TaxTMI 
TaxTMI 
2005 (11) TMI 432
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....rket value being 1/0.82 times of the peak credit of Rs. 2,83,17,204. (4)The CIT(A) has erred in confirming the conclusion of purchases at Rs. 6,45,88,956 in cash instead of credit purchase as declared by the appellant and thereafter adding Rs. 1,29,77,912 being 20 per cent of alleged cash purchase under section 40A(3) of Rs. 6,45,88,956 to derive at the taxable profits under section 80HHC at Rs. 34,23,864. (5)The CIT(A) has erred in confirming the derivation of taxable profit at Rs. 34,33,864 as explained in para 13(4) in the order of Assessing Officer instead of Rs. 32,75,841 as declared by your appellant. (6)The CIT(A) has erred in confirming the disallowance of Rs. 1,29,77,912 under section 40A(3) of the Act being 20 per cent of alleged cash purchase of Rs. 6,45,88,956 and also adding the said amount to the profit for the purpose of calculating income under section 80HHC." 2. The facts leading to the dispute, briefly, are as under : Assessee filed the return on 31st October, 2001 declaring income at Rs. 49,56,390. Assessee is a trader in diamonds and VCD rights and claimed deduction under sections 80HHC and 80HHF of the Income-tax Act, 1961, for the relevant year ....
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....ed as bogus purchases. 5. When summons were issued under section 131, all the parties attended except Yash Gems and Pritam Exports, who were found not existing at their given address. However, Assessing Officer records that all the parties confirmed that they made sales to the assessee and gave details of payments received from the assessee and also the details of the parties from whom goods purchased were sold to the assessee. Assessing Officer noticed that though all of them confirmed the transactions, none could reply satisfactorily the amount of credit given, i.e. number of days and their profit margin, which was around 1 per cent or less, though they stated at times they were purchasing goods on commission basis. Assessing Officer, vide para 8.4 of his order (has), given the list of parties along with then suppliers. He noticed, all the supplier parties are from Surat, whereas the purchase parties are from Mumbai. He further noted that though all the suppliers to the assessee's sellers are based at Surat, none of these parties were traceable. The existence and bona fides of these parties was referred to Investigation Wing of the Department at Surat. Investment revealed that....
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....more layer. These people are strong players and their bill commands more price than a regular bill provider. Assessing Officer then discussed the details of the parties, briefly stated as under. 7. Neha Gems : The party had a turnover of Rs. 22.9 crores and net profit of Rs. 1,19,959, which is effectively 0.1 per cent. This party supplied to the assessee diamonds worth Rs. 49,12,740. Neha Gems in turn purchased from Anmol Gems, Neelam Exports, who are not traceable according to the Assessing Officer. They filed returns showing commission income. Parties like Gautam Gems and Neelam Exports are essentially in the name of proprietors and are in existence for a short period. Gautam Gems had transactions of Rs. 14.25 crores; 80 per cent are cash withdrawals and the average daily balance comes to Rs. 10,000 or so. Neelam Exports had transactions of Rs. 15.08 crores; 80 per cent of the deposits withdrawn by cash and the average daily balance comes to Rs. 10,000. Hence Assessing Officer held, all these can be safely concluded as accommodating parties. 8. Rough Stones : This party supplied goods worth Rs. 95,05,440 to the assessee. They purchased from Parmar Exports and Sagar Gems alm....
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....hom the purchases (were) made by the assessee were examined. It was found that in almost all cases the goods which were sold to the assessee were shown to have been purchased from the parties who are non-existent and their bank accounts show only cash withdrawals from various deposits. Hence Assessing Officer came to the conclusion that in most of the cases cheques are finally encashed as self withdrawal. Assessee made a profit of about 24 per cent, whereas all other parties made profits of around 1.5 per cent or less. Assessee, in response to the above notice replied, briefly as under on 24th March, 2004 : Genuineness of the export sales is accepted. Quantity of purchase and sales tallied. At the time of search, no diamonds were found to be in possession of the assessee and no discriminating materials seized to show that the assessee had mala fide transactions or in possession of diamonds. Undoubtedly the creditors are in diamond business. They had office in Panch Ratna, Opera House. All of them are examined and the payments were made by crossed account payee cheques. Transactions of purchase and sales were examined and accepted in the block assessment by the Department. Size o....
