TaxTMI 
TaxTMI 
1988 (7) TMI 120
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....o this complaint, the Enforcement Directorate (which was formed to ensure the compliance of Foreign Exchange Regulation Act, 1973) alongwith the IT Department, jointly started their enquiries and the investigative process. The Officers of the Enforcement Directorate and the IT Department went to Sendiago in Sept., 1980 and recorded the statement of Mr. John Ashlyn in the office of the Consulate General of India, San Fransisco, California. Mr. John Ashlyn's statement was duly recorded and he produced certain copies of documents in support of his statement, which were attested and certified by the Consulate General of India, San Fransisco to be true copies of the original documents produced before the Officers. Mr. Hohn Ashlyn had deposed in his statement his dealing with serval leading jewellers of Jaipur, who had been carrying on transactions with and through him and in support thereof, he produced copies of their accounts in his account books, correspondence, copies of invoice received by him as also copies of invoices raised by him subsequently. One of such several jewellers happened to be the assessee. The documents, which were considered to be relevant and important relating to....
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....ded it was observed that in order to export the goods at half the price a fictitious party was created by the assessee in the name of M/s Veronica by opening an account by a similar name in Banque Libanaise pour le commerce, Geneva. The goods were got collected by M/s Salas S.A. and were sent to M/s Estrade Inc. and M/s Estrade Emerald Corporation, New York under his invoice. Mr. John Ashlyn had provided the copes of invoices raised by him on the two parties, namely, M/s Estrade Inc. and M/s Estrade Emerald Corpn., New York in support of his complaint that goods were exported at half the price, later were again exported from Geneva at double the price value. The further allegation was that prices were fixed by the New York party at Jaipur but they were routed through M/s Veronica at half the price covered by the assessee's invoice. The invoices that were considered to be relevant are the following: Asst. yr.: 1967-68 .Date of Invoice Value of Invoice in US $ Goods returned Actual Sale realised in Foreign Exchange Further sale Date export by Invoice Value 22-2-67 21,327.55 -- -- 21-3.67 42,112.65 22-2-67 56,671.75 -- -- 21-3-67 53,556.00 . . . . 21.3-67 59,....
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.... M/s Salas to Eastrade Inc. and M/s Eastrade Emerald Corpn. why they should not be treated as income of the assessee as the invoices raised by the assessee on Salas did not represent the true value. The assessee replied to this letter of the ITO vide his letter of 22nd Oct., 1981. The assessee denied that there was any agreement between the assessee and Salas for exporting goods under-invoicing them. The assessee in his reply has stated that goods were exported on consignment basis to M/s Veronica an entity of Salas. The assessee also had stated that there was no sale was made by him to Salas was further sold to M/s Eastrade Inc. and M/s Eastrade Emerald Corporation. The sale proceeds were realised by the Bankers. It was also stated that goods which were sent on consignment basis were not accepted in full by Salas and most of it had been returned back. The assessee also had stated that the allegation is baseless as no assessee would export the goods under-invoicing them and subsequently receiving it back unsold at the same value. It was also stated that the assessee had dealt with Salas on Principal to Principal basis and that the assessee had been constantly confronting the said p....
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....y the CBDT. It is, therefore, respectfully submitted that the entire stock position upto and as on 31st March, 1968 is covered in the settlement and no further query in this regard is expected from the department. However, without prejudice to our right and the submissions made in this regard, your goodself can verify the figures of the closing stock in the relevant covers which are duly certified by the bank. That as regards the proof of the Bombay office expenses, it is submitted that there is no separate set of books maintained by our Bombay office but an imprest account is given to our export manager at Bombay who in turn sends monthly statement of the expenses which are duly incorporated in our books at Jaipur. The details of such expenses are being produced for your verification. The copy of the settlement order, as desired by your goodself, is also enclosed. As regards the correspondence regarding exports to verify whether the exports were made on consignment basis or sale basis. It is submitted that if the goods are sent on consignment basis then the same fact is marked on the invoice. Similarly, if the goods are exported on sale basis the same is also mentioned in the f....
