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Income Tax Appellate Tribunal - Delhi
Kishan Lal Jewels (P) Ltd., New Delhi vs Assessee
 (fit for publication sd/-)
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "D" DELHI)

BEFORE SHRI G.E. VEERABHADRAPPA,

HON'BLE PRESIDENT
AND SHRI A.D. JAIN, JUDICIAL MEMBER

ITA NO. 229(Del)2011

Assessment year: 2001-02

Asstt.Commissioner of Income Tax, M/s. Kishan Lal Jewels (P)Ltd.,

Circle 5(1), New Delhi. V. 1244, Kucha Mahajani,
Chandni Chowk, New Delhi.

C.O. No. 43(Del)2011

(In ITA No. 229(Del)2011)
Assessment year: 2001-02

M/s. Kishan Lal Jewels (P)Ltd. Asstt.Commissioner of I. Tax,

1244, Kucha Mahajani, Chandni v. Cir. 5(1), New Delhi.
Chowk, New Delhi.

(Appellant) (Respondent)

Department by: Shri Jayant Mishra, DR

Assessee by: Shri Ved Jain, CA

ORDER

PER A.D. JAIN, J.M.

This is Department's appeal for A.Y. 2001-02 against the Order dated 15.11.10,
passed by the CIT (A)-VIII, New Delhi, 2 ITA 229 & CO 43(Del)2011 whereby he
has deleted the addition of Rs.3,69,58,000/- made by the AO under the
provisions of Section 69C of the I.T. Act, on account of purchases made from
undisclosed sources.

2. The brief attending facts are that the assessee Company is engaged in the
business of export of diamonds. It filed its return of income for the assessment
year under consideration, declaring an income of Rs.47,18,020/-, after claiming
a deduction of Rs.1,88,04,811/- under Section 80HHC of the Act. The AO,
however, completed the assessment at an income of Rs.4,29,74,424/- , vide
Order dated 31.3.2004, expressing the view that the purchases stated by the
assessee to have been made from its two suppliers, viz., M/s Mine-O-Gems and
M/s Vinayak Overseas, were not genuine and that as such, no corresponding
export of these goods could exist. On this basis, by invoking the provisions of
Section 68 of the Act, the AO held that the sale proceeds recorded in the books
of account of the assessee represented unexplained credit and accordingly, the
entire export sale proceeds of Rs.4,29,74,424/- were taken as income of the
assessee and the claim of deduction under Section 80HHC was disallowed. In
appeal, the CIT (A) confirmed the Assessment Order and the assessee filed a
further appeal before 3 ITA 229 & CO 43(Del)2011 the Tribunal. The Tribunal,
by virtue of its Order dated 12.9.2008, set aside the issue to the file of the AO,
with the following observations (relevant portion):

"10. .....The pertinent question there (sic) is whether on the facts and
circumstances of the case, the application of section 68 is justified. There
is small (sic) objection of the assessee that material used against the
assessee was not put to the assessee in accordance with law.

11. .....It is not the case of the assessee that above provision is not
applicable to alleged sale receipts. Sale receipt can be treated like any
other credit assessee called upon to explain the nature and source of
such receipt. It is now well settled law that for explaining cash credit the
assessee has to establish three things:

(i) Genuineness of the entry of

credit,
(ii) Identity of the creditors,
and
(iii) The creditworthiness of the
creditor.
4 ITA 229 & CO 43(Del)2
011

The burden to show that all the three

conditions / characteristics are satisfied is on the assessee. But in every

case of application of section 68, the nature and source of sum found
credited has first to be examined. In the present case, the A.O. has not
said anything on the nature of the credit appearing in the books of
account. It (sic) has also not recorded any finding as to source of these
credits. In the view of the A.O. and of learned CIT (Appeals), the
purchases were bogus and, therefore, there is no question of any sale or
export.
The credit entries have, therefore, been taken to be bogus for the purposes of
section 68. Above approach of the Revenue authorities can not be accepted. In
our considered opinion, it was necessary to examine nature of the entries and
thereafter explanation of the assessee, if any, furnished relating to the credit
entries. It appears to us that without examining above important aspect and
without recording a proper finding thereon, provision of section 68 has not
been properly applied. There is no gainsaying that credit in books can be 5 ITA
229 & CO 43(Del)2011 treated as deemed income of the assessee and, therefore,
it is necessary to concentrate on the credit, its nature and source.We are
unable to say that inference of no sale or export can not be drawn if the
purchases are held to be bogus. But if assessee has also shown sales and sale
consideration is claimed to have been received through the banking channels
with names and address of parties who purchased gods (sic) and remitted the
amount, it will be proper to hold credits as bogus without examining the
credit entries and the background of the creditors. The genuineness or
otherwise of the credit entries has to be examined. It is not uncommon to see
that trading accounts of the assesses (sic) (are) rejected with (sic) part or whole
of purchases are found as in-genuine. In those cases, disallowance is made out
of the purchases. If purchases partly or wholly are not genuine, then
appropriate disallowance is to be made.

Entire in-genuine purchases can be disallowed and sales can be subjected to

tax depending upon the facts and the circumstances of the case. In other cases
6 ITA 229 & CO 43(Del)2011 some reasonable amount may have to be allowed
as deduction towards purchases.
The present case where purchases were held to be bogus, those could have
been disallowed. But that has not been done and alleged sales assessed u/s 68
of the Income-tax Act.

12. The sale receipts have been treated as bogus as purchases were bogus and
assessee was dealing with people indulging in giving Hawala entries only.
This was done without examining the nature of the credit entries and without
providing reasonable opportunity to the assessee to explain those credit
entries.

The explanation of the assessee relating to the credit entries has not been
examined at all. There is no doubt that burden of proof to prove that credit
entries are genuine, is on the assessee. But the question of discharge of burden
is required to be decided on examination and appraisal of material available
on record. The present case was decided without such appraisal and without
considering the question with reference to material relating to the credit
entries. We have held above that 7 ITA 229 & CO 43(Del)2011 reasonable
opportunity was not afforded to the assessee as, in our opinion, certain
statements recorded at the back of the assessee have been relied upon without
putting those statements to the assessee and without considering his request
to cross-examine those witnesses used by the revenue.

13. In the light of above discussion, we are of view that this case should be
remitted back to the Assessing Officer for re-examination and application of
section 68 of the Income-tax Act in the light of our observations made above.
During the course of re-examination, it may be necessary to again call
witnesses connected with the purchases shown by the assessee. Having regard
to the finding that whereabouts of such witnesses are not known, the revenue
authorities will do well to hand over Dasti summons to the assessee, if request
is made by the assessee to call the witnesses for his examination.
The complaint of the assessee relating to observation of violation of principle
of nature should also be examined during the course of fresh hearing by the
revenue 8 ITA 229 & CO 43(Del)2011 authorities. Other grounds are linked with
the main addition discussed above.
Therefore, orders on those grounds are also remanded to the Assessing Officer
for re-examination and for fresh considerations in accordance with law.
For the aforesaid reasons, impugned orders are set aside and matter restored
to the file of the Assessing Officer."
3. On remand, as above, the AO took up the proceedings as directed by the
Tribunal and vide his Order dated 31.12.2009, which is the Order forming the
genesis of the present appeal, again held that the purchases made by the
assessee from M/s. Mine-O- Gems and M/s. Vinayak Overseas were not
genuine, though he did not agree with the findings of the AO in the earlier
round regarding addition of export sale proceeds of Rs.4,29,74,424/-, made
under Section 68 of the Act. The assessee had declared purchases of
Rs.1,92,87,608/- and the sale of the same as export for Rs.4,29,74,424/-, giving a
profit rate of 55.12%. The AO considered this GP rate to be too high. According
to him, the GP rate ought to have been between 10% to 15%. He applied a GP
rate of 14% on the declared export sale of Rs.4,29,74,424/- and thus, computed
the 9 ITA 229 & CO 43(Del)2011 purchases for this export at Rs.3,69,58,004/-. On
this basis, it was held that the assessee had made undisclosed purchases of
Rs.3,69,58,004/- and addition of this amount was made under Section 69C of
the Act. The AO, as such, recomputed the profit of the assessee at
Rs.59,52,434/-, as against that of Rs.2,35,22,830/- which had been declared by
the assessee and, accordingly, allowed a deduction of Rs.47,48,494/- under
Section 80 HHC of the Act to the assessee. While making the above calculation,
however, the AO ignored the purchases declared by the assessee at
Rs.1,92,87,608/-.

4. The assessee filed an appeal before the CIT (A), challenging the said action of
the AO, mainly on two grounds, i.e., that firstly, the AO, in the remand
proceedings under Section 254 of the Act, had passed the Assessment Order
contrary to the specific directions issued by the Tribunal while remanding the
matter, and that on merit, the AO was not justified in assuming that the
assessee had made undisclosed purchases, even though there was no evidence
at all on record to suggest any such purchase.

5. The CIT (A), vide Order dated 15.11.2010, i.e., the Order under appeal herein,
accepted the contention of the assessee on merit regarding the addition of
unaccounted purchases under Section 69C 10 ITA 229 & CO 43(Del)2011 of the
Act being unjustified. However, on the issue that the AO had gone beyond the
scope of the directions given by the Tribunal, he rejected the submission of the
assessee.
6. The revenue is in appeal against the deletion of the addition by the CIT (A),
raising the following Grounds of Appeal:-

"1. The order of the learned CIT (A) is erroneous & contrary to facts &
law.

2. On the facts and in the circumstances of the case and in law, the
learned CIT (A) has erred in deleting the addition made of Rs.
3,69,58,000/- made u/s 69C of the I.T. Act being the unexplained
expenditure incurred on purchase. 2.1 The Ld. CIT (A) ignored the
findings recorded by the A.O. and the fact that the assessee is involved in
the business of receiving bogus purchase entries to inflate profit for
claiming deduction u/s 80HHC of the Act.

3. On the facts and in the circumstances of the case and in law, the
learned CIT (A) has erred in deleting the addition made of Rs. 3,85,752/-
made u/s 69C of the I.T. Act being the unaccounted cash paid as
commission for obtaining bogus purchase bills.

11 ITA 229 & CO 43(Del)2011 3.1 The Ld. CIT (A) ignored the findings
recorded by the A.O. and the fact that the assessee is involved in the
business of receiving bogus purchase entries to inflate profit for
claiming deduction u/s 80HHC of the Act.

4. On the facts and in the circumstances of the case and in law, the
learned CIT (A) has erred in deleting the addition made of Rs. 16,816/-
made on account of interest on FDR.
 4.1 The Ld. CIT (A) ignored the findings recorded by the A.O. and the fact
that the assessee has not included interest on FDR in its income.