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....estment. 15. Assessee shown a net profit of 23.4 per cent during the year under consideration. Assessing Officer held, it was not realistic profit. The profit could be somewhere 5 to 6 per cent. He held, in view of this it can be presumed that the assessee has invested around 18 per cent in unaccounted cash to inflate its net profit to avail the deduction under section 80HHC. In view of the above, he computed Rs. 3,45,33,175 as unexplained investment in the business of the assessee, being the cost of diamonds, which were exported at market value being 1/0.82 times of the peak credit of Rs. 2,83,17,204 (the same being 82 per cent of market price), which covers the actual cost of diamonds at the prevailing market rate, taking into account the fair market profit of around 6 per cent. 16. While computing the deduction under section 80HHC, Assessing Officer noted, the total purchases reflected in the books of account of the assessee was Rs. 5,30,87,813 and he calculated the net profit at around 5 to 6 per cent in the case of trading as per the market conditions. The purchases of the assessee were rejected and he estimated the purchases. He held, the sales during the year (excludin....
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....urmises and recording certain transactions of the parties with whom the assessee had no direct dealings or any transactions. Assessee's books of account have not been rejected. The actual reason was unreasonable high profit, which led the Assessing Officer to an adverse inference. Assessing Officer has relied upon the evidence of ex-accountant, Shri Rajan A. Pawaskar, whose statement was recorded on 26th September, 2002, vide which he stated that assessee obtained bogus bills and made bogus claims of profit to avail benefit under section 80HHC. The conclusions arrived at by the Assessing Officer in the instant case of the assessee and the block assessment is quite contradictory to each other. The Dy. Commr. of Customs, Mumbai, handling the diamond exports confirmed that all the export of diamond's transaction of the assessee is genuine. It had documentary evidences. Dy. Commr. of Customs held that the statement of Shri Rajan A. Pawaskar is self contradictory and he himself has retracted from the statement subsequently and disproved by several documents, which is also part of the seized material. Hence assessee contended, the finding now arrived at by the Assessing Officer is pre-de....
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....n'ble Gujarat High Court in the case of CIT v. M.K. Brothers [1987] 163 1TR 249, was submitted, this finding of the Assessing Officer is illegal and cannot survive. It was further submitted, in fact details of purchase payments and sales realisation have been verified from the books and found to be correct and also confirmed by the respective suppliers and purchasers, including payments made/received. Hence, the assessee has discharged the onus. The parties have confirmed the transactions. 20. It was further submitted, in the block assessment Assessing Officer himself has recorded that suppliers like Neha Gems and Rough Stones appeared before him with their books of account and bill vouchers and confirmed the transactions. Assessee also furnished confirmations from other parties as well. Assessee further objected the finding of the Assessing Officer that Yash Gems and Pritam Exports have not filed the confirmations. Physical enquiry was conducted at the given address and the parties could not be found at the given address. Assessee submitted that the transactions of very same parties have been proved in the block period referred to above. Assessee further objected the remark reg....
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.... no. It is almost the same with every party. One of the questions put to the party was since the diamonds supplying parties are based in Surat, to explain how the diamonds were transferred from Surat to Mumbai and also to provide evidence in the form of expenses incurred on insurance, couriers, transport expenses, etc. The answer was, the diamonds were brought by couriers and the expenses were being debited to P&L a/c by self-made vouchers and the goods transported wore not insured. 22. Priyanka Exports, Mahavir Exports, Veni Gems, Rough Stone, Girish Diam, Shree Nakoda Exports and Neha Gems were all questioned. Assessee was provided copy of the remand report on 11th March, 2005. Assessee, in reply, submitted, though the Assessing Officer was requested vide letter date 10th September, 2004 to provide opportunity to cross-examine, however, Assessing Officer chose the date 19th and 20th January, 2005, when there was a marriage in the family of the assessee on 20th/21st January, 2005. Assessee also objected the following : "CIT(A) remanded the matter just to cross-examine the parties, whereas the Assessing Officer has taken fresh statements without assessee's presence. Assessee ....
