for any previous year and no explanation is offered by the assessee for the nature and source thereof and the explanation offered by him is not satisfactory in the opinion of the Assessing Officer. However, the addition made by the Assessing Officer in respect of the purchases cannot be added under Section 68 of the Act as cash credit as the respondent assessee was involved in circular transactions of sale and purchase. Therefore, submission made by the learned Senior Standing Counsel Mr.Varun Patel justifying the addition made by the Assessing Officer under Section 68 of the Act is contrary to the provisions of Section 68 of the Act itself and therefore, in our Page 19 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined opinion, both the CIT (Appeals) and the Tribunal has rightly deleted the entire addition of purchases made by the Assessing Officer under Section 68 of the Act.
10. The Tribunal while upholding the Order of the CIT (Appeals) has considered the findings of fact recorded by the CIT (Appeals) regarding admission of the assessee before the VAT Authorities in the case of the survey carried out in M/s.Biotar Industries Limited to the effect that the assessee has entered into a circular transaction of sales and purchases and accordingly, the difference between the sales and purchases has been considered as an income of the assessee.
11. So far as the reliance placed on behalf of the appellant-Revenue on the decision of this Page 20 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined Court in case of N.K.Industires Limited (Supra) is concerned, the said decision would not be applicable in the facts of the case as N.K.Industires Limited was not involved in circular transactions but it was involved in bogus purchases shown on the basis of the fictitious invoices debited in the trading account and there was a manufacturing activity on the basis of such bogus purchases outside the books of accounts and therefore, the addition confirmed by the Tribunal in respect of the undisclosed income relating to the purchases to 25% of the total purchases was upheld by this Court relying upon the decision of Vijay Proteins Limited versus CIT reported in [2015] 58 taxmann.com 44 (Guj). The Hon'ble Apex Court has also upheld the decision of this Court in case of N.K.Industries Limited by dismissing the Special Leave Petition which Page 21 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025 NEUTRAL CITATION C/TAXAP/213/2024 ORDER DATED: 21/01/2025 undefined is reported in [2017] 84 taxmann.com 195 (SC).
12. Therefore, in the given facts of the case, when there was no activity carried out by the assessee except entering into the circular transactions of issuing purchase and sales, we are of the opinion that the CIT (Appeals) and the Tribunal have rightly made addition of the difference between the sales and purchase and also making addition of 0.02% of the sales by dis-allowing the expenses and therefore, no interference is called for in both the matters. We answer the questions in negative i.e. in favour of the assessee and against the Revenue. Both the Appeals are accordingly dismissed.
(BHARGAV D. KARIA, J) (D.N.RAY,J) PALAK Page 22 of 22 Uploaded by PALAK BRAHMBHATT(HC01391) on Thu Jan 30 2025 Downloaded on : Sat Feb 01 02:48:26 IST 2025