5. The appellant craves leave to add, to alter, or amend any grounds of

appeal raised above at the time of the hearing."

7. The assessee has filed Cross Objections challenging the action of the CIT (A)
in rejecting the contention of the assessee that the order passed by the
assessing officer consequent to the order of the Tribunal is beyond the scope
of the remand directed by the Tribunal. These Cross Objections are as under:-

"1. On the facts and circumstances of the case, the learned CIT (A) has
erred both on facts and in law in rejecting the 12 ITA 229 & CO
43(Del)2011 contention of the assessee that the order passed by the
Assessing Officer consequent to the ITAT order under Section 254 of the
Act is bad in the eye of law, as the same is beyond the scope of direction
given by ITAT.

2. On the facts and circumstances of the case, the learned CIT (A) has
erred both on facts and in law in rejecting the contention of the
Appellant that the Assessing Officer cannot set up a new case in the
remand proceedings under Section 254 of the Act.

3. On the facts and circumstances of the case, the learned CIT (A) has
erred both on facts and in law in not appreciating the contention of the
Appellant that the scope of proceedings under Section 254 is limited to
the directions given by the ITAT and failure to do so will vitiate the order
and hence liable to be quashed.

4. On the facts and circumstances of the case, the learned CIT (A) has
erred both on facts and in law in rejecting the contention of the assessee
that the addition made by AO by invoking the provisions of Section 69C
of the Act is 13 ITA 229 & CO 43(Del)2011 untenable as the same was
neither the case of the AO in the original assessment proceeding nor the
case before the Hon'ble ITAT.
 5. On the facts and circumstances of the case, the learned CIT (A) has
erred both on facts and in law in rejecting the contention of the
Appellant that the order passed by the Assessing Officer is barred by
limitation."

8. Regarding the Cross Objections filed by the assessee, it was argued by the ld.
Counsel for the assessee that the AO has set up an entirely new case in the
proceedings after the Order passed by the Tribunal under Section 254 of the
Act, whereby he has made an addition under Section 69C of the Act in respect
of unaccounted purchases, as against the addition made in the original
assessment under Section 68 of the Act, in respect of unexplained credits on
account of export sales. In this regard, our attention was invited to the
Assessment Order passed in the original proceedings and the directions given
by the Tribunal, wherein the issue was regarding the nature of receipts which
the assessee has claimed to be export sales, whereas the AO had treated the
same as unexplained receipts and 14 ITA 229 & CO 43(Del)2011 added the
same as income of the assessee, by invoking the provisions of Section 68 of the
Act. Para 12 of the Tribunal Order was referred to, wherein, it has been
observed that:

"The sale receipts have been treated as bogus as purchases were bogus
and assessee was dealing with people indulging in giving Hawala entries
only. This was done without examining the nature of the credit entries
and without providing reasonable opportunity to the assessee to explain
those credit entries. The explanation of the assessee relating to the
credit entries has not been examined at all. There is no doubt that
burden of proof to prove that credit entries are genuine, is on the
assessee. But the question of discharge of burden is required to be
decided on examination and appraisal of material available on record."

9. The ld. Counsel for the assessee contended that it was on the basis of this
observation, that in para 13 of its order, the Tribunal directed that "in the light
of above discussion, we are of view that this case should be remitted back to
the Assessing Officer for re-

15 ITA 229 & CO 43(Del)2011 examination and application of section 68 of the

Income-tax Act in the light of our observations made above."; that accordingly,
the role of the AO was limited to examination of the credits and application of
the provisions of Section 68 of the Act to such credits and in case the same
were found to be genuine, no addition could be sustained; that the AO has
admitted that the exports were genuine and that is why he has not invoked the
provisions of Section 68 of the Act; that having done so, he has set up an
entirely new case against the assessee while making addition under Section
69C of the Act, holding that since the exports were genuine, the profit declared
on such exports was abnormal and that it was in that process, that the
assessee had made unaccounted purchases; that unexplained investment in
purchases is an entirely new source which has been set up by the AO; and that
this cannot be done, as held in the following cases:

i) CIT v. Late Jawaharlal Nagpal Through LRs, 171 ITR 136 (MP)

ii) Kartar Singh v. CIT, 111 ITR 184 (P&H)

iii) S.P. Kochhar v. ITO, 145 ITR 255 (All)

iv) Basudeo Prasad Agarwalla v. ITO & Ors., 180 ITR 388 (Cal)

16 ITA 229 & CO 43(Del)2011

v) CIT v. Mahindra & Co., 215 ITR 922 (Raj)

10. The Ld. Counsel for the assessee further submitted that the CIT (A) was not
justified in holding that there were no fetters set by the Tribunal on the AO;
that the inference drawn by the CIT (A), that the Tribunal had pointed out that
in cases of bogus purchases, necessary disallowance can always be made, is
incorrect; that the CIT (A) has not correctly read the order of the Tribunal; that
in para 11 of the Tribunal Order, at page 254 of the assessee's Paper Book
('APB', for short), the Tribunal has analyzed the provisions of Section 68 of the
Act; that on pages 11-12 (APB 255-256), the Tribunal has observed that:
 "In our considered opinion, it was necessary to examine nature of the
entries and thereafter explanation of the assessee, if any, furnished
relating to the credit entries. It appears to us that without examining
above important aspect and without recording a proper finding thereon,
provision of section 68 has not been properly applied. There is no
gainsaying that credit in books can be treated as deemed 17 ITA 229 &
CO 43(Del)2011 income of the assessee and, therefore, it is necessary to
concentrate on the credit, its nature and source. We are unable to say
that inference of no sale or export can not be drawn if the purchases are
held to be bogus. But if assessee has shown sales and sale consideration
is claimed to have been received through the banking channels with
names and address of parties who purchased goods and remitted the
amount, it will not be proper to hold credits as bogus without examining
the credit entries and the background of the creditors. The genuineness
or otherwise of the credit entries has to be examined. It is not
uncommon to see that trading accounts of the assessee rejected with
part or whole of purchases are found as in- genuine. In those cases,
disallowance is made out of the purchases. If purchases partly or wholly
are not genuine, then appropriate disallowance is to be made. Entire in-
genuine purchases can be disallowed and sales can be subjected to tax
depending upon the facts and the circumstances of the case. In other
cases some reasonable amount may have to be allowed as deduction
towards purchases. The present case where purchases were held to be
18 ITA 229 & CO 43(Del)2011 bogus, those could have been disallowed.
But that has not been done and alleged sales assessed u/s 68 of the
Income-tax Act."

11. It was further contended that in para 12 of the Tribunal Order, the issue as
to how addition under Section 68 of the Act in case of sale receipts needs to be
examined, has been analyzed; that based thereon, a specific direction has
been given in para 13 as under:

"13. In the light of above discussion, we are of the view that this case
should be remitted back to the Assessing Officer for re-examination and
application of section 68 of the Income-tax Act in the light of our
observations made above."

12. The Ld. Counsel for the assessee further submitted that it was the assessee
who was the appellant before the Tribunal and as such, it was his grievance
against the addition of export sale as unexplained credit under Section 68 of
the Act, which was in issue before the Tribunal and accordingly, the directions
of the Tribunal are limited to that issue only, i.e., verification of such export
sales; that the directions are specific directions and nowhere has it been stated
that the AO may pass an assessment order de novo; that on the 19 ITA 229 &
CO 43(Del)2011 matter of investigating the purchases beyond those recorded
in the books of account, there was no other direction issued by Tribunal; that
there is no discussion at all in the entire order of the Tribunal on the aspect of
the assessee having made any purchases outside its books of account; that
there are no directions issued by the Tribunal to make any enquiry pointing
towards the aspect of any purchases having been made in the form of
unexplained expenditure; that as such, the Assessing Officer has clearly gone
beyond the mandate of the order of the Tribunal; that the scope of the
derivative jurisdiction has been illegally enlarged by the AO by entering in a
totally new realm, which was not permissible in law; that hence, the addition
made by the AO deserves to be deleted at the very threshold, because it was
not permissible for the AO to exceed his derivative jurisdiction beyond the
directions given by the Tribunal; and that It is settled law that in a proceedings
under Section 254 of the Act, the AO cannot set up a new source and
accordingly, the action of the AO in setting up a new case was legally
untenable.

13. The Ld. DR, on the other hand, supported the order of the CIT (A). As per
the Ld. DR, once the matter has been set aside by the Tribunal and no
restrictions have been placed, the AO will be within 20 ITA 229 & CO
43(Del)2011 his rights to examine the issue from his own perspective afresh
and in the present case, having found that the exports were genuine, the AO
was well within his rights, thereafter, to find out the source of such exports;
that In this view of the matter, he was justified in going beyond the
requirements of the provisions of Section 68 of the Act and making enquiry to
find out the source of such exports; and that thus, the CIT (A) was justified in
rejecting the contention of the assessee on this count.
14. We have heard the parties qua the Cross Objections and have perused the
material brought on record.

15. In the original assessment, vide Assessment Order dated 31.3.04 (APB 185-
204), the AO, invoking the provisions of section 68 of the Act, added the entire
amount of Rs. 4,29,74,424/-, representing the assessee's stated export sale
proceeds. This was done by observing that the purchases of Rs. 1,93,87,608/-,
statedly made by the assessee on credit from M/s Mine-O-Gems and M/s
Vinayak Overseas, were not genuine, as these concerns were involved in
giving havala entries, providing bogus bills to different parties; and that the
purchases being thus bogus, no corresponding export sales could possibly
have been made by the assessee.
21 ITA 229 & CO 43(Del)2011
16. The Tribunal, vide Order dated 12.9.08 (APB 247-258), negated the above
observations of the AO by observing that the nature of the credit entries of the
assessee had not been examined and that the assessee had not been allowed to
explain them. The matter was remanded to the AO for re-examination and
application of section 68 of the Act on affording adequate opportunity to the
assessee to explain the credit entries.
17. So, evidently, the remand was limited to the application of the provisions
of section 68 of the Act, by allowing the assessee to support its case and
explain the credit entries. No more.