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.... value. Had the goods been under-invoiced, M/s Salas S.A. or Veronica SA, Geneva were free to disclose their real value to their local customs as has been done in other cases, and therefore, it is wrong to compare our case with any other parties against whom such allegations are there." 6. The assessee vide its letter dt. 4th March, 1983 again reiterated its earlier submissions. It had stated as under: "3. In paragraph 2 of the show-cause notice it is alleged that the value of goods in the invoices sent from India to Salas/Veronica were shown at half the actual market price. In support of the said allegation, a telegram purported to have been addressed by John Ashlyn to Geneva is referred. Reference is also made in the same paragraph to "some confidential index card" alleged to have been maintained by Mr. John Ashlyn. Neither the alleged 'telegram' nor the alleged 'confidential index cards' are produced in original in the course of recording the statement. Even the photo copies have not been supplied. Besides, we fail to appreciate how the aforesaid documents lead to the conclusion that we had been under-invoicing goods to the extent of half of actual market price or have request....
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....ng on our business with Salas SA, Geneva. We humbly pray for summoning of the supplier of the alleged documents to the Department to enable us to cross examine the said person to enable us to assist the Department in bringing out the true facts of the matter. 5.00 Regarding Paragraph 4 of the show-cause notice it is respectfully submitted that there is no material or evidence to suggest the alleged trans-shipping of goods from Salas SA, Geneva to Eastrade Inc. or Eastrade Emerald Corporation. The photocopies of some alleged invoices by Salas to other parties appear to be fabrication of documents to implicate us. We have no knowledge of the parties to whom the consignees in turn sell goods and we have nothing to do with any arrangement that may subsist between the consignees and his buyers. 6 Regarding paragraph 5 of the notice, it is submitted that since after recording of the statement and receipt of notice we have informally checked with the parties referred in the said paragraph whether the said parties had any dealings with Salas SA. Our fears are that the allegations emanate from malicious intentions of some party fabricating documents and connecting allegations to implicate....
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.... them as has been retained by Salas SA are accounted for in the sales. 8.0 Regarding paragraph 7 it is denied that any account is maintained by us in Swiss Francs or U.S. Dollars. No commission on sales has been paid by us. We do not know and have never dealt with any person or concern by the names M/s Gemmes Du Monde. It is respectfully submitted that in fairness to us the complainant or who ever should be able to produce any independent evidence in support of the allegations rather than relying on his forged and fabricated documents of which he has refrained from supplying the originals. In the event of the original being with the Department, it is respectfully prayed that the same may be produced to enable us to rebut of the allegations made in the said notice. Further as our partner recalls that in alleged photocopy of legalised document 220 (112) 80 of the alleged confidential index the words Gemmes Du Monde are hand-written, obviously an afterthought to implicate us. 9.01 It would not be proper and fair to make any additions on the basis of books of a third party and specially when we have not been given a chance or an opportunity to examine those books and cross examine Jo....
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.... of so-called legalised photocopies referred to in your letters 1144 and 1147 and without giving the opportunity to cross examine the party. 11.02 Your attention is drawn to para 9 of our settlement petition dt. 30th Oct., 1968 and for your immediate reference we would like to quote the same. "In view of the recent changes in the IT Act and the WT Act, and more particularly the drastic penal provisions, we have tried to ascertain the correct stock of our goods. We find that on a proper verification, the stock as on 31st March, 1968 would be Rs. 87,32,778.11. We have already made the necessary adjustments in our books of account for the year ending 31st March, 1968." 11.03 On 31st March, 1968 a thorough assessment of the stock on hand was made and it was on the basis that stock included all the returned goods sent during this assessment year from M/s Salas SA/Veronica. The valuation on 31st March, 1968 was made physically on the goods on hand on that date. 11.04 We would also like to quote Para No. 11 from this letter dt. 30th Oct., 1968 which is relevant: "The main purpose of approaching your honour, at this stage, is to ensure that by our showing income on the basis of the afo....