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....ducing the total amount of payments made by you to the seller parties from the total amount of the value of purchases on a transaction-wise basis. However, the Assessing Officer has not taken into account the purchases made by you from M/s Veni Gems while working out the unaccounted peak investment. The Assessing Officer, further, worked out your unaccounted peak investment on the basis of the dates of payment as per your bank statement instead of working out such peak investment on the basis of the dates of various purchase bills. The correct amount of peak investment, according to me, needs to be worked out on the basis of the following table : THE REVISED WORKING OF PEAK CREDIT On the basis of above discussed facts, I propose to compute your unexplained investment in purchasing diamonds against cash payments, after considering the supposed reuse of cash received back at the time of making cheque payments, at Rs. 4,67,01,433 as against the same computed by the Assessing Officer at Rs. 3,45,33,175 after upholding the Assessing Officer's point of view regarding your understatement of purchase consideration in order to increase the profit ratio, giving rise to earning of unrea....
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....ll is required to be made in the hands of such parties. All the parties in question who have been examined have confirmed that they have filed necessary returns of income and that they have been assessed to tax on such income. It is therefore, submitted that on a plain and simple reading of both the above sections, the proposed addition on account of peak credit of Rs. 4,67,01,433 cannot be made." 26. Regarding the peak credit also the assessee objected as under : "Peak Credit In working out the peak credit, the Assessing Officer, in his remand report has added 18 per cent of the purchase price and worked out the market value of the goods stating that this figure is the credit enjoyed by the assessee, i.e., how the peak credit has been worked out at Rs. 4,67,01,433. If one looks at the assessment order in addition to this figure, there is an addition of profit of Rs. 34,23,864 on account of diamond exports. If the profit of 18 per cent has already been included in working out the peak credit, then the addition of Rs. 34.23 lakhs as taxable income amounts to a double addition and cannot be sustained. Probably in his enthusiasm to inflate the figure as much as possible, the ....
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....s convince that the purchase consideration paid by the assessee through cheques has been finally withdrawn in cash after its movement through various bank accounts, which leads to a reasonable suspicion that the amount has been received back by the assessee in cash. Hence he agreed with the Assessing Officer. He held, mere production of sale bills and payments through cheques is not conclusive proof that the assessee in fact purchased the impugned goods from the same parties if the subsequent investigation indicates that all this was stage managed. 29. CIT(A) held that the addition can be made on the basis of preponderance of probability and it is not necessary to prove the facts leading to such an addition, beyond any reasonable doubt. In the case of the assessee, he held, the facts clearly indicate that the assessee has not purchased the diamonds from its disclosed seller parties against cheque payments and the only reasonable conclusion that can be drawn is that same were actually purchased against cash consideration in open unorganized market. Hence he held, provision of sections 69B and 69C is applicable in the instant case of the assessee. He held, assessee has understated....
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....nd the same is required to be increased to 100 per cent, i.e., Rs. 6,35,83,184 on the basis of the fact that the appellant's real profit in respect of export of diamonds was only 5.4 per cent as against the same recorded at 23.4 per cent in the books of account. For this purpose, the appellant was issued a notice of enhancement under the provisions of section 251(2) of Income-tax Act, 1961. Accordingly, I hold that the appellant's unaccounted peak investment works out to Rs. 3,55,70,422 as per the appellant's own books of account and the same is to be treated as representing only 82 per cent of the real purchase consideration paid by the appellant in view of the fact that the appellant has recorded an unreasonable as well as manipulated profit rate of 23.4 per cent as against the same reasonably estimated at 5.4 per cent by the Assessing Officer. In order to arrive at the realistic unaccounted peak investment, the figure of Rs. 3,55,70,422 is required to be increased to Rs. 4,67,01,433, which will be at par with the 100 per cent value of the purchase consideration actually paid in cash by the appellant. Therefore, the appellant's unaccounted peak investment in effecting purchase of....
