Disclaimer

1. 1. 1. In the course of appellate proceedings, it is submitted that the addition was made purely on estimation basis after rejection of books and there were no clinching evidence in possession of the learned AO of either concealment of income or furnishing of inaccurate particulars of income. Even if the addition is confirmed in the first appeal and if the assessee has not filed a second appeal in order to buy peace of mind and avoid litigation, that does not lead to impose penalty automatically unless it is established with evidence that the assessee has committed a clear default u/s. 271(1)(c) of the Act. No further appeal is filed by the assessee or Revenue.
      2. The issue is squarely covered by the decision of CIT vs. Subhash Trading Co. [221 ITR 110] (HC)(Guj.), wherein the catch note is as follows, “Penalty – For concealment of income – Assessment year 1973-74 – After rejecting assessee’s accounts, Assessing Officer assessed income by applying estimated gross profit rate at 15 per cent on estimated sales, and also imposed penalty by invoking Explanation to section 271(1)(c) – Tribunal, while reducing gross profit rate to 12 per cent held that there was no evidence to conclude a positive finding about concealment and deleted penalty – Whether, in absence of any other material which might reflect on conduct of assessee about deliberate attempt to maintain false books of account, on a preponderance of probabilities, no other conclusion could be reached but that failure to return total assessed income was not on account of any fraud or gross or wilful neglect on part of assessee – Held, yes.”

1. 1. 3. In the instant case, the facts are more favourable because in the case of CIT vs. Subhash Trading Co. ( supra) , the ITO on rejection of books estimated the sales at Rs.8,75,000/- instead of Rs.7,75,000/- which was disclosed in Books of Accounts by the assessee and then the ITO estimated Gross Profit at 15% instead of 5% disclosed in Books of Accounts by the assessee which was reduced by Tribunal to 12%. In the present case, the turnover was undisputedly taken at Rs.4,27,11,794/- by ITO which was as per Books of Accounts and Audit Report only. The GP was enhanced from 10.25% to 12% leading to an estimated addition of Rs.7,43,555/-. Thus in Subhash Trading Co. there was allegation of suppression of sales which is not in the case of the assessee.
      4. Further, on perusal of assessment order it can be seen that the books are rejected mainly on the ground of low GP and this is well settled that books cannot be rejected u/s 145(3) on account of low GP. Though the assessee has failed to take the ground for rejection of books before CIT(A) and hence the CIT(A) has dismissed the appeal on merits, adverse view should not be drawn for the purpose of penalty.
      5. Thus, it is submitted that when there is a estimation of gross profit on the turnover shown by the assessee in the Books of Accounts, penalty u/s. 271(1)(C) is not leviable. This view is also fortified by the judgement of Gujarat High Court of CIT vs. S.P Bhatt 97 ITR 440 wherein it was held that “Whether where assessment was made on basis of an estimate and there was nothing on record to show that any particular entries in books of accounts were false or incorrect or any particular item of purchase or sale was omitted to be entered in books of account, assessee could be held to have discharged onus which rested upon him to show that failure to return total income assessed was not on account of any fraud or gross or wilful neglect on its part – Held, yes – Whether, therefore, legal fiction enacted in Explanation to section 271(1)(c) was not attracted, and assessee was not liable to penalty – Held, yes”
      6. In respect of such estimated additions no penalty can be imposed and in support of said contention, further the following case laws are relied upon :-

• • • • CIT vs. Sankarsons and Company [85 ITR 627] (HC) (Kerela) Held that Penalty –For concealment of income – Assessment year 1964-65 – Gross profit shown by assessee in return was according to ITO too low on admitted turnover – ITO rejected accounts on account of certain defects in it and estimated gross profit which resulted in addition – Penalty on that basis was levied under section 271(1)(c) – On appeal, assessee contended that addition was merely for deficiency of gross profit and that it was based on estimate – Tribunal found that finding regarding defective nature of account and suppression of stock was based on mere suspicision and conjectures and thus deleted penalty – Whether explanation given by assessee read in light of facts and circumstances of case was sufficient to warrant conclusion that assessee was not guilty of fraud or gross or wilful negligence in furnishing return – Held, yes – Whether, therefore, Tribunal was justified in deleting penalty – Held, yes

• • • • CIT V/s Vijay Kumar Jain [325 ITR 378] (HC) (Chattisgarh) Held that particulars of receipts furnished by the assessee not having been found inaccurate and there being no allegation by the revenue that the assessee has concealed any income in his return, penalty under section 271(1)(c) could not be imposed simply on account of addition made by the AO on application of higher rate of net profit.

• • • • Harigopal Singh vs. CIT [258 ITR 85] (HC) (P&H) Held that since the AO and the Tribunal adopted different estimates in assessing the income of the assessee, it cannot be said that the assessee had concealed the particulars of his income so as to attract cl. (c) of s. 271(1). There is not even an iota of evidence on the record to show that the income of the assessee during the year under appeal was more than the income returned by him. Additions in his income were made, on estimate basis and that by itself does not lead to the conclusion that the assessee either concealed the particulars of his income or furnished inaccurate particulars of such income. There has to be a positive act of concealment on his part and the onus to prove this is on the Department. The Tribunal grossly erred in law in relying on Expln. 1(B) to s. 271(1)(c) to raise a presumption against the assessee. The assessee had justified his estimate of income on the basis of household expenditure and other investments made during the relevant period. It is not the case of the Revenue that he had, in fact, incurred expenditure in excess of what he had stated. In this view of the matter, it cannot be said that the explanation furnished by the assessee had not been substantiated or that he had failed to prove that such explanation was not bona fide. The provisions of s. 271(1)(c) are not attracted to cases where income of an assessee is assessed on estimate basis and additions are made therein on that basis.