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....: "6. The value of the closing stock as on 31st March, 1968 is taken at 91.70 lacs as detailed below: Local Stock . Rs. 26.36 lacs Foreign stock valued at Sales Rates 74.35 lacs . Less estimated profit thereon at 12.15% 9.01 lacs . . . Rs. 65.34 lacs . . Rs. 91.70 lacs" 7. After considering the various submissions made by the assessee in view of various documents provided by Mr. John Ashlyn, his statement recorded, draft of the assessment was made. As per the draft assessment order to the party already assessed income an addition to the tune of Rs. 5,88,182 and Rs. 3,18,760 were made for asst. yrs. 1967-68 and 1968-69 respectively on account of under-invoicing of exports. For the asst. yr. 1968-69, another addition of Rs. 15,000 was proposed on account of encashment of US $ 1000 and on account of alleged under-valuation of stock of Rs. 6,33,288. 7.1 The assessee filed its objections to the draft assessment order vide its letter of 6th June, 1983. This was followed by another letter to the IAC in the 144B proceedings dt. 30th Oct., 1984. In this letter, it was stated that the goods returned by Salas were re-exported in the same year or in the next year. In support ....
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.... assessee firm and for the benefit of the assessee firm and not at the instance of these two parties of New York. Another additional important objection given by the assessee was through para 5 of written submissions dt. 30th Oct., 1984 under which it was claimed that Ets. Gemmes Due Monde, to whom payments had allegedly been made by M/s Salas SA at the instance of the assessee firm, had no connection with the assessee firm. It was also claimed that Ets. Gemmes Due Monde was an independent business house existing in Geneva and they have also been advertising in India in the magazine "Gems & Jewellery". This again was an important objection which was very seriously considered and all the relevant legalised documents were carefully examined to ascertain whether any instruction were actually issued by the assessee firm for transferring the balance which had got accumulated in the account of the assessee firm maintained with M/s Salas SA and represented 40 per cent of the invoice price received from New York parties for and on behalf of the assessee firm in Switzerland. Since the laws of Switzerland do not permit any direct enquiry in the matter, we have to go by circumstantial eviden....
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....ems & Jewellery" was examined and the letter was also written to President, Gems & Jewellery Export Promotion Council for supplying the photocopy of applications which were being sent by "Gemmes Due Monde" for giving advertisement in the Magazine "Gems & Jewellery ". Reply was received through letter dt. 3rd Jan., 1984 (photocopy enclosed) and only part information was supplied by stating that full records were not available. In any case advertisement can be given by Gemmes Due Monde in Gems & Jewellery even it is a business concern that is partly or wholly owned/substantially controlled by the partners of assessee firm. Moreover the close connection of the assessee with the business house named as "Gemmes Due Monde" established in Switzerland cannot be ruled out and is in fact very much definite as is evident from the legalised documents. The assessee had claimed through written submissions dt. 17th Dec., 1984 the invoicing at double the original price was being done by Salas SA to Eastrade Emerald Corporation and Eastrade Inc. New York to help them to inflate their purchase price. But obviously the claim is without any basis and the assessee agreed that he had no evidence whatso....
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....rue and correct and that Salas SA used to give confidential index card number to almost all the exporters. In the end the assessee claimed that considering, no conceding, that the assessee had indulged in under-invoicing then the commission charged by Sales SA and debited to the accounts of the assessee and the freight expenses and insurance expenses, etc., incurred on reshipping and charged from the assessee should be allowed as deductions. The relevant lists of such expenses under different heads were prepared by the assessee from legalised document No. 71 to 74. Total expenditure under different heads on re-shipping the precious stones, sent by the assessee firm under invoice dt. 18th Feb., 1967, 20th Feb., 1967 and 21st Feb., 1967 to actual buyers in New York incurred by John Ashlyn and charged from the assessee firm has to be allowed as deduction". Assessment Year: 1968-69 "For this purpose, instance of the very first invoice sent on 29th April, 1967 is being taken from the stage of sending proforma invoice to the stage of final invoice. First of all emeralds were sent by the assessee firm to Veronica through invoice dt. 29th April, 1967 and lot numbers given were 99 to 19....