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....ties who sold the goods to the assessee. The difference between 6 per cent estimated by the Assessing Officer and the profit disclosed by the assessee is treated as assessee's additional cost. Also on the total turnover the revenue authorities disallowed 20 per cent, resorting to section 40A(3). Assessee is objecting all these. 33. Learned counsel filed written submission dated 23rd September, 2005. The submission can be summed up, briefly, as under : Assessee is a registered firm engaged in trading of diamonds, silver bars and pieces. Assessee is also dealing in VCD rights and claimed deduction under sections 80HHC and 80HHF for the relevant assessment year on account of assessee's exports. Assessee-firm came into existence on 7th January, 2000. PAN No. AACFG5730E by DCCC-3, Mumbai. Assessee filed the return on 31st October, 2001 declaring income of Rs. 49,56,390. Assessment was completed under section 143(3) fixing income at Rs. 3,96,37,587 vide order dated 29th March, 2004. Assessee, aggrieved by the above order, approached the first appellate authority. CIT(A) enhanced the assessed income by Rs. 1,21,68,258. Aggrieved by the above order, assessee is in appeal before the T....
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....mentioned parties, from whom assessee made the purchases. The statements were recorded from all these parties under section 131 and all of them confirmed sale to the assessee and also gave details of the payment received from the assessee/details of parties from whom goods purchased in turn by the assessee. The export of the assessee is confirmed by the Dy. Commr. of Customs, Mumbai. However, the Assessing Officer, in spite of all this, did not accept the fact, which is established on the basis of evidences because of his pre-conceived notion. Learned counsel further submitted, bank accounts of the abovestated parties (suppliers to the purchase parties of the assessee) were traced, which reflected huge cash withdrawals. Assessing Officer stated "RBI guidelines states of reporting of Rs. 10 lakhs and above cash transaction, to evade the same a sum of Rs. 9,95,000 and odd figures are withdrawn everyday on account of cheque deposits in relevant accounts. All the above parties have opened a large number of accounts and the cheque of higher denomination deposited are splitted into convenient amount of Rs. 10 lakhs each and transferred to various bank accounts and then cash is withdrawn ....
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....Hence it was contended, the conclusion arrived at is on the basis of hypothesis and not supported by any material/evidence. Assessee also objected for not providing an opportunity to cross-examine the parties from whom the evidence was considered against the assessee. 37. Learned counsel further objected the opportunity given to the assessee for cross-examination, which coincided with the marriage in the family of the assessee. The cross-examination (was) fixed on 19th and 20th January, 2005, whereas the marriage was fixed on 21st January, 2005. Assessing Officer's action was also objected by the assessee before the CIT(A) on the ground that no fresh interrogation was directed by the CIT(A) and the Assessing Officer went beyond the scope of remand order. The assessee again objected disturbance of peak account. Learned counsel contended, all these objections were overlooked by the CIT(A), merely observing "I am not impressed by the appellant's allegation that the Assessing Officer had fixed the appellant's opportunity of cross-examination on 19th and 20th January, 2005 with any intention to effectively deny such opportunity to the appellant in view of a marriage ceremony taking p....
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....no evidence with the revenue that the account books of the assessee are unreliable or incorrect. In fact, it has not been rejected at all. No purchase has been omitted. No addition has been made on that account either. In the case of St. Teresa's Oil Mills (supra) the Hon'ble High Court held that rejection of books should not be done light-heartedly. Relying upon the decision of the Hon'ble Delhi High Court in the case of Addl. CIT v. Jay Engineering Works Ltd. [1978] 113 ITR 389 , learned counsel contended, books of account are evidence under section 34 of the Evidence Act after the relevant entries are proved or admitted. As the rules of evidence are not strictly applicable to the assessment proceedings, Assessing Officer should accept such books and/or entries therein, barring the special deeming and specific onus provisions, to be correct unless he has in his possession some material to the contrary. In the instant case there is no contrary material except guessing of Assessing Officer. Assessee also relied upon the following decisions : (1)CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78 (SC); (2)Elite Developers v. Dy. CIT [2000] 73 ITD 379 (Nag.); (3)Bedi & Co. (P.)....