• • • • CIT vs. Valimkbhai H. Patel [280 ITR 487] (HC) (Guj) Held that penalty under s. 271(1)(c)—Concealment—Claim of loss of goods on estimate basis—Assessee carrying on business of manufacturing salt which is stored in the open in heaps, loss returned by assessee on account of cyclone and rain on estimate basis would not constitute concealment under s. 271(1)(c) on the same being reduced by AO—This is a case of substitution of one estimate by another estimate—Penalty not leviable.

• • • • CIT vs. Sangrur Vanaspati Mills Ltd. [303 ITR 53] (HC) (P&H) Held that Penalty – For concalment of income – Assessment years 1992-93 and 1993-94 – Whether when addition had been made on basis of estimate and not on account of any concrete evidence of concealment, then penalty under section 271(1)(c) was not leviable – Held, yes

• • • • DCIT vs. Madad Ali Ansari & Co. [69 TTJ 0279](2000)(Trib.)(Jodhpur) Held that simply because assessee’s assessed income was worked out at a figure higher than the declared income on the basis of application of higher profit rate it could not be said that there has been concealment of income and penalty for concealment could not be levied under s. 271(1)(c).

        Disclaimer

        This article doesn’t constitute professional advice. The author does not represent that the said information is correct and complete in all regards. The views contained in this article are personal views of the author and may change depending upon underlying facts and circumstances. Judicial and legal authorities may not subscribe to the views of author and can take different view. Readers of this article are advised to take professional advice before taking any course of action or decision. The author does not assume any responsibility or liability in respect of the information contained in this article or for any decision/ course of action readers may take based on information contained in this article.

In law, cross-examination is the interrogation of a witness called by one’s opponent. Section 138 of the Indian Evidence Act 1872 provides that a witness will be first examined in chief, and then if the adverse party deems fit, cross-examined and if the party calling him so desires, be re-examined.

The issue of cross examination of witnesses in Income Tax proceedings has seen substantial litigation before various appellate forum. Many a times, income tax assessments, otherwise sound on facts and merits, suffer adverse consequences due to opportunity of cross examination not being provided to the assessee. Right of cross examination shall be given to the assessee to uphold the principle of natural justice. It is necessary, therefore, to understand the importance and scope of the principles of cross examination in income tax proceedings.

The purpose of this article is to provide a focus on various decisions and judgments of Tribunals and higher Courts on the issue of cross-examination and its applicability to the provisions of Income Tax Act 1961 through the website itatorders.in

Following are few Judgments on this issue which might be relied upon.

1.  Amitabh Bansal, Delhi v. ITO, [ITA 7804/DEL/2018] dated 11.02.2019

“Aforesaid Hon’ble Supreme Court, Hon’ble High Court and this Tribunal rulings, second issue framed by me above on consequential impact of lack of cross examination and violation of principle of natural justice, I have no hesitation to accept the plea of Ld. AR that lack of cross examination and violation of principle of natural justice results is total nullity of the entire addition, hence, the additions in dispute is hereby deleted.”

 Full judgment link: https://itatorders.in/appeal/ita-7804-del-2018-14-amitabh-bansal-delhi-ito-ward-46-4-new-delhi

2.  Andaman Timber Industries vs. CICE, [281 CTR 0241(SC)] dated 02.09.2015

“Held that not allowing Assessee to cross-examine witnesses by Adjudicating Authority though statements of those witnesses were made as basis of impugned order, amounted in serious flaw which make impugned order nullity as it amounted to violation of principles of natural justice.”

3.  Chartered Motors Pvt. Ltd. V/s ACIT (ITA No. 26/Ahd/2012) dated 29.08.2014

“Thus, we find that the assessee was not allowed any real opportunity to cross-examine the persons who made the statement at the back of the assessee. In our considered view, in the circumstances, the statement of those persons cannot be read against the assessee. Our above view finds support from then decision of the Hon’ble Jurisdictional High Court in the case of:

1. Heirs and Legal Representatives of Late Laxmanbhai S. Patel Vs. Commissioner of Income Tax (supra)

2. CIT Vs. Indrajit Singh Suri (supra)

3. DCIT Vs. Mahendra Ambalal Patel (supra)

4. CIT Vs. KanitbhaiRevidas Patel (supra)

In view of the above settled position of law, we find force in the argument of the assessee that the statements of the persons mentioned above are not admissible evidence against the assessee. In absence of these statements, we find that no other material has been brought on record by the Revenue to show that why still the amount in question should be treated as income of the assessee when the assessee furnished all the documents which were available with it to discharge the onus which was upon it u/s 68 of the Act.

In the above circumstances, in our considered view, the addition was made solely based on the inadmissible and unreliable material and therefore addition so made cannot be sustained. We, therefore, delete the addition of Rs 2,00,00,000/- made in the case of M/s Charted Motors Pvt. Ltd. As well as addition of Rs 70,00,000/- made in the case of M/s. Chartered Speed Private Limited.”