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.... in para 3 above. (ITO should attach the photocopies of all the legalised documents which have been referred to in this para 5 of the directions issued under s. 144B)". "It has been noted that a statement of account as on 10th Nov., 1967 was prepared by John Ashlyn and this statement is available in the form of legalised document No. 79 and 80 and photocopies of these legalised documents are attached alongwith the order for asst. yr. 1967-68. Below this statement, Shri John Ashlyn had written: "Perused and approved by Rashmi on visit to Geneva". The assessee firm had expressed ignorance about this noting but it had been seen that Shri R.K. Jain, partner of the assessee firm had gone to Geneva on that date and he had also made an application to the bank at Geneva for issue of travellers cheques. For this purpose reference may be made to legalised document Nos. 94 &95. which do have the signature of Shri R.K. Jain, partner. Hence it is clear that Shri R.K. Jain had gone to Geneva for approving his account and had actually approved the account. Thereafter under the instructions from Shri R.K. Jain almost the entire balance i.e. $ 1,10,000 equal to 4,73,000 SF which stood to the cre....
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....so where similar attempt at under invoicing had been made. These facts have duly been accepted by other exporters of Jaipur and they have also accepted that entries made by John Ashlyn in his account books under similar circumstances and in similar manner were correct. For this purpose reference may be made to the statement of Shri Hari Krishan Jajoo, recorded by the Asstt. Director on 17th Jan., 1980 and photocopy of this statement should be enclosed alongwith the final assessment order (Annexure F to the final order). In this statement Shri H.K. Jajoo had accepted that they had been sending the invoice from India at 50 per cnet of the actual price and that they are paying commission to Salas SA for helping them in this process and that goods were sent to actual buyers at double the invoice price and that statements of account of his firm kept in the books of Salas SA were true and correct and that Salas SA used to give confidential index Card No. to almost all the exporters. In the end the assessee claimed that considering, not conceding, that the assessee had indulged in under-invoicing then the commission charged by Salas SA and debited to the account of the assessee and the f....
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....ook page 1 and submitted that for asst. yr. 1967-68, the assessment was re-opened under s. 147(1) on 30th March, 1976. The assessee filed return under protest to this notice on 14th April, 1976. The re-assessment was made on 27th March, 1980 on a total income of Rs. 12,82,429, making an addition of Rs. 50,000 under s. 69 of the Act. On an appeal filed by the assessee against the said order, the CIT(A) vide his order dt. 11th June, 1980 had set aside the assessment so made. This set aside assessment was pending on the day when the reasons were recorded and also on the day when the fresh re-assessment notice dt. 10th Feb., 1981 was issued on the assessee. He further submitted that the set aside re-assessment is still pending and has been not concluded. His objection was that when the assessment as a consequence of re-assessment notice was still pending, issuing of a second notice under s. 148 was not valid and, therefore, the initiation itself was totally against the very provisions of the IT Act. He further submitted that the Department had preferred appeals against the order of the CIT(A) dt. 11th June, 1980 and the matter was restored to him by the order of the Tribunal dt. 19th M....
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....ith the statement, which at pages 53 to 57, which give the reference to the lot numbers, No. of stones, weight in carat, rate, value in Dollars as well as Rupees, as was re-imported. (on their rejection by Salas), their subsequent sale to parties in U.K. and other places. Referring to this, the submission was that the value at which it was re-exported was almost at the same value at which it was originally consigned to M/s Salas. The point he was emphasising was that the authorities, i.e., both Enforcement Directorate as well as the IT Department are fully accepting the undisputed fact that the value at which the goods re-exported represent the true and full invoice value of the goods, which were were returned back originally by Salas and there is hardly any difference between the value at which it was re-imported and later re-exported. The point which Mr. Vaish was emphasising was that over 60 per cent of the goods, which were returned back by M/s Salas and exported subsequently at almost the same value, are fully accepted by both the authorities. They are doubting the other part of the consigned sale made to Salas, which M/s Salas alleges to have sold on behalf of the assessee at....
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....Referring to the telegram, which was one of the basis for the allegation of Salas that the goods are exported at double the value contains a stamp of the Post Office dt. 21st Nov., 1967 and refers to invoices of the assessee dt. 18, 20, 21 Feb., which had already been sold to him. The emphasis made by the assessee was that almost after 9 months he purported to have sent a telegram to his office from Hong Kong stating that the goods were under-invoiced, which clearly goes to indicate that this document was a fabricated one and the only purpose was to harass the assessee and to malign the assessee. Referring to the copy of the invoice which has been provided by the Department as annexure to the order, the submission was made that the Customs Department at Switzerland had provided its seal on this invoice in satisfaction of reasonability of the invoice. The counsel for the assessee then referred to the complaint filed by Mr. John Ashlyn in Rajasthan in the Court of District Judge, wherein he had implicated several persons that they had been trading with him only for purpose of sending the goods to Switzerland at half the price, to be only subsequently sold to parties at double the inv....