18. In the second round, vide the Assessment Order dated 31.12.09, however,
while once again holding the purchases made by the assessee from M/s Mine-
O-Gems and M/s Vinayak Overseas to be bogus, the AO, though he accepted the
export sales of the assessee, declared at Rs. 4,29,74,424/-, which had been
added by the A.O. in the first round,rejected the G.P. rate of 55.12% on these
sales, as declared by the assessee, holding it to be too high. Instead, the AO
considered a G.P. rate of 14% to be appropriate and applied the same to the
declared export sales, computing the purchases at a hypothetical Rs.
3,59,58,004/-. Holding that these purchases of Rs.
22 ITA 229 & CO 43(Del)2011 3,59,58,004/- had not been disclosed by the
assessee, the AO added this amount to the income of the assessee, under the
provisions of section 69C of the Act.
19. While in the first round, no deduction had been allowed by the AO to the
assessee under the provisions of section 80HHC of the Act, in the second
round, recomputing the profit of the assessee at Rs. 59,52,434/-, rather than
that computed by the assessee at Rs. 2,35,22,830/-, the AO, ignoring the
purchases declared by the assessee at Rs. 1,92,87,608/-, allowed a deduction of
Rs. 47,48,494/- to the assessee under section 80HHC of the Act.

20. The CIT (A), by virtue of the impugned Order, did not accept the assessee's
challenge that the AO, while passing the Assessment Order dated 31.12.09, had
transgressed the directions issued by the Tribunal. He, however, accepted the
assessee's grievance against the addition under section 69C of the Act, made
on account of alleged undisclosed purchases.

21. Respectively aggrieved thereby, both the parties are before us by way of
the Department's Appeal and the assessee's Cross Objections.
23 ITA 229 & CO 43(Del)2011

22. The first issue up for determination is that raised in the assessee's Cross
Objection Nos. 1 to 4, id est, whether the ld. CIT (A) is correct in confirming the
AO's action of travelling beyond the directions issued by the Tribunal, thereby
setting up an entirely new case against the assessee by invoking, and making
addition under, the provisions of section 69C of the I.T. Act, which had never,
at any stage, been the case of the Revenue in the first round of assessment.

23. The directions of the Tribunal, as contained in its Order dated 12.9.08, it is
seen, are as follows:

"10. .....The pertinent question there (sic) is whether on the facts and
circumstances of the case, the application of section 68 is justified. There
is small (sic) objection of the assessee that material used against the
assessee was not put to the assessee in accordance with law.

11. .....It is not the case of the assessee that above provision is not
applicable to alleged sale receipts. Sale receipt can be treated like any
other credit assessee called upon to explain the nature and source of
such receipt. It is now 24 ITA 229 & CO 43(Del)2011 well settled law that
for explaining cash credit the assessee has to establish three things:

(i) Genuineness of the entry of

credit,
(ii) Identity of the creditors, and
(iii) The creditworthiness of the
creditor.
 The burden to show that all the three conditions / characteristics are
satisfied is on the assessee. But in every case of application of section 68,
the nature and source of sum found credited has first to be examined. In
the present case, the A.O. has not said anything on the nature of the
credit appearing in the books of account. It (sic) has also not recorded
any finding as to source of these credits. In the view of the A.O. and of
learned CIT (Appeals), the purchases were bogus and, therefore, there is
no question of any sale or export. The credit entries have, therefore,
been taken to be bogus for the purposes of section 68. Above approach
of the Revenue authorities can not be accepted. In our considered
opinion, it was necessary to examine nature of the entries and
thereafter explanation of the assessee, if any, furnished relating to the
credit entries. It appears to us that without examining above important
aspect 25 ITA 229 & CO 43(Del)2011 and without recording a proper
finding thereon, provision of section 68 has not been properly applied.
There is no gainsaying that credit in books can be treated as deemed
income of the assessee and, therefore, it is necessary to concentrate on
the credit, its nature and source.We are unable to say that inference of
no sale or export can not be drawn if the purchases are held to be bogus.
But if assessee has also shown sales and sale consideration is claimed to
have been received through the banking channels with names and
address of parties who purchased gods (sic) and remitted the amount, it
will be proper to hold credits as bogus without examining the credit
entries and the background of the creditors. The genuineness or
otherwise of the credit entries has to be examined. It is not uncommon
to see that trading accounts of the assesses (sic) (are) rejected with (sic)
part or whole of purchases are found as in-genuine. In those cases,
disallowance is made out of the purchases. If purchases partly or wholly
are not genuine, then appropriate disallowance is to be made. Entire in-
genuine purchases can be disallowed and sales can be subjected to tax
depending upon the facts and the circumstances 26 ITA 229 & CO
43(Del)2011 of the case. In other cases some reasonable amount may
have to be allowed as deduction towards purchases. The present case
where purchases were held to be bogus, those could have been
disallowed. But that has not been done and alleged sales assessed u/s 68
of the Income-tax Act.

12. The sale receipts have been treated as bogus as purchases were bogus and
assessee was dealing with people indulging in giving Hawala entries only. This
was done without examining the nature of the credit entries and without
providing reasonable opportunity to the assessee to explain those credit
entries. The explanation of the assessee relating to the credit entries has not
been examined at all.

There is no doubt that burden of proof to prove that credit entries are
genuine, is on the assessee. But the question of discharge of burden is required
to be decided on examination and appraisal of material available on record.
The present case was decided without such appraisal and without considering
the question with reference to material relating to the credit entries. We have
held above that reasonable opportunity was not afforded to the assessee as, in
our opinion, 27 ITA 229 & CO 43(Del)2011 certain statements recorded at the
back of the assessee have been relied upon without putting those statements
to the assessee and without considering his request to cross-examine those
witnesses used by the revenue.

13. In the light of above discussion, we are of view that this case should be
remitted back to the Assessing Officer for re-examination and application of
section 68 of the Income-tax Act in the light of our observations made above.

During the course of re-examination, it may be necessary to again call

witnesses connected with the purchases shown by the assessee.

Having regard to the finding that whereabouts of such witnesses are not
known, the revenue authorities will do well to hand over Dasti summons to
the assessee, if request is made by the assessee to call the witnesses for his
examination. The complaint of the assessee relating to observation of violation
of principle of nature should also be examined during the course of fresh
hearing by the revenue authorities. Other grounds are linked with the main
addition discussed above. Therefore, orders on those grounds are also
remanded to the Assessing Officer for re-examination and for fresh
considerations in accordance with 28 ITA 229 & CO 43(Del)2011 law. For the
aforesaid reasons, impugned orders are set aside and matter restored to the
file of the Assessing Officer."

24. A bare perusal of the above observations of the Tribunal shows that the
directions handed down by the Tribunal are clearly very specific to the effect
that in the remanded assessment proceedings, the AO was to restrict the
examination to be conducted, to the credit entries of the assessee. If the AO
found that these credit entries were genuine, no addition was to be made and
the AO was to rest at that and proceed no further. His jurisdiction in the
remand proceedings, in compliance of the directions of the Tribunal, was
confined to this only, and to no more. The role of the AO was circumscribed by
these precise directions given by the Tribunal.
25. That in remand proceedings, the function of the AO is confined to and
restricted within the diktat of the prescription by way of the directions
ordering the remand, is judicially well settled.
26. In 'Kartar Singh' (supra), it has been held that where an assessment is set
aside by the Tribunal to the I.T.O., it is not open to him to introduce into the
assessment new sources of income so as to 29 ITA 229 & CO 43(Del)2011
enhance the assessment; and that any power to enhance is confined to the old
sources of income which were the subject-matter of appeal before the
Tribunal. 'Sri Gajalakshmi Ginning Factory Ltd. v. Commissioner of Income-
tax', 22 ITR 502 (Mad) was applied, holding that:

"It is not necessary for us to enter into a detailed discussion of the

questions raised in view of the fact that the addition of Rs. 54,075 made
by the Income-tax Officer was from a new source and this he was not
competent to do. In Shri Gajalakshmi Ginning Factory Ltd. v.
Commissioner of Income-tax [1952] 22 ITR 502 (Mad), the learned judges
observed that it would not be open to the Appellate Assistant
Commissioner to introduce into the assessment new sources as his
power of enhancement was restricted only to the income which was the
subject-matter of consideration for purposes of assessment by the
Income-tax Officer. We are of the view that on remand by the Income-
tax Appellate Tribunal, it was not open to the Income-tax Officer to
introduce into the assessment new sources of income so as to enhance
the assessment. His power to enhance,

30 ITA 229 & CO 43(Del)2011 if it existed, was confined to the old sources of
Income which were the subject-matter of appeal to the Income-tax Appellate
Tribunal."

27. In the present case, as the fact is, in the Order passed pursuant to the
remand by the Tribunal, the AO made an addition under Section 69C of the Act
in respect of alleged unaccounted purchases, as against the addition made in
the original assessment under Section 68 of the Act, in respect of unexplained
credits on account of export sales. He, thereby, made out an entirely new case
against the assessee in the proceedings under Section 254 of the Act. Now this,
we find, is wholly untenable, going by the decision in 'Kartar Singh' (supra).

28. 'Kartar Singh' (supra) has been referred to in 'Late Jawaharlal Nagpal'
(supra), to hold that in fresh assessment proceedings after the original
assessment has been set aside, the ITO has no jurisdiction to tax new sources
of income. Referring to 'CIT v. Rai Bahadur Hardutroy Motilal Chamaria', 66
ITR 443 (SC), their Lordships held that:
 "Now, in the instant case, the matter was remanded to the Income-tax
Officer by the 31 ITA 229 & CO 43(Del)2011 Appellate Assistant
Commissioner to afford a proper opportunity to the assessee in regard
to each item of addition made by him and thereafter to pass an order of
assessment afresh. The order of remand, therefore, was limited to make
a fresh enquiry into the question of additions made by the Income-tax
Officer in the original assessment order. It is true that there is a
difference of opinion as reflected in the decisions of the various High
Courts cited before us, on the question as to whether it is open to the
Income-tax Officer to consider the entire matter afresh, notwithstanding
the terms of the order of remand. It is, however, not necessary in the
instant case to enter into that controversy, because there is another
aspect of the matter which arises in this case. In CIT v. Rai Bahadur
Hardutroy Motilal Chamaria [1967] 66 ITR 443, the Supreme Court has
held that while deciding an appeal from an order passed by the Income-
tax Officer, the Appellate Assistant Commissioner has no jurisdiction to
assess a source of income which has not been assessed by the Income-
tax Officer and which is not disclosed either in the return filed by the
assessee or in the assessment order and the 32 ITA 229 & CO 43(Del)2011
Appellate Assistant Commissioner, therefore, cannot travel beyond the
subject-matter of the assessment. From this decision, it follows that the
Appellate Assistant Commissioner cannot, while setting aside the
assessment, empower the Income-tax Officer to go into points which he
himself could not have Investigated in exercise of his power of
enhancement. Now, if the Appellate Assistant Commissioner could not
have empowered the Income-tax Officer to assess a source of income not
processed by the Income-tax Officer in the original order of assessment
and not disclosed either in the return or in the assessment order, it is
difficult to appreciate as to how the Income-tax Officer could assume
jurisdiction to tax that new source of income while making a fresh
assessment in pursuance of an order of remand by the Appellate
Assistant Commissioner."