Download Full Judgement here : https://www.itatorders.in/appeal/itssa-25-ahd-2013-16-chartered-speed-pvt-ltd-ahmedabad-the-acit-cent-circle-2-2-ahmedabad

4.     DCIT vs. Mahendra Ambalal Patel [462 of 1999 /40 DTR 243 ] dated 13.04.2010

“Though the AO has placed reliance upon the statements of Shri Manoj Vadodaria and Shri G.C. Patel for the purpose of taxing the amount in the hands of the assessee, despite specific request being made by the assessee for cross-examining both the said persons, the AO has not permitted the assessee to cross-examine them. In the circumstances, no reliance could be placed upon the statements of the said persons as the respondent assessee had no opportunity to cross-examine them. The statements made by the aforesaid persons would have no evidentiary value and as such, would not be admissible in evidence”

5.     H.R. Mehta v. ACIT [289 ITR 0561 (Bom)] dated 30.06.2016

“Held that the least that the Revenue should have done was to grant an opportunity to the assessee to meet the case against him by providing the material sought to be used against assessee in arriving before passing the order of reassessment. Assessee was bound to be provided with the material used against him apart from being permitting him to cross examine the deponents. Despite the request dated 15th February, 1996 seeking an opportunity to cross examine the deponent and furnish the assessee with copies of statements and disclose material, these were denied to him.”

6.     Kishancand Chellaram v/s CIT [125 ITR 713] [SC] dated 19.04.1962

“Honorable Supreme Court has held that evidence which is not shown to the assessee cannot be admitted. The opportunity to controvert should be given to the assessee.”

7.     CIT v. Ashwani Gupta [322 ITR 0396 (DEL)] dated 16.02.2010

“Held that once there is a violation of the principles of natural justice in as much as seized material is not provided to an assessee nor cross-examination of the person on granted, then, such deficiencies would amount to a denial of opportunity and therefore, Tribunal was right in confirming the CIT(A)’s order in deleting additions made by the AO as he had neither provided copies of the seized material to the assessee nor had he allowed the assessee to cross-examine concerned party.”

A Techno-Legal startup itatorders(dot)in helps to file an appeal against such cases online and do a case research on such issues and deliver to you a Gist of Judgements on such issues. And now in the advent of the new initiative by Income Tax Department of mandatory faceless assessment, such online research service from legal expert shall help the taxpayer to reduce litigation costs, as there is no requirement of physical interaction between taxpayer and Income Tax Authorities and hence a good online submission from Legal expert shall suffice.

In many instances, there are allegations from Income Tax Department that the tax payer has made BOGUS PURCHASES in order to reduce the Income Tax Liability although the assessee has furnished the invoices which is even supported by payment through A/C Payee cheque. In some instance due to unorganized market the purchases are made actually genuine & stock has actually entered Stock Register. However, the purchaser may have given bill of any other bogus entity because of which assessee is unnecessary fastened with tax liability treating the said purchases as bogus. With the advent of GST, the modus operandi of bogus purchases is relatively reduced but still in many unorganized sector it is still prevailing. Where there is addition on account of alleged Bogus Purchases the assessee may take benefit of following submission where he can pick & choose depending on the peculiar case.

Addition of Rs. 47,77,994/- on account of bogus purchases:

1. 1. 1. In the course of appellate proceedings, it is submitted that even on merits the assessing officer erred in disallowing purchases of Rs. 47,77,994/- made from M/s ABC and the following submissions are made:
         • The assessee had made purchase of cut and polished diamonds to the tune of Rs. 47,77,994/- from M/s. ABC and had submitted the relevant documents before Assessing Officer viz purchase bills, purchase register, day to day stock register, ledger account of creditors etc.
         • Assessee also submitted the confirmation of ledger account duly signed by the parties to the Assessing Officer, which proves that they have confirmed the transaction with us with regard to purchase of diamonds.
         • The said parties have bank account through which they have received payment by cheque/RTGS. There is no instance that the said money paid to them has ever ploughed back to the assessee. No withdrawal of cash was also found in the bank statement of the said party and there was no evidence that assessee received any cash against payment made for impugned purchases. Bank Statement of the M/s. ABC (Alleged Party) is filed in paperbook.
         • In support of the same, the assessee maintained day-to-day stock register showing inward and outward of goods as and when purchase and sale takes place. The stock register shows that purchases from the said parties have been sold subsequently and is included in the audited accounts and income earned thereon has been offered for taxation in the relevant assessment year.
         • Further, it was contended by the assessee that the main material, very heavily relied upon by the Assessing Officer was the statement recorded u/s. 132(4) of Shri Gautam Jain at the back of the assessee firm without allowing any opportunity to the assessee firm to cross-examine them. Thus, it was submitted that merely on the basis of the third party statement which is general in nature, the impugned purchase can’t be held to be bogus.
         • Moreover, the assessee had also mentioned all the quantitative details of purchases and sales and had got his books of accounts audited u/s 44AB of the Income Tax Act, 1961. Copy of audited statements of accounts along with computation of income and acknowledgement of return of income is filled in the Paper Book.
      2. Infact, the Assessing Officer has appreciated the documents filed during the scrutiny and while dealing with rebuttal of reply filed by the assessee against show-cause notice, the Assessing Officer in Para no. 10 (pg. no. 7) of Assessment Order has stated that “I have carefully gone through all the materials in the form of bills and vouchers, bank statement, PAN No., details of the sellers, mode of payments of cheques etc., have been carefully considered by me. This documentary evidences and proof are sufficient and acceptable if it is a matter of normal scrutiny assessment…”
      3. The above finding of the Assessing Officer shows that he was satisfied with the documentary evidence filed during the course of assessment proceedings. However, he has formed a biased opinion against the assessee solely because there was a search action u/s 132 in the case of Gautam Jain group who has given a statement that they were in the business of providing accommodation entries. However it is relevant to mention that in the said statement, nowhere the name of the assessee is said to be mentioned nor there is any evidence that assessee has received any cash against payment for purchase. Thus, it is submitted that addition cannot be made on the basis of mere statement of third party which is general in nature. The assessee had requested the Assessing Officer to provide him the full copy of statement u/s 131 recorded of Shri Gautam Jain and other materials relied upon by him but the request was not accorded to. In this regard, it is submitted that the principle of natural justice requires that before any adverse inference based on third party statement or documents is to be taken, then either the documents which has been relied on by the authority or the persons on whose statements authority is relying, must provide the assessee with the relied documents and an opportunity of cross examination of such person before making any addition.
      4. The Honorable Supreme Court in the case of Kishancand Chellaram v/s CIT [125 ITR 713] has held that evidence which is not shown to the assessee cannot be admitted. The opportunity to controvert should be given to the assessee.
      5. In any case, mere bald statement, that too self-serving, without any corroborative evidence cannot be made a ground to make huge additions. Reliance is placed on the decision of Hon’ble jurisdictional Gujarat High Court in the case of DCIT vs. Mahendra Ambalal Patel – Tax Appeal No. 462 of 1999 dated 13th April 2010 [ 40 DTR 243 ] wherein the Honourable High Court held as under