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....8, the assessee never had any telex as the P & T Department provided the telex only in Nov., 1968. This, according to learned counsel, clearly indicates that this card was prepared very much after the transactions were discontinued with him. The other notings in the Index Card, the plea of the assessee was that assessee had never advised Salas or entered into any agreement as is indicated in the Index Card and since it had been very clearly brought out that the Index Card was prepared very much after the transaction was discontinued. Placing on any reliance on the Index Card would not be proper and justified for the reasons that they do not indicate the reality of the situation. It was also argued with relevance to the above Index Card at page 23 that during the period of Feb., 1967 to June, 1968, the telephone Nos. of the assessee were 2757, 5557 and 2318 while this has been mentioned as 72757, 75557 & 72318. The submission of the assessee was that this also clearly goes to establish that there are all fabricated documents only to serve the purpose as John Ashlyn. 12.2 The counsel for the assessee also emphasised that there is not even an iota of evidence available on the record ....
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....im, these correspondences clearly indicate that, it was at the instance of the assessee that the name Veronica was suggested by John Ashlyn. Referring to page 31 of the Annexure to the order of the ITO, the submission made by Mr. Singh was that the two parties, namely, M/s Eastrade Inc, and M/s Eastrade Emerald Corporation were already known to the assessee. This, according to him, clearly establishes that the assessee having known the two parties, used John Ashlyn as the mediator by which goods were sent to him at half the value, later to be shown as exports made by him to the known parties at double the value and retain the difference out of India. Referring to page 14 of the Annexure to the order of the ITO, the submission made was that this is a letter from M/s Eastrade Emerald Corporation addressed to M/s Salas in which it has been specifically mentioned that the party had inspected the goods in Jaipur and the goods are returned only for the reason that they turned out to be much more expensive than they wanted to pay for it. Referring to pages 12 and 13, he submitted that it is a copy from the books of Salas, which go to indicate that the difference between invoice value rais....
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....ranshipping his goods through Geneva to his customer in New York. The essential part of these transactions was to double the price of his invoice, to Salas S.A. and retain the difference with us at his disposal. He did not wish the India Customs or other authorities to known that he is dealing with Salas S.A. The modus operandi we adopted for this was to create a fictitious name of Veronica as on account with the Lebanese Bank in Geneva. The sole purpose of this account was to receive goods from R.Y. Durlabhji, Jaipur, to be reshipped in the name of Salas S.A. to his customer, namely, Eastrade Emerald Corpn., New York. Although M/s Eastrade did not know the arrangement was made with Rashmi Jain, they knew the prices at which they were to receive the goods as these were already selected and prices agreed upon in Jaipur. Salas commission on this business was agreed as 2 1/2 per cent of the sales price in view of the anticipated substantial turnover. This collaboration lasted for about one year, after which Rashmi informed us that he could do this business cheaper through Hong Kong. (Photocopies of several documents authenticated by Consulate General of India, and numbered Leg. 220 (....
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....tement, Mr. John Ashlyn had provided copies of the Confidential Index Card maintained by him, copies of ledger account in his books, copies of invoices received by him from the assessee, copies of invoices raised by him on Eastrade Inc. and Eastrade Emerald Corporation, copy of telegram dt. 21st Nov., 1967, copies of correspondence between him and Rashmi K. Jain, copy of letter written by Eastrade Emerald Corporation to Mr. John Ashlyn. The correspondences as have been alleged to have been exchanged between assessee and John Ashlyn have already been reproduced in the initial paragraph while bringing out the facts of the case. 15.2 The question as posed by the assessee was (i) whether the various materials are sufficient enough for formation of a belief of escapement of income or these are only in the nature of raising of suspicions? (ii) The second question posed was, if it were in the nature of suspicions only is the initiation of proceedings under s. 147(a) valid? (ii) For asst. yr. 1967-68, since the re-assessment was still pending after the re-assessment was set aside by the CIT(A), issuing of a fresh notice and proceedings with re-assessment was valid or not, as according to ....