29. In the case before us too, as observed herein above, the remand ordered by
the Tribunal was specifically limited to examine the credit entries of the
assessee. The AO, in the Order passed pursuant to the remand, by invoking the
provisions of section 69C of the Act and making addition thereunder, which
had not been done in 33 ITA 229 & CO 43(Del)2011 the original assessment, has
clearly gone beyond these precise directions of the Tribunal, which is legally
impermissible.
30. In 'Basudeo Prasad Agarwalla' (supra), the thrust of the argument of the
assessee, as observed by the Hon'ble High Court, was that after the decision of
the appeal sending the matter on remand, the scope of the AO had become
limited and he could not, after remand, take any effective action beyond the
scope of the order of the appellate authority; and that such an action after the
order of remand would be unwarranted and uncalled for and such an action
would be without jurisdiction. Their Lordships held that:

".....but with regard to the order made by the respondent authorities

after the order of remand, it is to be considered in the proper
perspective inasmuch as the authorities concerned cannot take steps
beyond the scope of the order of remand. If the order of remand is open
and the authorities concerned, after remand, can exercise the
jurisdiction in accordance with law, there is nothing for this court to
regulate such action; but at the same time, this court observes that if the
scope of remand is limited, after remand, the 34 ITA 229 & CO
43(Del)2011 authorities cannot enlarge the same and make an
assessment beyond the scope of the order of remand. The authorities
concerned, after remand, are certainly entitled to proceed in accordance
with law, but limited, if there is any order of the appellate authority
permitting the authorities concerned to proceed in the light of the
directions made therein. ....." (emphasis supplied).

31. In the case at hand, indisputably, the matter was remanded by the Tribunal
with specific directions, as noted above, laying down, in no uncertain terms,
the scope of the action to be taken by the AO, pursuant to such remand. By
invoking the provisions of section 69C of the Act in the Order passed after
remand, and making addition under the said section, whereas in the original
assessment proceedings, addition had been made under section 68 of the Act,
rather than under any other section, muchless under section 69C, the AO has
clearly transgressed the limits set by the Order of remand. This, as held in
'Basudeo Prasad Agarwalla' (supra), is unsustainable in the eye of law.
35 ITA 229 & CO 43(Del)2011
32. As in the afore-mentioned cases, in 'Mahindra and Company' (supra), it has
been held, inter alia, that the jurisdiction of the Income- tax Officer as well as
the Inspecting Assistant Commissioner in respect of a matter where the
assessment order has been set aside by the appellate authority is limited to the
extent of the directions given by such an authority. Therein, reference was
made to 'CIT v. Fundilal Rikhabchand', 208 ITR 348 (Raj), in which case, it was
held that where the Appellate Assistant Commissioner has set aside the
assessment, a fresh assessment has to be made in accordance with the
directions given by the appellate authority and the Income-tax Officer is
bound by those directions. Reference was also made to 'Cawnpore Chemical
Works Pvt. Ltd. (No. 1) v. CIT', 197 ITR 296 (All), wherein, it was held that
where the order of the Appellate Assistant Commissioner is specific, it is not
open to the Income-tax Officer to conduct a fresh enquiry beyond the said
directions and to proceed to make a fresh assessment without reference to the
earlier assessment.

33. 'S.P. Kochhar' (supra), in this regard, in fact, goes to the extent of holding
that:

".....When the Tribunal sets aside the assessment and remands the case
for making a fresh assessment, the power of the ITO is confined to the
subject-matter of appeal before the 36 ITA 229 & CO 43(Del)2011
Tribunal. He cannot take up the questions which were not the subject-
matter of appeal before the Tribunal, even though no specific direction
has been given by the Tribunal." (emphasis ours).

34. On perusing the specific directions issued by the Tribunal, we find no force
in the stand taken by the Revenue that no fetters were placed on the AO by the
Tribunal and that in the second round, the AO was justified in making the
addition under section 69C of the Act, as opposed to the addition made
invoking the provisions of section 68 in the original assessment proceedings.
The above- discussed judicial pronouncements lay down a clear mandate that
where the directions contained in the order of remand are specifically
restrictive, the AO would be exceeding his jurisdiction under the remand if he
transgresses those precise directions.
35. The ld. CIT (A) too has erred in holding in para 6.4 of the impugned Order
that:

"However, a perusal of the order of the ITAT reveals that there are no
fetters placed by the Hon'ble Bench in the said order on the AO in so far
as making inquiries regarding purchases is concerned. Rather, the ITAT
has opined that in 37 ITA 229 & CO 43(Del)2011 cases of bogus
purchases, necessary disallowance can always be made. Therefore, I do
not find any merit in the argument of the ld.

Counsel that the AO has exceeded his

jurisdiction in making inquiries regarding
purchases made from M/s Mine 'O' Gems and

M/s Vinayak Overseas and all the arguments made in this regard are
being rejected."
While observing thus, the ld. CIT (A) has erred in failing to take into
consideration the fact that the observations of the Tribunal were in respect of
application of the provisions of section 68 of the Act. The entire discussion in
paragraph nos. 11 to 13 of the Tribunal Order, as reproduced herein above,
are devoted to this aspect of the matter only, and to none else. It cannot be
gainsaid that an order needs to read in its entirety and bits and pieces thereof
cannot be just picked up and read out of context, divorced from the other
observations contained in the order.
36. On the basis of the above discussion, Cross Objection Nos. 1 to 4 raised by
the assessee are accepted. We hold that the AO has erred in passing the
Assessment Order by going beyond the specific 38 ITA 229 & CO 43(Del)2011
directions issued by the Tribunal while remanding the matter to him and the
ld. CIT (A) has erroneously upheld this action of the AO.
37. The last Cross Objection raised by the assessee, i.e., Cross Objection No. 5
states that the ld. CIT (A) has erred in rejecting the contention of the assessee
that the order passed by the AO is barred by limitation.
38. No argument regarding this Cross Objection was addressed before us on
behalf of the assessee. Moreover, no such challenge is seen to have been raised
before the ld. CIT (A) too. Therefore, Cross Objection No. 5 is rejected.
39. Turning to the Department's Appeal, Ground Nos. 1 and 5 are general.

40. Apropos Ground Nos. 2 and 3, the Department contends that the ld. CIT (A)
has erred in deleting the addition of Rs. 3,69,58,000/- made under section 69C
of the Act, being the unexplained expenditure incurred on purchase and of Rs.
3,85,752/- made under section 69 C of the Act, being the unaccounted cash paid
as commission for obtaining bogus purchase bills; and that while doing so, the
ld. CIT (A) has wrongly ignored the findings recorded by the AO and the fact
that the assessee is involved in the business of 39 ITA 229 & CO 43(Del)2011
receiving bogus purchase entries so as to inflate its profit for claiming
deduction under section 80HHC of the Act.
41. The Ld. DR has stated that the CIT (A) was not justified in deleting the
addition made by the AO. According to him, the AO had carried out the
investigation as per the directions of the Tribunal and in this process, he
recorded the statement of Shri Sanjay Parekh, Proprietor of M/s Mine-O-Gems.
The ld. DR contended that the AO has given cogent reasons in the assessment
order to hold that the two concerns, i.e., M/s Mine-O-Gems and M/s Vinayak
Overseas, were only paper concerns and they had not done any business
whatsoever. He further submitted that having held that the purchases
declared by the assessee in its books of account were not genuine, the AO was
justified in making the addition on account of unaccounted purchases, since
the assessee had made export sales which were found by the AO to be
genuine; that further, being of the view that the gross profit rate on the export
sales declared by the assessee was too high, he rightly considered the GP rate
of 14% as reasonable and applied the same on the export sales made by the
assessee and thus, correctly computed the purchases required for such export
at Rs.3,69,58,004/-; that having held that the said amount of purchases 40 ITA
229 & CO 43(Del)2011 was required for the export sales made by the assessee,
the AO had no option but to make the addition under Section 69C of the Act,
which was correctly done; and that the said addition cannot, in any manner,
be said to be erroneous.

42. On an observation by the Bench, that the AO had taken two intrinsically
mutually contradictory stands, on the one hand, ignoring the source of the
purchases of Rs.1,92,87,608/-, as explained by the assessee in its books of
account and at the same time, making an allegation of unexplained
expenditure by way of unaccounted purchases of Rs.3,69,58,004/-, the ld. DR
clarified that this was done by the AO probably for the reason that the
purchases accounted for by the assessee in its books of account were not
found to be genuine and the assessee would obviously have made purchases
of Rs.3,69,58,004/- from other sources, which had not been accounted for by
the assessee in its books of account. He further submitted that at best, credit of
the expenditure of Rs 1,92,87,608/-, as accounted for in the assessee's books of
account, could be given, but even if it were to be so done, an unaccounted
expenditure of Rs 1,76,70,396/- would still remain, which would, again, be
liable for addition under Section 69C of the Act.

41 ITA 229 & CO 43(Del)2011

43. As regards the evidence of such alleged unaccounted purchases, the Ld. DR
submitted that in such type of cases, it is difficult for the department to collect
direct evidence. Concerning the basis for applying the GP rate of 14%, it was
submitted that though in the Assessment Order, the AO has not given any
comparable instance, it is just and proper to apply a reasonable rate of profit,
which the AO has rightly applied at 14%.

44. The Ld. Counsel for the assesse, on the other hand, supported the order of
the CIT (A). It was submitted that firstly, the finding given by the AO that M/s.
Vinayak Overseas and M/s. Mine- O-Gems are not genuine firms, is perverse.
In this regard, he has referred to pages 142 and 143 of the Assessee's Paper
Book, which is a copy of the return filed by one Mr. Gauri Shankar Parekh,
Proprietor of M/s Vinayak Overseas, to APB pages 136 to 138, being copies of
invoices issued by M/s. Vinayak Overseas and to APB 140 and 141, i.e., copy of
the confirmation. He also referred to the order passed by the Tribunal 'B'
Bench, Jaipur in the case of M/s. Vinayak Overseas, a copy whereof is placed at
APB 265 to
282. He invited our attention to the finding of fact recorded by the 42 ITA 229
& CO 43(Del)2011 Tribunal at APB 274, wherein it has been observed that the
assessee in that case, i.e., Vinayak Overseas, had made a huge import of goods
during the year and in the subsequent years and these imported goods had
been sold in India and accordingly, the sale against such imported goods could
not be a mere paper entry.
45. Further, the ld. Counsel for the assessee referred to the fact that in the
assessment year under consideration, M/s. Vinayak Overseas had made import
of Rs.33,49,51,369/-. He also referred to APB 275, where a certain statement
made by the AO has been found by the Tribunal to be contrary to the facts.
After examining the facts, the Tribunal has recorded a finding at internal page
13 of its order (APB 279), that it could not be held that M/s Vinayak Overseas
was issuing bogus bills on commission without delivering the goods and it is
on this basis that the order of the CIT (A) was being upheld.