“Though the AO has placed reliance upon the statements of Shri Manoj Vadodaria and Shri G.C. Patel for the purpose of taxing the amount in the hands of the assessee, despite specific request being made by the assessee for cross-examining both the said persons, the AO has not permitted the assessee to cross-examine them. In the circumstances, no reliance could be placed upon the statements of the said persons as the respondent assessee had no opportunity to cross-examine them. The statements made by the aforesaid persons would have no evidentiary value and as such, would not be admissible in evidence”

1. 1. 6. In case of Andaman Timber Industries vs. CICE (2015) 281 CTR 0241(SC), it was held that held that not allowing Assessee to cross-examine witnesses by Adjudicating Authority though statements of those witnesses were made as basis of impugned order, amounted in serious flaw which make impugned order nullity as it amounted to violation of principles of natural justice.
      7. Further, the Assessing Officer himself has stated that on the basis of documentary evidence that no addition should be made but however, the disallowance is made solely on statement of third party and hence it proves that the purchase party were the witness of Revenue and thus, the onus is on Revenue to produce said parties.
      8. In nut shell, it is submitted that the purchases to M/s. ABC are supported by a copy of purchase register as well as copy of ledger accounts. The creditor is assessed to tax and the payments in respect of purchases are made through account payee cheques and the payments are reflected in assessee’s bank statement as well as Bank Statement of creditor. The assessee is in the business of trading in diamonds and complete Quantitative details were submitted in the course of assessment proceedings and the books of accounts of assessee are also audited u/s 44AB of the Act & the quantitative details also form part of the Audit Report. There is no evidence that the money paid to the creditor has been returned back to the assessee in cash or any other manner and hence no adverse inference should be drawn
      9. The case is squarely covered by the decision of ITAT Mumbai in the case of Ramesh Kumar & Co. V/s. The ACIT [ITA No. 2959/Mum/2014] wherein it was held that “We have carefully perused the orders of the lower authorities and the relevant documentary evidences brought before us. We find that the AO has made the addition as some of the suppliers of the assessee were declared Hawala dealers by the Sales Tax Department. This may be a good reason for making further investigation but the AO did not make any further investigation and merely completed the assessment on suspicion. Once the assessee has brought on record the details of payments by account payee cheque, it was incumbent on the AO to have verified the payment details from the bank of the assessee and also from the bank of the suppliers to verify whether there was any immediate cash withdrawal from their account. No such exercise has been done. The Ld. CIT (A) has also confirmed the addition made by the AO by going on the suspicion and the belief that the suppliers of the assessee are Hawala traders. We also find that no effort has been made to verify the work done by the assessee from the Municipal Corporation of Greater Mumbai. We agree with the submissions of the Ld. Counsel that if there were no purchases, the assessee would not have been in a position to complete the civil work.”
      10. Reliance is also placed upon the decision of Hon’ble Gujarat High Court in the case of CIT V/s. Nangalia Fabrics Pvt. Ltd. 40 taxmann.com 206 (Gujarat) wherein it was held that “We have considered the rival submissions and the materials placed on record. The purchases are supported by bills, entries in the books of account, payment by cheque and quantitative details Assessing Officer did not find any inflation in purchase price or inflation in consumption or suppression the production. The addition had been made only on the ground that the parties are not traceable. Assessee had made payment through crossed cheques and assessing officer did not find that payment made came back to assessee. Assessing Officer has made addition in respect to the outstanding amount as on 31.3.2001 which has been cleared in the succeeding years. The ratio of the creditor to the purchases is normal considering the past records of the assessee. The creditors were outstanding owing to liquidity as assessee is also required to get credit in respect of sales also. Even otherwise provision of section 68 is not attracted to amounts representing purchases made on credit as held in the case of Panchan Dass Jain cited supra. The addition for bogus purchases cannot also be sustained in full or in part in view of the various cases laws cited by the assessee and in view of the facts that the decision of Vijay Proteins Ltd. and Sanjay Oil Cake Industries are not applicable to the facts of the assessee’s case. Assessee’s case is covered by the decision of Hon’ble Gujarat High Court in case of Kashiram Textile Mills. In view of the matter, addition made by the assessing officer is deleted. Ground No.1 of Assessee’s appeal is allowed and ground No.1 of Revenue’s appeal is dismissed.”
          • Infact the facts in the present case are favourable, because the creditors are not non-traceble but they have complied with notice u/s 133(6) and have also filed an affidavit confirming the transaction. Mobile Number of the Proprietor was also provided to the Assessing Officer.
      11. Reliance is placed on the case of Tejua Kapadia in ITA No. 691/Ahd/2017 dated 18.09.2017, wherein the total addition made on account of alleged bogus purchase was deleted. The said decision is confirmed by Gujarat High Court in tax Appeal No Tax Appeal No. 691 of 2017 and the SLP filed by Revenue was dismissed by Apex Court vide SLP No. 12670/2018 dated 04.05.2018
      12. In view of the above, it is submitted that the total addition should be deleted and without prejudice to the above contention of the assessee, it is submitted that even if any addition is made, it should be made on estimated basis. This is more so because the payment to supplier is paid by account payee cheque and it may be appreciated here that the quantity purchased from M/s. ABC has gone into Sales & accordingly the same stands included in the figure of sales and closing stock. The quantitative details including Day to day Stock Register is also filed before the AO and the audited financial statements reflect the quantitative details for the year. On perusal of same, it can seen that the purchases are made on 08.10.2007 and 11.10.2007 of 249.83 carats and 581.57 carats respectively from M/s. ABC and the same is sold to various parties on respective date as given below. If just for the sake of assumption in case, if we exclude the purchase made from M/s. ABC, then the closing stock would be negative as (-) 433.35 carats, as per quantitative details in the table below:

          Description	Polished Diamond [Mumbai Branch] (Wt. In Carats)
          Opening Stock as on 01.04.2007	Nil
          Purchase during the year (Excluding purchases allegedly held as bogus by  Assessing Officer)	6799.96
          Sales during the year	(7233.31)
          Closing Stock as at 31.03.2008	(433.35)

1. 1. 13. This clearly shows that impugned stock of purchases made is actually sold and hence, when the sales are accepted, disallowance of total purchase should not be made. Therefore in such case, the total purchases cannot be treated as bogus. Reliance is placed on the case of Sun Steel in ITA 147/Ahd/2006, the Honourable Tribunal only made lump sum addition of Rs. 50,000/- to cover the discrepancy in purchase.
      14. The facts of the present case are favorable because in this case, the assessee has also proved a direct co-relation between alleged bogus purchase from M/s. ABC and corresponding sales and in fact the assessee has already filed the ledger account before the Assessing Officer and same is attached herewith and it should be appreciated that the exact carats of purchase is entered in stock register and sold to third parties. The following table shows the details of the sale in respect of purchase made from M/s. ABC and the same may be considered.

          Purchase from M/s. ABC			Sale
          Date	Weight (In carats)	Amount (In Rs.) [A]	Date	Party Name	Weight (In carats)	Amount (In Rs.) [B]
          08.10.2007	249.83	15,59,283	19.10.2007	M/s. XYZ	228.69	14,97,139
          			20.10.2007	M/s. PQR	21.14	78,218
          11.10.2007	581.57	30,21,256	22.10.2007	M/s. HIJ	230.69	12,11,122
          			23.10.2007	M/s. LMO	350.88	18,42,120

1. 1. 15. Further, regarding the estimation of profits in such cases, there is binding decision of Gujarat High Court in the case of M/s. Mayank Diamonds Pvt. Ltd. Vs. ITO in Tax appeal no. 200 of 2003 (Gujarat High Court) dated 07.11.2014. The said entity was engaged in the business of trading of polished diamonds. The ld. Assessing officer came to conclusion that purchases amounting to Rs. 1,86,36,447/- are bogus and disallowed the same. The ld. Commissioner of Income Tax (Appeals) dismissed the appeal, however Honourable Tribunal gave the partial relief to assessee by directing the ld. Assessing officer to make addition @ 12.5%. On appeal, the Honourable High court of Gujarat has held that “the gross profit rate of 5% is the average rate of the industry and we think it fit to make addition of 5% of gross profit” Hence the base of 5% is taken in many subsequent decisions of Honourable ITAT.
      16. This is more so because in this case the Assessing Officer has already rejected the books of accounts u/s 145(2) and hence it is submitted that the estimation of profits has to be made in a judicious manner. Further, there is binding decision of Gujarat High Court in the case of M/s. Mayank Diamonds Pvt. Ltd. Vs. ITO in Tax appeal no. 200 of 2003 (Gujarat High Court) dated 07.11.2014. The said entity was engaged in the business of trading of polished diamonds. The ld. Assessing officer came to conclusion that purchases amounting to Rs. 1,86,36,447/- are bogus and disallowed the same. The ld. Commissioner of Income Tax (Appeals) dismissed the appeal, however Honourable Tribunal gave the partial relief to assessee by directing the ld. Assessing officer to make addition @ 12.5%. On appeal, the Honourable High court of Gujarat has held that “the gross profit rate of 5% is the average rate of the industry and we think it fit to make addition of 5% of gross profit” Hence the base of 5% is taken in many subsequent decisions of Honourable ITAT.
      17. Recently, on similar facts of the case, the Honourable Income Tax Appellate Tribunal, Surat Bench has taken a view that 5% disallowance of impugned purchase is reasonable in following cases:

          Sr. No	Name of Assessee	Reference No.	Addition restricted to % of impugned purchase
          1.	Deluxe Diamonds	ITA No. 1396/Ahd/2017	5%
          2.	J.B. Brothers	ITA No. 3661/Ahd/2015/Srt	5%
          3.	Sudeep M Shah	ITA No. 2423/Ahd/2016/Srt	5%
          4.	M/s. Krunal Enterprise	ITA No. 2262/Ahd/2015/Srt	5%
          5.	Gangani Impex	ITA No. 353/Ahd/2017	5%
          6.	Bhavna Automobiles	ITA No. 2760, 2761  Ahd/2015 & 239/Ahd/2017	5%

1. 1. 18. The CIT(A)-3 has respectfully followed the above referred decision of jurisdictional ITAT Surat Bench in case of Pavan Jain vide Appeal Order No. CIT(A) -1/10550/2016-17 dated 19.12.2018, wherein the addition was restricted to 5% of impugned purchase.
      19. In view of the above your Honour is requested to quash the assessment and/or delete or reduce the disallowance made by the assessing officer on merits.

If the whole world is looking upto India as their prospective market, then how can our Indian economy crash?

Is the slow down of economy man-made or natural ?

During Demonetisation , I had tried to explain the concept of “Velocity of Money” through an animated Video and had stated that the success of demonetization would depend largely on the effect on the velocity of money in the post demonetization period.

In this article, I would like to extend my views on the present state of economy in continuation of the said video.

Though the good “political intent” of the present Government cannot be denied and most of their actions are steered towards the best interests of the nation, but it also seems that the Government lacks smart and intelligent advisors  leading to slow down of economy.

One biggest blunder which the present Government is making is the assumption of “complete parallel economy”

We need to understand that parallel economy is just theoretical and “physical money” or “cash” per se cannot be black or white.

Money on the move has no fixed abode. From one wallet to another, from one shopper to the next, from one bank account to another, that is the life of money. 

“Cash/Money in Bank” has a peculiar feature compared to other assets. If a Machine is transferred through 12 people in a year, it will still give almost the same level of production, but this is not so in the case of money!
When Rs. 2000 Note flows in an economy hundred times in a day, it gives 100 people satisfaction while going home that they have earned Rs. 2000/- and applied the same in stuffs which gives them happiness and the total value is worth Rs. 200000 showing signs of a healthy economy

But it is natural that out of these 100 people transacting in money, some 90 people may account for the money transaction and some 10 may not account for the same but the Government needs to realize that in order to not allow these 10 transactions going unaccounted – the stopping of the flow of all the 100 transactions is not the solution which ultimately leads to economic slow down and getting the remaining 90 people to go out of business !

Let me explain this with a real life example.

Lets say, when a consumer “A” may buy Jewellery worth Rs. 2,00,000 in cash, “A” may be using his unaccounted money but the receiver Jeweller “B” deposits cash into bank by invoicing it in the name of some “X“ and pays due income tax on the same.

Now the the jeweller B subsequently pays its job-worker “C” for their job charges by account payee cheque and after deduction of 1% TDS which ensures that job worker shall pay taxes on the same and out of their job-charges credited in its bank, “C” would pay salary to its individual employees “D” by cheque who shall also file their returns. The individual employees “D” shall now use this amount to consume various services like petrol , e-commerce shopping while making digital payment through Mobile wallets and hence these moneys are always accounted.
Now assuming that whole trail of money transaction as described above has happened on the same day, A,B,C and D all would go home happy and the value of Rs. 2,00,000/- would be Rs. 8,00,000/- at the end of the day and the Government would also get its share of direct and indirect taxes on each transaction total amounting to Rs. 8,00,000/- . The only Revenue leakage was the tax lost on the source from which person A has earned Rs. 2,00,000/-. Sometimes, even “A” who has accumulated past savings does not know whether the amount spent by him on buying jewellery is black or white and as I said , the biggest mistake which the present Government is doing is the doubting of the very first transaction of consumers like “A” who then loses his purchasing power due to tax terrorism and uncertainties in law and which ultimately results into lower velocity of money because none of the transactions shall happen.

In other words, earlier the Rs. 1000 Note used to travel something like this in an Indian economy.

BLACK, WHITE , WHITE , WHITE, WHITE , WHITE, BLACK, WHITE...

However, due to immature steps of the present Government during the post demonetization period and the hasty implementation of GST, the new Rs. 2000 Note now travels in the following fashion

BLACK, IDLE, IDLE, IDLE IDLE, IDLE , IDLE , BLACK, IDLE ,IDLE… 

And this has lead to massive recessive and liquidity crunch wherein the businessman are sitting IDLE!