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....g as soon as it is commenced, and until it is concluded". From the above principle as laid down by their Lordships of the Supreme Court, it is clear that if an assessment proceedings could be said to be pending, no notice for re-assessment could be issued and if it is so issued, then it would be a invalid notice. The undisputed facts as has been brought out earlier is that the re-assessment as per the earlier notice was still pending as a consequence of CIT(A) having set aside the assessment. This being so, during the pendency of such re-assessment proceedings a fresh notice under s. 147(a) could not have been issued and since it has been so issued it would take the colour of an invalid notice. This has been so held by their Lordships of the Supreme Court in the case of CIT vs. Ranchhoddas Karsondas (1959) 36 ITR 569 (SC). Since a notice becomes invalid in view of the Supreme Court's decision in the case of CIT vs. Kurban Hussain Ibrahimji Mithiborwala, the re-assessment would become invalid. Therefore, respectfully placing reliance on the aforesaid Supreme Court decisions, we have to hold that the re-assessment proceedings for 1967-68 are invalid in view of the earlier re-assessme....
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.... invoice, which is at page 3 to 5 there is no mention about the assessee, as is contained in the invoice, which is placed at page 40. As per the invoice at page 3 to 5 most of the goods were returned back to Salas and he had provided the credit by 31st May and has re-invoiced on 29th May. Referring to the copy of the ledger account of the assessee in the book of Salas the entry in regard to the said invoice had been made on 30th June only while the invoice supposed to be dt. 29th May. We may also add that there is no entry regarding the goods sent vide Invoice No. 67098 dt. 12th May, 1967. Similarly, the Invoices No. 67048, 67049, 67050 all dt. 21st March, 1967 have been shown as of 30th June and 9th June respectively in the ledger account of assessee in the books of Salas. Much reliance has also been placed on the letter of 13th June, 1967 from Rashmi K. Jain to John Ashlyn, which reads as under: "Dear, John, I have to acknowledge your letter of the 6th June and thank you very much for the same. I thank you for keeping me informed about the Colombian lot and it is just by luck that somebody also has had a chance to get at it before you could. However, I would request you to be ....
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....ortant fact emerges out is that the name of Veronica was suggested by Salas so that the other dealers are not in the know of, who was the customer. There is no dispute to the fact that Salas had no agreement with the assessee for allegedly re-exporting the goods for and on behalf of the assessee to the two New York parties. The revenue came to believe of such an agreement only on the statement of Salas but Salas had no documentary proof to establish such an agreement having existed at all. Instead he tried to support his allegation by providing copies of invoices allegedly raised by him on the two parties in New York, but he again withheld the original consignment invoices as were sent by him. It is rather unfortunate that the Revenue Department did not consider its necessary to ask Salas to provide the copies of the consignment invoices as were originally sent to the two parties. The Department also did not feel it necessary to get the invoices counter-checked with the two parties as to whether the invoices as are said to have been raised on them represent the copies of the invoices raised on them. To our mind, these two steps were absolutely essential, which could only have gone ....
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....ly. 18.3 The FERA s. 18 requires that the exporter shall furnish a declaration that the goods, which are exported by him. the invoices raised for them represent the full export value of the goods. The Enforcement Directorate are primarily concerned with the goods exported out of India realised its full market value. 18.4 On the material collected, the Enforcement Directorate apparently has felt itself satisfied that the allegations made by John Ashlyn about the under-invoicing does not stand the test of evidence and, therefore, apparently had not initiated any proceedings against the assessee. 18.5 We may also observe that though the assessee was provided with the copy of statement made by Mr. John Ashlyn assessee never got the opportunity to cross-examine John Ashlyn, as the Revenue was contending that it was for the assessee to produce John Ashlyn. 18.6 We may also observe that there is no evidence available or collected by the Revenue authorities from the Custom Authorities of Switzerland in connection with these invoices, that they they do not represent the correct value. 18.7 The alleged telegram dt. 20th Nov., 1967 stating about additional insurance coverage required in ....