46. So far as regards the case of M/s. Mine-O-Gems, the Ld. Counsel for the
assessee invited our attention to APB 178 and 179, which is a copy of the
income tax return filed by one Mr. Sanjay Parekh, Proprietor of M/s. Mine-O-
Gems, for the assessment year 2001-02. He also took us through the audited
balance sheet of M/s.
43 ITA 229 & CO 43(Del)2011 Mine-O-Gems, a copy whereof has been placed at
APB 157 to 177. It was stated that as per this balance sheet, M/s Mine-O-Gems
had made a sale of Rs.51,71,48,930/- during the year and had carried out
import of Rs.9,47,10,437/-. He also referred to APB 149 to 152, which are copies
of invoices issued by M/s. Mine-O-Gems and to APB 182, which is a copy of
bank statement showing payment made by cheque to M/s. Mine-O-Gems. He
also referred to the copy of letter dated 5.11.2009 at APB 318, submitted by Mr.
Sanjay Parekh, Proprietor of Mine-O-Gems on his personal appearance before
the AO, along with copy of the account of the assessee, copies of the invoices
and copy of the audited balance sheet.
47. The ld. Counsel for the assessee also invited our attention to the order
passed by the Tribunal, Jaipur Bench in the case of M/s Sambhav Gems Ltd.,
where also, an issue had come up regarding purchases made by M/s. Sambhav
Gems Ltd. from M/s. Mine-O- Gems. On the basis of the above said order, it was
argued that having produced the parties before the AO and such parties
having admitted the transactions, it had to be accepted that the obligation of
the assessee stood discharged, particularly in view of the facts which 44 ITA
229 & CO 43(Del)2011 had come on record regarding the import and sale by
these parties to other different parties.

48. On the basis of the above, it was stated by the ld. Counsel for the assessee
that the finding given by the AO that these parties are not genuine, is not
correct. It was submitted that the ld. CIT (A) has properly appreciated the facts
brought on record and that these facts have not been disputed by the Ld. DR.

49. As regards the invocation of Section 69C of the Act for making the addition
of the so-called unaccounted purchases, it was submitted on behalf of the
assessee, that there was absolutely no material with the AO to show that the
assessee had made any purchase outside its books of account; that the
assessee had submitted the audited balance sheet and the profit and loss
account and the fact that export has been made stands accepted by the AO;
that the AO has assumed the gross profit rate of 14% without giving any
comparable case and without giving any justification for applying the said rate
of 14%; that on the other hand, the assessee has produced all the purchase
bills and also all the sales bills; that the export of diamonds is through the
Customs Department, which approves the value of these diamonds; that the
AO has wrongly 45 ITA 229 & CO 43(Del)2011 made the assumption merely on
surmises and conjectures, even though there is absolutely no basis whatsoever
brought out by the AO to disregard the book results declared by the assessee;
that no comparable case were cited by the AO for assuming the gross profit
rate of 14%, whereas on the contrary, there are comparable cases of GP rate of
55%, which has been considered to be a reasonable GP rate in the case of
Prakash Chand Vijay, as upheld by the ITAT in its order dated 28.7.2006, in ITA
No. 26/JP/2005; that the onus of proving alleged unexplained expenditure is on
the revenue and it is for the revenue to bring on record material to prove the
alleged unexplained expenditure; that in the present case, there is absolutely
no material brought by the Revenue to prove any unexplained expenditure as
having been incurred at the hands of the assessee; that there is an inherent
contradiction in the stand of the AO, in as much as he ignored the explained
source of the purchases and without giving credit of such source of the
expenditure incurred, assumed that the assessee had incurred expenditure
which was unaccounted for; that the AO is completely silent about not only as
to whom payment of such expenditure has been made, but also as to how it
was paid; that the gross profit rate is the difference between 46 ITA 229 & CO
43(Del)2011 the sale value and the purchase value; that in case the AO has any
doubt on the gross profit rate earned by the assessee, he would be well within
his rights to investigate not only the rate and the quantity of the sales, but also
the rate and quantity of the purchases; that he would be well within his rights
to examine and compare the same with the market rate in case of any
variation which may raise a doubt about the value of the purchase or the
value of the sales; that in case the AO has any such doubt about the purchase
value or the sales value, the onus would be on him first to establish that the
purchase rate or the sale rate is different from the market rate or value, and
also to further establish that the assessee has actually paid money over and
above that stated in the books of account in respect of purchases, or has
received any amount over and above the sale price stated in the books of
account; that in the present case, pertinently, the AO has not doubted the sale
value and he has accepted the same as genuine; that having done so, he has
simply thereafter applied the GP rate of 14% and has computed the value of
the alleged unaccounted purchase, without even first ascertaining the market
value of such purchases and without discharging his onus to establish that the
assessee has paid something over and above what 47 ITA 229 & CO
43(Del)2011 has been stated in its books of account. In support of this
proposition, the ld. Counsel for the assessee invited our attention to the copies
of the export invoices and other documents placed at APB 46 to 78, giving the
description of each of the items exported, as verified by the Customs
Authorities at the time of export and the certificate of the same regarding
valuation by the Customs Cargo Appraiser have been marked.

50. The ld. Counsel for the assessee invited our attention to the invoices issued
by M/s Vinayak Overseas in respect of the items exported by the assessee (APB
136 to 138) and invoices issued by M/s Mine-O-Gems (APB 149 to 152). In this
regard, it was contented that the exact specifications of the items purchased
with the rates and quantity have been stated in these purchase invoices; that
the specification and the quantity as stated in the purchase invoices matches
with the specification and quantity stated in the export invoices; that the AO
has accepted the export sales as genuine and he has also accepted their value;
that as regards the purchases, the AO also admits the fact that the assessee had
made purchases for such exports; that he has, however, wrongly disregarded
the purchase value declared by the assessee as evidenced by the 48 ITA 229 &
CO 43(Del)2011 purchase invoices and has wrongly applied an arbitrary GP
rate of 14% on the export to determine the value of purchases and on that
basis, he has made an erroneous and unsustainable addition of unaccounted
purchases without even verifying the comparable rates of purchases, without
any evidence of any payment having been made over and above that which
was claimed; that it is not the case of the AO that the items stated in these
invoices and the items exported by the appellant are inter se different and do
not match; that further, it is not the case of the AO that the stated rates of these
items as per the purchase invoices are below the market rates; that as such,
the AO was not justified in arbitrarily applying a GP rate of 14% on the export
sales; that in the absence of any finding that either the purchase rate, or the
quantity stated was incorrect, the AO was not justified in estimating the
purchases at a fantastic figure of Rs.4,29,74,424/-, as against the actual value of
such purchases at Rs.1,92,87,608/-.; and that the directors of the company are
quite experienced in this trade and they have very good connections. In this
regard, the ld. Counsel for the assessee invited our attention to APB 40 to 44,
which is a copy of the audited Profit & Loss Account of M/s Kishan Lal & Sons,
of which, Mr. Ajay Gupta was the 49 ITA 229 & CO 43(Del)2011 Proprietor and
M/s S.R. Jewels, of which, Mr. Rajeev Gupta was the Proprietor from AY 1998-
99 to AY 2001-02. He submitted that both of them are directors of the assessee
company and so, the allegation of the AO that the company is new and that the
GP rate is too high, is not sustainable.

51. Having heard the parties on this issue and having gone through the
material brought on record with regard thereto, it is seen that to enable
invocation of the provisions of section 69C of the Act, the AO needs to be in
possession of some material indicating that the assessee has incurred
expenditure on purchases which have not been reflected in the books of
account. Existence of such material with the AO, in fact, is the sine qua non for
invoking section 69C of the Act.

52. In the present case, the Assessment Order does not evince the presence of
any material whatsoever with the AO to show that the assessee had actually
incurred any expenditure on purchases outside its books of account. The
assessee had, on the contrary, furnished all its purchase as well as sale bills. It
was shown that the export of 50 ITA 229 & CO 43(Del)2011 diamonds made by
the assessee had been through the Customs Department, which Department is
the Department responsible for approving the value of diamonds to be
exported. The audited Balance Sheet and the Profit and Loss Account had been
produced before the AO by the assessee. The factum of export, in fact, was
accepted by the AO by observing in the Assessment Order that:

".....however, I do agree with the findings of the A.O. made therein accept
the part of addition, i.e. addition made u/s 68 of the 'Act' of the sales
amount of Rs.4,29,74,424/."

However, he ignored the source of the purchases, even though adequately

explained by the assessee. As such, without giving credit of such source of the
expenditure incurred, the AO wrongly assumed that unaccounted expenditure
had been incurred by the assessee. That this was merely a baseless
assumption of the AO is evident from the fact that the Assessment Order does
not contain even as much as a whisper about the recipient of the payment, if
the AO had found any such recipient. That apart, the AO has also not ventured
to 51 ITA 229 & CO 43(Del)2011 register any comment concerning the mode of
incurrence of such alleged expenditure at the hands of the assessee.

53. Further, the gross profit rate of 14% has been applied by the AO only on
the basis of assumption, without giving any comparable case and without
giving any justification for applying the said GP rate. The AO has wrongly
made the assumption merely on surmises and conjectures, with absolutely no
basis to disregard the book results declared by the assessee. It is seen that as
rightly submitted by the assessee, no comparable case was cited by the AO for
assuming the gross profit rate of 14%. On the other hand, there is a
comparable case of Prakash Chand Vijay, as upheld by the Tribunal in its order
dated 28.7.2006, in ITA No. 26/JP/2005, where a GP rate of 55%, has been
considered to be a reasonable GP rate. In the case of Prakash Chand Vijay, as
also in the cases of M/s Jaipur Gem Exports M/s Badhalias of Jaipur, the very
same AO had, pertinently, himself accepted the GP of 50% under similar
circumstances. The ld. CIT (A) has taken note of this fact in para 6.7 of the
impugned Order.