While some notable reforms are made by the Government through the introduction of RERA and implementation of Insolvency and Bankruptcy Code which were necessary irrespective of its negative effect on the velocity of money, but as a Chartered Accountant practising into Income Taxes, if I am to suggest one step to increase the speed of money which will automatically boost the economy, it shall be the –

“Removal of the draconian provisions of Section 115BBE under the Income Tax Law which was amended during demonetization in a very insensitive manner”

The citizens of India has not yet tasted the venom of this amended draconian law of Section 115BBE because it is made applicable w.e.f A.Y 2017-18 and the scrutiny of the cases of the said year are under assessment and the ill-results as envisaged by me shall come by December 2019 if corrective steps are not taken.

What is Section 115BBE ?

Section 115BBE of the Act, as amended by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. A.Y 2017-18 states that if a taxpayer fails to prove the nature and source of credit in its books of account or the explanation offered by him in respect of any credit is not satisfactory in the opinion of Assessing Officer, he shall be liable to pay effective tax at the rate of 77.25% even if he has offered the said income in his return of income !

For example, lets say that one of my friend “V” started teaching CA students and in pursuance of this noble profession, he  received fees of Rs. 11,00,000/- in cash which he deposited in the bank account and offered the same for taxation in his return of income as tuition fees. Now at the time of income tax scrutiny, the provisions of Section 115BBE shall vest the Income Tax Officer with unfettered powers to reject any explanation, being not to his satisfaction. After two years, my friend may be asked to produce the parents of the students before ITO to record their statement. The parent shall be asked to show the entry of tuition fees paid in their books of accounts and in order to save his skin, the said parent would never turn up to confirm the transaction or say that his son never studied under that teacher. Ultimately, my friend “V” shall be asked to pay flat tax of 77.25% on his income of Rs. 11,00,000/-

On the contrary, my other friend “U” who claims to have won Rs. 11,00,000/- from casino and betting will just pay tax at the maximum rate of 30%.

This provision of Section 115BBE shall affect any taxpayer into any business where there are cash sales involved and the Income Tax Officer has suspicion that the cash is not arising out of regular business.

In case of earlier example of Jeweller “B”, now B has to file confirmation from customer A ( which is unlikely) and on failure to do so, the Government shall fasten B with 77.25% tax. Thus by resorting to such harsh measure, the Government is stopping the whole flow of money from A to D to all leading to decrease in the velocity of money and rather the above provision is encouraging the parallel economy as now the jeweller B shall not deposit the said cash in his accounts though it wants to pay tax ( at 30% and not 77.25% ) and now the money will always remain black money and even the Government will lose its share at each time the money flows from one person to another.

Talking about corruption, the mentality of present tax-payers of “New India” is such that if an option is given to them to pay 30% tax or to pay bribe and reduce tax to 0% , I am very confident the citizens of New India would opt to pay 30% tax because they trust this Government blindly and they trust that the Government shall use their hard earn tax money for the betterment of the nation. But when the same Government themselves shall make laws to make the scenario – 77.25% or 0%, the Government is either spreading tax-terrorism or is indirectly encouraging corruption because the taxpayer is left with no other option to save his hard earned money and more importantly to buy peace of mind but to succumb to the wishes of a Babu.

There are series of such poor decisions lately by the Government like 100% penalty for transactions in cash for more than Rs. 2,00,000/- , taxing the profits of corporate thrice leading to effective tax rate of 50% on profits of Companies, poor implementation of GST etc which has lead to decrease in velocity of money and liquidity crisis and ultimately slow down of economy.
No doubt, there are natural factors in addition to the above, which are attributable to economic slow down.

It is true that the businesses have not slow down but the business model have changed. The valuation of Airbnb which does not own any properties is much more than Hilton or Marriot. The Valuation of Uber or Ola which does not own any taxi is much more than any Company in the world owning fleet of taxis or self drive cars.

We have moved from
“We sell Cars” to “We transport”.
“We run Private Schools” to “We educate”
“We trade” to “We make markets”

and thus every Indian businessman has to accept this change and bring an innovation in its products, process or Services. The present Government is doing an excellent work in encouraging innovation through its flagship programme “Startup India”. India with its 22k Startups is heading towards becoming one the largest Startup ecosystem in the World and Government has supported these Startups right from the launch of its Scheme.

The popularity of our PM is unmatchable. The present Government has got the greatest mandate ever in history of India and hence it is expected from the Government to grace its mistakes, be open to public discussion, take external advisory from Research Institutions or opposition leaders, where needed and take corrective actions for decisions which has gone miserably wrong.

PS : Become part of the movement to send a message to the Law makers about the ill-effects of Section 115BBE by signing this petition on change.org at http://chng.it/nNkxbhcK. Also you may share this article through Facebook/ Whatsapp or Retweet from my Twitter handle camehul87 to spread awareness.

In FY 2018-19 and 2019-2020, many taxpayers have received notices from Income Tax Department proposing to tax the total surrender value received on account of Designated Unit linked insurance policies in the nature of pension without any sum assured or death benefit. The taxpayers are perplexed because at the time of investment in such insurance plans, they believed that such policies shall be fully exempt at the time of receipt but now notices are received for reopening the cases u/s 148 and taxing the total surrender value or maturity value at relevant tax rate.

