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