52 ITA 229 & CO 43(Del)2011

54. The gross profit rate is the difference between the sale value and the
purchase value. In the present case, if the AO harboured any doubt concerning
the gross profit rate earned by the assessee, it was well within his rights to
investigate not only the rate and the quantity of the sales, but also the rate and
quantity of the purchases, and to examine and compare the same with the
market rate. In case he had any doubt about the purchase value or the sales
value, it was for him to first establish that the purchase rate or the sale rate
was different from the market rate or value, and further that the assessee had
actually paid any amount over and above the amount stated in the books of
account in respect of purchases, or that the assessee had received any amount
over and above the sale price as declared in the books of account. However,
the AO has not doubted the sale value declared by the assessee. Rather, he has
accepted the same to be genuine. Even so, after having done so, he applied the
GP rate of 14% without any basis and computed the value of the alleged
unaccounted purchase, without even first ascertaining the market value of
such purchases and without discharging his onus to establish that the assessee
had paid anything over and above what had been stated in its books of
account. The GP rate of 14% was 53 ITA 229 & CO 43(Del)2011 applied ignoring
that of 50% applied by himself in the cases noted in the preceding para. He did
not even venture to differentiate those cases from the present one.

55. In this regard, it is seen that the copies of the export invoices and other
documents placed at APB 46 to 78, contain the description of each of the items
exported, as verified by the Customs Authorities at the time of export and the
certificate given by the Customs Cargo Appraiser certifies the valuation of the
material exported.

56. The copies of the invoices issued by M/s Vinayak Overseas in respect of the
items exported by the assessee are to be found at APB 136 to 138 and the
copies of the invoices issued by M/s Mine-O- Gems are at APB 149 to 152. These
vouchers were duly furnished by the assessee before the AO. These purchase
vouchers contain the exact specifications of the items purchased with the rates
and quantity. These details, it is seen, match with the specification and
quantity stated in the export invoices. It was, therefore, that the AO accepted
the export sales as genuine and also accepted their value. In fact, the AO also
admitted the fact that the assessee had made purchases for the exports. He,
however, wrongly disregarded the purchase value declared by the assessee as
evidenced by the 54 ITA 229 & CO 43(Del)2011 purchase invoices and wrongly
applied an arbitrary GP rate of 14% on the export to determine the value of
purchases and as such, he made a wholely uncalled for addition of
unaccounted purchases without even verifying the comparable rates of
purchases and without any evidence of any payment having been made over
and above that claimed.
57. Pertinently, it is not the case of the AO that there is any mismatch between
the items in the invoices and the items exported by the assessee. The AO also
does not say that the stated rates of these items, as per the purchase invoices,
are lower than the market rates. And that being the case, the AO was,
obviously, not justified in arbitrarily applying a GP rate of 14% on the export
sales. Further, in the absence of any finding that either the purchase rate, or
the quantity stated was incorrect, there was nothing prompting the AO to
estimate the purchases at Rs. 4,29,74,424/-, as against the value of such
purchases declared by the assessee at Rs. 1,92,87,608/-.
58. Then, the copies of the audited Profit & Loss Account of M/s Kishan Lal &
Sons, of which, Mr. Ajay Gupta was the Proprietor and M/s S.R. Jewels, of
which, Mr. Rajeev Gupta was the Proprietor from AY 1998-99 to AY 2001-02
(APB 40 to 44). Both, Ajay Gupta 55 ITA 229 & CO 43(Del)2011 and Rajeev Gupta
are directors of the assessee Company and so, the observation of the AO that
the assessee Company was a new Company and that the GP rate was too high,
was wrong.
59. Then, it is seen that the finding recorded by the AO, to the effect that the
two supplier concerns of the assessee, namely, M/s. Vinayak Overseas and M/s.
Mine-O-Gems were not genuine concerns, was erroneous. At pages 142 and
143 of the APB is a copy of the Return of Income filed by Sh. Gauri Shankar
Pareek, Proprietor of M/s Vinayak Overseas. APB 136 to 138 are copies of the
invoices issued by the concern M/s. Vinayak Overseas. APB 140 and 141 is the
confirmation.

60. Further, APB 265 to 282 is a copy of the order dated 30.5.2008, passed by
the Tribunal, 'B' Bench, Jaipur in the case of Gauri Shankar Pareek in ITA Nos.
223/JP/2007 to 229/JP/2007 filed by the assessee for A.Ys.1998-99 to 2004-05 and
ITA Nos. 365/JP/2007 to 371/JP/2007, the corresponding Cross Appeals filed by
the Revenue. The Tribunal has observed therein (at APB 274), that the assessee
in that case, i.e., Gauri Shankar Pareek, proprieter of M/s Vinayak Overseas
had made a huge import of goods during 56 ITA 229 & CO 43(Del)2011 the year
and in the subsequent years and the imported goods had been sold in India
and that accordingly, the sale against such imported goods could not be
dubbed as a mere paper entry. The Assessment Order in that case, inter alia,
mentioned that in the assessment year under consideration, M/s. Vinayak
Overseas had made import of Rs.33,49,51,369/-. The conclusion arrived at by
the AO has been found by the Tribunal to be contrary to the facts (APB 275 and
276). The Tribunal observed (at APB, pages 279 and 280), that it could not be
held that M/s Vinayak Overseas had been issuing bogus bills on commission
without making actual supply of the goods. The Order of the ld. CIT (A) was
thus upheld by the Tribunal.
61. Then, APB 178 and 179 is a copy of the Income Tax Return filed by Sh.
Sanjay Pareek, Proprietor of M/s Mine-O-Gems for the Assessment Year 2001-
02. APB 157 to 177 is the Audited Balance Sheet of M/s. Mine-O-Gems. It shows
that M/s Mine-O-Gems had made sale of Rs. 51,71,48,930/- and import of Rs.
9,47,10,437/- during the year. APB 149 to 152 are copies of the invoices issued
by M/s. Mine-O-Gems. APB 182 is a copy of Bank Statement showing payment
made to M/s. Mine-O-Gems by cheque. APB 318 is a copy 57 ITA 229 & CO
43(Del)2011 of letter dated 5.11.2009 from Sanjay Parekh, Proprietor of M/s
Mine-O-Gems to the AO, which letter he submitted to the AO when he
personally appeared before him, along with a copy of the account of the
assessee, copies of the invoices issued by the concern and copy of the Audited
Balance Sheet of the concern.

62. Still further, the order passed by the Tribunal, Jaipur Bench in the case of
M/s Sambhav Gems Ltd. shows that therein also, the matter regarding
purchases made by the said M/s. Sambhav Gems from M/s. Mine-O-Gems was
at issue. The assessee had produced the parties before the AO and they had
unambiguously admitted the transaction.

63. Therefore, it can, in no manner, be disputed that the assessee had duly
discharged its onus, particularly by duly bringing on record the facts
regarding the import by these parties and sale to other different parties.
64. The observations of the ld. CIT (A) on this issue are as under:
"6.5 Now coming to the issue of addition made by the AO u/s 69C of the
Act. The Appellant has submitted that on merits no addition u/s 69C is
called for. Adverting to the provisions of Section 69C, it has been
contended that it applies to an expenditure 'incurred' which means
actually spent. It is also stated that Section 69C is attracted only if it is
shown 58 ITA 229 & CO 43(Del)2011 that there was an expenditure
which was incurred by the assessee but the source of which is not
satisfactorily explained. The term 'expenditure' has been explained to
mean spending or paying out or by way of something which has gone
irretrievably. Unless it is shown that there has been spending of any
money, section 69C does not apply. Reference in this regard has been
made to the two judgments of the Delhi High Court and one of ITAT
Chandigarh Bench to contend that unless it is shown that expenditure
was actually incurred, Section 69C has no application. It was contended
that the AO on his part has done nothing to demonstrate that purchases
to the extent of Rs 3,69,58,004/- were made which were not recorded in
the books of account and for which the source was not explainable. It
was, thus, contended that even on merits, there can be no warrant for
making such an addition.

6.6 On a careful consideration, I find that the provisions of Section 69C

may be invoked only in situations where the assessing officer finds that
any expenditure has actually been incurred by some assessee and for
which he/she does not have any satisfactory explanation. The Hon'ble
Delhi High Court in the cases of CIT Vs Lubetech 301 ITR 175(Delhi) and
CIT vs. Ved Prakash Choudhary 305 ITR 245 (Delhi) has held that it has
first to be established by corroborative evidence that an expenditure has
been incurred and only thereafter if the explanation offered by the
assessee about the source of such expenditure is not found satisfactory,
the amount may be added to the income.

Examining from this standpoint what emerges from the order of the AO
is that he has not brought out any evidence whatsoever to demonstrate
that the purchases to the extent of Rs. 3,69,58,004/- were made from
"unknown" parties. It is not even mentioned from whom they were
purchased and what was the description of such purchases. The AO has
merely stated that he was of the 'strong opinion' that the assessee made
purchases from some unknown parties other than the 59 ITA 229 & CO
43(Del)2011 two parties mentioned above. Undisputedly, no addition can
be made merely on the basis of "strong opinion".
6.7 Further, the AO has opined that in the cases of exporters, the normal g.p.
rate varies between 10% to 15%. However, inspite of specific query by the
under signed, no instances of comparable cases have been made available. On
the other hand, the appellant has filed copies of assessment orders in the cases
of Sh. Prakash chand Vijay, M/s Jaipur Gem Exports and M/s Badhalias of
Jaipur where g.p. of more than 50% has been accepted by the assessing officer
himself/ITAT. 6.8 As stated earlier, the assessing officer, while completing the
original assessment has made reference to some inquires made by the
investigation wing Jaipur in the cases of M/s Mine 'O' Gems and M/s Vinayak
Overseas. Therefore, an attempt was made to find out as to what compliance
has been made by the appellant company in relation to the directions given by
the Hon'ble ITAT regarding making the aforesaid two parties available for
examination by the A.O. It has been pointed out by the learned counsel for the
appellant that the proprietor of M/s. Mine 'O' Gems, Shri Sanjay Pareek has
appeared twice before the AO and has confirmed the transactions entered into
with the appellant company. It is also stated that the learned AO has recorded
his statement in the course of assessment proceedings. As regards, Shri Gauri
Shankar Pareek, proprietor of Vinayak Overseas, it was stated by the learned
counsel that Shri Pareek has made all the requisite information available to
the AO by means of registered post. Thus, the case of the learned counsel for
the appellant is that all necessary evidence regarding purchases made from
the aforesaid parties was made available to the AO. Further, both the persons,
namely, Shri Gauri Shankar Pareek and Sh. Sanjay Pareek are assessed to
income tax and sales tax and both of them have responded to the notices
issued by the AO. Thus, the claim of the appellant is that the onus cast upon it
has been duly discharged insofar as proving the existence and identity of the
sellers and the genuineness of purchases is concerned.