There are instances where even if the total surrender value receipts is almost same as amount of premium paid and despite the fact that there is no profitability, the tax officials are demanding tax on the entire maturity proceeds/surrender value without giving any deduction of premium paid by citing the provision of Section 80CCC(2).

Hence, this article is written to provide an opinion as to how such situations can be dealt with.

First of all, it is true and to be known that exemption in case of ULIPs in nature of pure pension is not available u/s 10(10D) on surrender of such plan where there are no mortality charges and no sum assured attached to the policy and hence the provisions of Section 80CCC(2) are clearly attracted.

Now, the Provision of Section 80CCC is relevant which is reproduced here:

80CCC (1) Where an assessee being an individual has in the previous year paid or deposited any amount out of his income chargeable to tax to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund referred to in clause (23AAB) of section 10, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount paid or deposited (excluding interest or bonus accrued or credited to the assessee’s account, if any) as does not exceed the amount of one hundred and fifty thousand rupees in the previous year.

(2) Where any amount standing to the credit of the assessee in a fund, referred to in sub-section (1) in respect of which a deduction has been allowed under sub-section (1), together with the interest or bonus accrued or credited to the assessee’s account, if any, is received by the assessee or his nominee—

(a)  on account of the surrender of the annuity plan whether in whole or in part, in any previous year, or

(b)  as pension received from the annuity plan,

an amount equal to the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in that previous year in which such withdrawal is made or, as the case may be, pension is received, and shall accordingly be chargeable to tax as income of that previous year.”

Now the following argument may be raised before the tax officials:

As per Section 80CCC(2) of IT Act, the taxability shall arise only in respect of amount credited in respect “of which deduction has been allowed” and hence if no deduction is claimed on account of premium paid on impugned policy, and the surrender value is less than total premium paid then the provision of Section 80CCC(2) cannot be invoked.

For Example, lets say ‘A’ has taken a policy for 5 years with premium of Rs.1,00,000/- to be paid every year. However, A surrenders the policy before completion of term of 5 years and receives Rs.4,50,000/- as surrender amount against the premium paid of Rs. 4,00,000/-. Now, if ‘A’ has not taken any deduction of premiums paid for the respective years, then  the surrender amount of Rs.4,50,000/- on receipt should not be fully taxed as one may argue that the provisions of Section 80CCC(2) is not invokable for the reason that no deduction is taken for the premium paid.

In this case, an interesting scenario may arise, where the assessee had made investments in PPF of Rs.1,50,000/- and in pension plan to the tune of Rs.1,00,000. In the return of income, deduction upto Rs.1,50,000/- is only allowed as per Section 80CCE [cumulative deduction of Rs.1,50,000/- allowed under Section 80C, 80CCC and 80CCD(1)] and so it is not discernible  whether deduction of Rs. 1,50,000/- was claimed in respect of pension plan or PPF and hence it can be argued that deduction was taken only for PPF and 80CCC(2) is not applicable as no deduction is claimed in respect of pension plan

Another scenario arises where deduction is claimed but not fully say for example deduction taken was only Rs.70,000 for pension plan and no other eligible deduction available thereby the limit of Rs.1,50,000/- was not fully absorbed, in such cases, Assessing Officer may take a view that the entire receipt from insurance is fully taxable as once deduction was taken, Section 80CCC is invokable and no separate deduction is available as per provision of Section 80CCC(2). However according to our view only the amount of deduction earlier claimed along with bonus and interest should be taxable.

Emphasis is also laid on Circular no.7/2003 dated 05.09.2003 wherein it was clarified that, “The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.”

Though the above Circular was for earlier Section 88 of IT Act which now stands substituted by Section 80C w.e.f 2006 and hence the ratio of Circular would be equally applicable in the given scenario.

Regarding the applicability of provision 80CCC(2) reference may be made on the decision of ITAT Mumbai Bench in case of Sandeep Sukhtankar vs ITO [ITA No.2690/Mum/2012] dated 18.06.2014 wherein it was held that,

“We  have  heard  the  rival  submissions. AO  had  admitted  that  the  assessee  had  not  claimed deduction under the provisions of chapter VI A of the Act,that he had had received an amount in dispute  by  surrendering  lifetime  pension  policy  and  life  insurance  policy  from  ICICI  Prudential life  insurance. These  two  factors  in  themselves  are sufficient  to  hold  that  money  received  by  the assessee is a capital receipt and not taxable. Provisions of section 2 of the section 80CCC are very clear. In light of the said sub section, we decide ground no.4 in favour of the assessee.”

Alternatively, it can even be argued that the investment in such ULIP is capital asset because the definition of capital asset is exclusive definition defined as follows:

 “Section 2(14) capital asset” means—

(a)  property of any kind held by an assessee, whether or not connected with his business or profession;

(b)  any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992),

but does not include—

 (i)  any stock-in-trade other than the securities referred to in sub-clause (b), consumable stores or raw materials held for the purposes of his business or profession ;

(ii)  personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—

(a)  jewellery;

(b)  archaeological collections;

(c)  drawings;

(d)  paintings;

(e)  sculptures; or

(f)  any work of art.

Explanation 1.—For the purposes of this sub-clause, “jewellery” includes—

(a)  ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b)  precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

The definition of capital asset specifically excludes certain items and insurance policies does not fall under the exception given and hence accordingly, the benefit of indexation and deduction on account of cost of acquisition should be made available.