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....ugust, 2005, while granting stay. Learned counsel submitted, though prima facie observation of the Tribunal which clinches the idea and the facts "in our opinion the assessee has prima facie discharged the onus by producing the entities from whom it made purchases, more so the entities confirmed the sales to the assessee. In such situation assessee is not required to prove the source of source. Therefore, in our opinion assessee has prima facie arguable case". Hence learned counsel submitted, the following additions are to be deleted : (1)Enhancement of peak credit from Rs. 3,45,33,175 to Rs. 4,67,01,433. (2)Confirmation of addition of cash purchases to the tune of Rs. 6,45,88,956. (3)Addition of Rs. 1,29,77,912 under section 40A(3) on the ground that assessee allegedly made cash purchases of diamonds mentioned above. (4)Re-computing profit for the purpose of claiming deduction under section 80HHC. 41. Learned counsel once again objected the confirmation of the addition made on account of unaccounted investment being Rs. 3,45,33,175 and enhancement of the same further to Rs. 1,21,68,258 by recomputing the peak credit at Rs. 4,67,01,343. Learned counsel submitted, onc....
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....Representative made the following submissions: Out of the ten parties, assessee filed confirmations from six. Remaining two parties filed confirmations themselves, but regarding two parties, viz. Yash Gems and Pritam Exports, no confirmations were filed despite giving various opportunities, as they did not exist at the given address. The fact that confirmations were filed during the block assessment does not discharge the onus cast on the assessee as even summons sent to them came back unserved. In the present case, the issue relates to purchases and not of loan. In case of loan, genuineness is subsequently proved by way of entry through the bank. The averment of the assessee that the assessee has not to prove the source of sources or the origin of origin has no much relevance in the instant case of the assessee. The decisions relied by the assessee is connected with the loan transactions, whereas this is a case of purchase and sale. The purchase does not involve only money/credit but it also deals with material, movement of material/transport, stocking of material and insurance of material if a valuable item as in this case. All these issues are very relevant to prove the genui....
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....and merely examined to reiterate the conclusions arrived at by him during the assessment proceedings. Even otherwise, learned Departmental Representative submitted, the materials collected can be used in the proceedings even if it is not collected by a mode, which is not as per law. The learned Departmental Representative relied upon the decision reported in Pooran Mal v. Director of Inspection (Inv.) [1974] 93 ITR 505 (SC) for the above proposition. 47. Learned Departmentals Representative submitted, the statement of Shri Rajan A. Pawaskar at the time of search on 26th Sept., 2000 is very relevant. This could not be substantiated of course during the course of block assessment, but this can be used against the assessee in the normal assessment. Learned Departmental Representative further submitted, assessee is doing a new business totally unrelated to the existing business of the group and assessee is purchasing the materials without making the payment quite long time. He submitted, it is very material to consider the fact that the assessee's profit is very high, abnormal, about 23 per cent against the normal profit of 5 to 6 per cent in this line of export business. Learned De....
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....sis, which is an impossible situation to imagine. The learned Departmental Representative further submitted, all the eight parties failed to furnish the residential address and telephone number of the parties, who supplied them the diamonds. Further, the parties failed to provide the present business address and telephone numbers of Surat based supplier parties. The parties expressed their inability to produce the supplier parties for verification. The sale invoices of Surat based parties do not bear the telephone number of the said parties. Surat based supplier parties are maintaining bank account in the same branch of the suppliers to the assessee despite the fact that they are not maintaining any office at Mumbai. The opening of bank account in the same branch at Mumbai shows close nexus between the seller parties and the supplier parties but the seller parties could not furnish the abovementioned details. As noted hereinabove, there is no evidence of transportation of the diamond. They are maintaining only self-made vouchers but could not provide any ticket, insurance charges, courier charges, etc. all of which raise curiosity as to how the diamonds are transported from Surat t....