60 ITA 229 & CO 43(Del)2011 6.9. Further, in the course of appellant

proceedings, the ld. Counsel for the appellant has invited my attention to the
judgment of the Hon'ble ITAT Jaipur 'A Bench in ITA no. 26/jp/2005 in the case
of Prakash Chand Vijay Vs DCIT wherein the Hon'ble ITAT Jaipur has accepted
GP rate of 49.8% and 55% for the assessment years 2001-02 and 2002- 03 as
reasonable. Copy of the aforesaid order has been filed before the assessing
officer and the undersigned. Further, the appellant has also pointed out that in
the case of Shri Gauri Shankar Pareek proprietor of M/s. Vinayak Overseas, the
Hon'ble ITAT Jaipur has categorically held that Shri Pareek was genuinely
engaged in the business of import and export and trading of precious and
semi precious stones and there was no material with the AO to come to the
conclusion that he was only issuing bogus bills on commission basis without
delivery of the goods. For the sake of convenience, the relevant portion of the
said judgment is being extracted as below:
 "Para 13 Considering the above submissions in our view certain
materials aspect of the case are important to be considered for the
adjudication of the issue raised in the appeals preferred by the parties
i.e. as to whether the A.O. was justified in coming to the conclusion that
assessee was only issuing bogus bills and charging commission on total
turnover to estimate his income. These important aspects of the matter
are that during the course of search and seizure operation conducted by
the department no documents was found to ascertain that assessee was
issuing bogus bills only. The allegation of the A.O. that the assessee was
only issuing bogus bills without supplying of the goods is totally based
on the statement of Sh. Mohan Prakash Sharma who worked with the
assessee for the two years only. Undisputedly, Sh. Mohan Prakash
Sharma was not employee or power of attorney holder at the time of
giving his statement. He had left the services of the assessee much
before the date of search. Under these circumstances, there is no reason
to doubt the contention of the assessee that he was not having good
relation with Sh. Mohan Prakash Sharma and he had made 61 ITA 229 &
CO 43(Del)2011 false statement due to his business rivalry and
jealousness with the assessee. It is also worth noting that statement of
Sh. Mohan Prakash Sharma were recorded behind the assessee and no
opportunity of confrontation was afforded to the assessee which was
required on the part of the A.O. to meet out the well established
principal of natural justice. In his affidavit Sh. Mohan Prakash Sharma
has given the period he was working with the assessee i.e. 01/04/1997 to
30/11/1999. The search was however, conducted at the premises of
Naman Gems Pvt. Ltd. And M/s. Shruti Gems on 19/06/2003. Keeping all
these facts in totality we are of the view that the statement of Sh. Mohan
Prakash Sharma were not worth relying especially in absence of any
corroborative evidence to establish that M/s. Vinayak Overseas was
engaged in the issuing of bogus sale vouchers without supplying the
goods. Para 14 The custom authorities had also recorded the statement
of the assessee on 08/05/2004 (Page No. 179 to

185), 13/05/2004 (Page No. 186 to 189), 19/05/2004 (Page No. 190 to 193)
and 04/06/2004 (Page No. 194 to 197). The statement on 19/05/2004 was
recorded in the presence of Sh.

Mohan Prakash Sharma and part of the statement before the custom
authorities are in the handwriting of Sh. Mohan Prakash Sharma. All these
statement were recorded u/s 108 of the Custom Act. The assessee therein had
stated that he had made the delivery of goods against the sales in all the cases.
Of course the A.O. was right in his observation that the statement given before
the custom authorities are not binding to him under the Income-tax
proceedings but it is also correct to say that those statement recorded by
another authority of the Govt. of India cannot be totally ignored without
having adverse material with the A.O. to disbelieve the same. It is also worth
noting that during the year and in subsequent years the assessee had made
huge imports of goods. This facts has also not been denied by the opposite side
that the custom authorities prepare bill of entry in case of each import and the
import is always coupled with physical delivery of goods. The claim of the
assessee that he had sold the imported goods in India, under these
circumstances cannot be doubted. The details of goods imported by the
assessee are as under:-

62 ITA 229 & CO 43(Del)2011 A.Y. Imports in Rs.

2000-01 11,01,01,799/-

2001-02 33,49,51,369/-

2002-03 1,15,86,811/-

2003-04 4,03,51,692/-

TOTAL 49,69,91,671/-

Para15 Under the above facts and circumstances, we

are of the view that there was no sufficient material or evidence before
the A.O. to come to the conclusion that the assessee was only issuing
bogus bills on commission basis without delivering the goods. The
Ld.CIT (A) was thus not justified in upholding the said finding of the A.O.
We thus while setting aside order of the lower authorities in this regard
decide the issue in favour of the assessee with direction to delete the
addition made and sustained by the lower authorities on account of
estimation of the alleged income earned on commission for supplying
the bogus bills. The Ground No. 2 of the appeals preferred by the
assessee is thus decided in favour of the assessee by allowing the same."

As regards purchases from Sh. Sanjay Pareek proprietor of Mine 'O' Gems, it
has been pointed by the learned counsel 63 ITA 229 & CO 43(Del)2011 for the
appellant that in the case of in the case of M/s. Sambhav Gems Ltd. the Hon'ble
ITAT Jaipur has recorded, the following findings in identical circumstances as
under:

"Para 15 We fully agree with the submission of the Ld. D.R. that for
deciding an issue in a case totality of facts and circumstances are
required to be gone into and strict rules of evidence do not apply to
Income tax proceedings but at the same time for deciding an issue
weightment of evidence produced by the parties cannot be ignored.
Preponderance of probabilities works where there is no direct evidence
to support a claim of either party. In the present case however the
assessee had admittedly exported the goods involving several channels
of Custom department and Bank Accounts thus admittedly goods were
purchased by the assessee for the said export. The only dispute is as to
whether the assessee had purchased the said good from the aforesaid
five parties, existence of which has been doubted by the department on
the basis of some observations of the A.O. discussed in detail above or
from some unknown parties. From record it appears that the assessee
while furnishing necessary informations regarding the transactions and
the aforesaid five parties like purchase bills issued against goods
purchased, sales- tax registration numbers of the parties, PANs, their
confirmations and Bank statements showing the debit of the amount
paid through Account payee Cheques to them in the account of assessee
and credited in the Bank Account of sellers, had discharged its primary
onus. And thereafter the onus shifted on the department to rebut the
same. At one hand there are sufficient documents as discussed above
with the assessee to support its claim that goods were purchased from
the aforesaid parties and so far as existence of those parties and that
they were not in the business of selling of the goods supplied to the
assessee as observed by the AO is concerned, we find from the record
itself that a search operation U/s 132 in the case of M/s Vinayak Overseas
was conducted by the Department. Shri Sanjay Pareek, Proprietor of M/s
Mine 'O' Gems and Director of Sahil Diamonds Pvt Ltd. was produced
before

64 ITA 229 & CO 43(Del)2011 the A.O. who admitted the transaction, Shri Om
Prakash Ghiya, Proprietor, M/s Anmol Ratan and Shri Umesh Kumar Saboo
worked for M/s Shruti Gems as broker were also appeared before the A.O.
Thus, it cannot be accepted beyond doubt that the aforesaid five parties were
not in existence at the time when the assessee claimed to have made
purchases of goods from them. There is also no direct evidence that the
amount paid by the assessee through Account Payee Cheques to the aforesaid
parties was withdrawn by these parties to return these amounts after
deducting commission by these parties to the assessee. This submission of the
Ld. A.R. also carries substance that after completion of a transaction it is
beyond control of a purchaser to secure the presence of sellers before the A.O.
to establish the genuineness of the transaction. Considering the totality of
aforesaid facts and circumstances and material available on record we are of
the view that the Department could not succeed in establishing beyond doubt
that the claim of the assessee that the goods were purchased from the
aforesaid five parties are false specially when there are several materials
including sales-tax registration, PAN, Bank statement etc., and the very
conduction of search u/s 132 on the premises of some of them and recording of
statements of some related persons to nurture the believe that the assessee
had purchased the goods from the aforesaid parties only. There is nothing on
record to indicate that from whom the assessee had purchased the goods other
than the aforesaid five parties especially when huge amount is involved in
purchasing the goods. We are thus of the view that the Lower authorities were
not justified in making and sustaining a huge addition of Rs. 6,45,03,018/- on
account of bogus purchase u/s 69 C of the Act on the basis of some
probabilities that assessee might not have purchased goods exported from the
above five parties."

6.10 Thus, it may be seen that the allegation of the Department that Shri Gauri
Shankar Pareek and Shri Sanjay Pareek were running a hawala racket and
issuing 65 ITA 229 & CO 43(Del)2011 bogus bills on commission without
making any supply of goods has been disapproved by the Hon'ble ITAT Jaipur
which is the final fact finding authority.
It may be relevant to point out here that the order of the Hon'ble ITAT in the
case Sh. Gauru Shankar Pareek was in relation to additions made on the
ground that he was issuing bogus bills against commission and no goods,
namely, precious and semi precious stones were actually supplied to the
purchasers. As stated earlier, on the basis of these allegations search u/s 132 of
the Act was also conducted at the premises of Sh. Gauri Shankar and his
business concerns, M/s Vinayak Overseas. The assessment in the case of the
appellant company was also primarily based on the information received
from Inv. Wing, Jaipur that Sh. Gauri Shankar Pareek and Sh. Sanjay Pareek
were indulging in issuing bogus sale bills against commission and the
appellant company had also taken advantage of such accommodation bills.
Therefore, the judgement of the Hon'ble ITAT in the case of Sh. Gauri Shankar
Pareek is an important development and should have taken note of by the ld.
A.O. As stated by the Id. Counsel for the appellant, Sh. Gauri Shankar Pareek
has made all the relevant documents available to the A.O. through registered
post. 6.11 Further, as stated earlier, a search u/s 132 of the IT Act was
conducted at the premises of the appellant company and its directors.
However, no adverse material and incriminating evidence was found during
the said search operation and the block assessment for the period 01-4-96 to
12-2-03 has been complete at Nil income.

6.12 Thus, no evidence suggesting any purchase from the so called "unknown
parties" was found in the course of search operation at the business premises
of the appellant company and the residential premises of its directors.
Therefore, the finding of the ld. A.O. that the appellant has made unexplained
purchases of Rs 36958004 from "unknown parties" and made payment thereof
out of undisclosed sources is without any material/evidence.
66 ITA 229 & CO 43(Del)2011 6.13 As stated earlier, the appellant company had
come in to existence only in the month of December, 2000 and its first
business activity had commenced only in the month of February, 2001.
Therefore, it is practically impossible that even before the appellant could
start any business activities, it had generated huge unaccounted income of Rs
3,69,58,004/- for making payment against purchases from the unknown
parties. Therefore, in my view, the finding of the Id. A.O. is based only on
conjectures and surmises and is not sustainable in law.

The Hon'ble Supreme Court, in the case of CIT Vs Noorjahan (P.K.) (Smt.) 237
ITR 570, has considered a somewhat identical fact situation and recorded the
following finding:-

"According to the high court, the Tribunal had not committed any error
in taking in to account the complete absence of resources of the assessee
and the fact having regard to her age and the circumstances in which
she was placed she could not be credited with having made any income
of her own and in these circumstances the Tribunal was right in
refusing to make an addition of the value of the investment to the
income of the assessee.
 Shri Ranbir Chandra, learned counsel appearing for the revenue, has
urged that the Tribunal as well as the High Court were in error in their
interpretation of section 69 of the Act. The submission is that once the
explanation offered by the assessee for the sources of the investment
was found to be non-acceptable the only course open to the Income-tax
Officer was to treat the value of the investment to be the income of the
assessee. The submission is that the word "may" in section 69 should be
read as "shall". We are unable to agree. As pointed out by Tribunal, in
the corresponding clause in the Bill which was introduced in
parliament, the word "shall" has been used but during the course of
consideration of the Bill and on recommendation of the Select
Committee, the said word was substituted by the word "may". This
clearly indicate that the intention of parliament in enacting section 69
was to confer a discretion 67 ITA 229 & CO 43(Del)2011 on the Income-
tax Officer in the matter of treating the sources of investment which has
not been satisfactorily explained by the assessee as the income of the
assessee and the Income-tax Officer is not obliged to treat such source of
investment as income in every case where the explanation offered by
the assessee is found to be not satisfactory. The question whether the
source of the investment should be treated as not under section 69 has
to be consider in the light of the fact of each case. In other word, a
discretion has been conferred on the Income-tax Officer under section
69 of the Act to treat the source of investment as the income of the
assessee if the explanation offered by the assessee is not found
satisfactory and the said discretion has to be exercised keeping in view
the facts and circumstances of the particular case.

In the instant case, the Tribunal has held the discretion had not been
properly exercised by the Income-tax Officer and the Appellate assist-
ant Commissioner in taking into account the circumstances in which the
assessee was placed and the Tribunal has found that the sources of
investments could not be treated as income of the assessee. The High
Court has agreed with the said view of the Tribunal. We also do not find
any error in the said finding recorded by the Tribunal. There is thus no
merit in these appeals and the same are accordingly dismissed."

6.14 As regards, purchases from Sh. Sanjay Pareek, proprietor of M/s Mine 'O'
Gems, it is stated that in the case of M/s Sambhav Gems Ltd Vs ACIT, the
Hon'ble ITAT has held that both Sh. G.S. Pareek and Sh. Sanjay Pareek were
engaged in import, export and trading of precious and semi precious stones
and there was no material/evidence with the IT Department to substantiate
the allegation that these two persons were only issuing bogus bills without
actual bills without actual delivery of goods. In the case of M/s Sambhav Gems
Ltd also the facts were that it has purchased precious and semi precious
stones from five parties of Jaipur including Sh. GS Pareek and Sh Sanjay
Pareek and in the assessment all the purchases from the aforesaid persons
were held to be bogus. Though in the first appeal the action 68 ITA 229 & CO
43(Del)2011 of the department was upheld by the CIT(A), the Hon'ble ITAT
Jaipur disapproved the action of the AO and recorded the following findings:-

"We even in the present case, do not deny the contention of the ld. DR _s
totality of the facts and circumstances of a case is very material to
decide an issue arising there from and we have accordingly proceeded
in the present case. The ld. DR has also placed reliance on the several
decision to support his contention that colourable devices have been
adapted in the present case to avoid payment of due tax. We fully agree
that the colourable devices cannot be allowed to avoid payment of due
tax but the onus in that circumstance lies upon the department to
establish that the devices adopted by the assessee are colourable. As
discussed above, the department has thoroughly failed to establish the
same in the present case. The ld. DR in support of his contention that
strict rules of evidence do not apply to the provisions of the IT Act and
real test in these matters is preponderance of probabilities and not
beyond reasonable doubt has placed reliance on the decisions of Hon'ble
SC in the cases of Sumati Dayal v. CIT and oth. We fully agree with this
contention of the ld. DR and in such a situation, while deciding an issue
on the basis of preponderance of probabilities, one has to weigh the
evidence and material on record in view of facts and circumstances of
that very case. The ld. DR has also placed reliance on several decisions of
Hon'ble Courts including the decision of Jaipur bench of the tribunal in
the case of M/s Kanchwala Gems. In all these cases, including the
Hon'ble jurisdictional high court in the case of Indian Woolen Carpet
Factory v. ITAT, a well established position of law that onus lies on the
assessee to prove the genuineness of the claimed purchases, has been
reiterated. Thus, while deciding an issue as to whether the claimed
purchase is genuine or not it is undisputedly to be seen as to whether
the assessee had discharged its burden by bringing evidence in support
of the claim or not. Thus, ultimately the facts and circumstances of that
very case and the evidence produced by the parties in support of their
case

69 ITA 229 & CO 43(Del)2011 are material for the adjudication of the issue of
genuineness of the claim of the purchase".
6.15 The AO has also made an observation that the exorbitant rate of profit of
55.12% is just impractical and impossible and the assessee has shown the
higher rate of profit only to book maximum export profit and claim deduction
u/s 80HHC of the IT Act, 1961. Further the AO has also observed that in the
export trade the prevailing GP rate ranges between 10-15% and has therefore
applied rate of 14 % to the case of the appellant.

In this regard, as stated earlier, the ld. Counsel for the appellant has pointed
out that the AO has not mentioned any comparable cases nor has he disclosed
the basis on which he has come to the conclusion that the profit in this line of
business ranges between 10-15%. Therefore, according to the ld. Counsel the
observation of the AO is nothing but conjectures and surmises and has no
evidentiary value in taxation matters. Further, it has been pointed out by him
that in the case of Sh. Prakash Chand Vijay Vs. DCIT, Circle-5, Jaipur, AY 01-02,
the Hon'ble ITAT has held in identical facts and circumstances that the GP rate
of 55% was reasonable. On the basis of aforesaid conclusions, the Hon'ble ITAT
rejected the argument of the AO that the purchases made from the certain
persons were not genuine and the same were understated in order to book
higher profits so as to claim higher amount of deduction u/s 80HHC. In this
regard, the Hon'ble ITAT has recorded the following findings:-

The only doubt expressed by the AO in the present case is that the
transactions with the suppliers from whom the assessee claimed to have
purchased the goods exported is not genuine, but the identity of the
suppliers and their existence in the capacity of their being assessed to
income tax or in the other government department with whom they are
registered for the purpose have not been denied not the supplies of
goods in export by the assessee. From the facts of the present case, it is
clearly emerging that the goods were exported and foreign currency
was received by the 70 ITA 229 & CO 43(Del)2011 assessee against the
exported goods, thus purchasing of goods by the assessee cannot by be
denied unless the foreign purchaser and the other related government
authorities deny that the goods were not exported. The lower authorities
are thus do not appear to be justified in denying the claim of the
assessee unless they come with this evidence that no goods were not
exported or money was received against that exported goods by the
assessee. The Hon'ble Guwahati high court......

No evidence has been brought on record by the AO that the assessee, who had
admittedly exported the goods has indeed purchased the goods not from the
above three named parties buy from some other parties and the amount paid
to above three parties was ultimately returned by them to the assessee. In the
absence of these material evidence, the AO under the provisions of Sec 69C of
the Act, has failed to discharge her onus to justify the addition in question,
especially when no defect has been pointed out in this regard in specific word
in the books maintained by the assessee. The ground is, thus, decided in
favour of the assessee with the direction to the AO to accept the claim of the
assessee and delete the addition.

6.16 In addition to the above, the Id. Counsel has also submitted that in the
cases of M/s Jaipur Gem Exports, Gopalji Ka Rasta Jaipur and M/s Badaliya
Jaipur, GP rate of 58.46% and 45% respectively have been held to be
reasonable by the AO himself.

6.17 In view of the above facts and under the circumstances, there is no merit
in the claim of the Id. AO that the GP rate in the cases of the assesses dealing in
this line of business ranges only between 10-15% as the AO himself has not
substantiated this claim with any material. On the other hand, the appellant
company has substantiated a higher rate of gross profit with specific instances
as discussed above. In view of the above facts and looking to the submissions
made by the appellant that it had discharged its primary onus by furnishing
purchase bills, sales tax registration 71 ITA 229 & CO 43(Del)2011 number, PAN
details confirmation letters and bank statements of the two suppliers and the
both of them being existing assesses, I have no hesitation in holding that the
appellant has duly explained the purchases made from M/s Mine "O" Gems
and M/s Vinayak overseas and the AO has no evidence, let alone credible
evidence, to support his case that the purchases in question were not made
from the aforesaid parties and the same were made from somewhere else for
a consideration of Rs 3,69,58,004/-. Accordingly, the addition in question is
being deleted.

6.18 As the addition of Rs. 36958004 itself has been deleted, the alternative
plea for allowing relief for the purchase already forming part of accounts has
become in fructuous and not being adjudicated.
7. For the similar reasons, the addition of Rs 385752 being alleged commission
paid by the appellant is also deleted."

65. Hence, the ld. CIT (A), while deciding this issue in favour of the assessee, in
our considered opinion, has correctly appreciated the full factual as well as
legal matrix, as discussed above. We find no error in the findings of the ld. CIT
(A) in this regard and we hereby confirm the same.

66. The grievance of the Department by way of Ground Nos. 2 and 3 is,
therefore, rejected.

67. Ground No. 4 states that the ld. CIT (A) has erred in deleting the addition of
Rs. 16,816/- made on account of interest on FDR.

72 ITA 229 & CO 43(Del)2011

68. This Ground, it is seen, does not arise from the impugned Order and it is
rejected as such.

69. In the result, the appeal of the Department is dismissed and the Cross
Objections filed by the assessee are partly allowed.

Order pronounced in the open court on 04.05.2012.

Sd/- sd/-
(G.E. Veerabhadrappa) (A.D. Jain)
President Judicial Member

Dated: 04.05.2012

Copy forwarded to:

1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
True copy
By order
Assistant Registrar
73 ITA 229 & CO 43(Del)2011