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....he assessee was 28.11 per cent; whereas the assessee was claiming 100 per cent deduction under section 80HHC and in this year it is only 80 per cent. It is true, the percentage of profit is substantially high, but in the absence of any comparative cases brought on record, we are unable to subscribe the view canvassed by the learned Departmental Representative. 51. The second reason for the revenue authorities is that though the assessee had filed confirmation letters from the immediate purchase parties and in response to summons issued under section 131 they attended and admitted the sale; the revenue authorities having knowledge of the modus operandi of the diamond export business, conducted inquiries with the third parties, ail of whom are based at Surat. Either they are not known or if known, most of them had offices in the same building. Their profit is about 1 to 2 per cent; whereas the assessee earned profit of 23.4 per cent. From the above facts, the revenue authorities came to the conclusion that the claim of the assessee that the assessee purchased the goods from 11 parties mentioned in the assessment order at p. 2, is incorrect. Assessing Officer came to the conclusion....
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.... assessee and also the assessee perhaps purchases the diamonds from open market and obtained bills from these parties. None of these facts, except the reasoning, are based on any evidence. 54. The CIT(A) remanded the matter back to the file of Assessing Officer and the Assessing Officer obtained statements from Surat based parties. But going through the statements, we find two of the most important factors have not been brought out of this questioning. First the assessee made the payments through cheques to these parties and these parties in turn also paid to the third parties. The real case of the Assessing Officer is that the third parties (had) withdrawn these amounts in cash and then it reached back to the assessee. But to say the least, no question to a single party has been put, whether the money withdrawn by cash by any of the parties ultimately reached back to the assessee or even to the second party. This is the most crucial point Assessing Officer wanted to establish, but has not established at all. 55. Another reasoning of the revenue authorities is that the assessee's profit is too high, whereas the other/parties who provided the accommodation bills are obtaining ....
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.... by the Customs Department. They rejected Shri Pawaskar's statement. Therefore, the issue that whether assessee exported or not does not arise. The question is whether the assessee purchased the diamonds by paying cash. There is nothing on record to suggest to the above conclusion. The reasoning however powerful cannot take the force of evidence. No evidence has been brought on record to this effect. As we have already noted, not even a single question was put to any of the parties from whom the statements were recorded by the Assessing Officer, as to whether the payment made by the assessee by cheque was withdrawn and paid back to the assessee. In the absence of any other evidence on facts, we are unable to accept the reasoning of the Assessing Officer that the assessee made the cash purchases. 58. In view of the above facts, the further addition made by the revenue authorities, resorting to section 40A(3) also does not survive. In view of the above, we also hold that there is no material to recompute the profits for the purpose of deduction under section 80HHC. 59. We have also noted hereinabove that the Assessing Officer worked out the peak credit at Rs.3,45,33,175 and the....
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....sible in this line of business, at least not a general trend m the market. But then, no similar cases of export have been mentioned anywhere by the Assessing Officer or by the CIT(A) to discredit the assessee's claim of higher profit. Export of the assessee is accepted by the Customs Department, which shows that the export of diamonds cannot be doubted. 62. Coming to the decision relied upon by the revenue authorities reported in the case of Attat Singh Gurmukh Singh (supra) the issue before the Hon'ble Supreme Court was the validity of section 40A(3) of the Act and the applicability of section 40A(3) to payment made for acquiring stock-in-trade. Their Lordships upheld the Constitutional validity of section 40A(3). The Hon'ble Supreme Court held that this section is not arbitrary and does not infringe fundamental right to carry on business. 63. Coming to the decision of the Hon'ble Punjab & Haryana Court in the case of Chanana Associates ( supra), in this case the assessee did not produce any material to show that belief that section 40A(3) was not attracted where the profit was determined on estimate basis after rejecting the book results of the assessee. The facts in the in....