TaxTMI 
TaxTMI 
TaxTMI 
2008 (11) TMI 276
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....tead 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 s. 40A(3) of Rs. 6,45,88,956 to derive at the taxable profits under s. 80HHC at Rs. 34,23,864. 5. The CIT(A) has erred in confirming the derivation of taxable profit at Rs. 34,23,864 as explained in para 13(4) in the order of AO 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 s. 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 s. 80HHC." 2. The facts leading to the dispute, briefly, are as under: Assessee filed the return on 31st Oct., 2001 declaring income at Rs. 49,56,390. Assessee is a trader in diamonds and VCD rights and claimed deduction under ss. 80HHC and 80HHF of the IT Act, 1961, for the relevant year on account of exports. Assessee's turnover comes to Rs. 6,90,23,486 on account of sale of diamonds from the purchases of Rs. 5,30,87,813. Assessee earned net profit of 23.4 per cent on sales as compared to a net profit of 28.11 ....
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....ed from the assessee and also the details of the parties from whom goods purchased were sold to the assessee. AO 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. AO, vide para 8.4 of his order (has), given the list of parties along with their 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. Investigation revealed that none of the parties are in existence. No local information was available regarding these parties. AO further noted from the bank accounts of these parties that there were cash withdrawals from these accounts. He held, this leads to a conclusion that the deposited money goes back to the assessee. 6. The modus operandi of the people in diamond busin....
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.... turn purchased from Anmol Gems, Neelam Exports, who are not traceable according to the AO. 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 AO 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 almost on the same line, i.e. 80 per cent of the deposits are withdrawn in cash. These parties (viz. Parmar Exports and Sagar Gems) are conduit for accommodation bills, AO opined. The margin shown by Rough Stones from the transactions with the assessee is about only 1 per cent. 9. Girish Diam: This party supplied goods worth Rs. 19,35,802, which they in turn purchased from Sanskar Diamond. Summons were issued to Girish Diam and it wa....
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....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 of business and number of transactions is not the criteria to assess the genuineness of the transactions. None of the creditors confessed that the transaction is not genuine. Sales are accepted. Naturally there should be corresponding purchases. Payments are made through proper banking channel. Bank statements are in possession of the Revenue. Eight parties were summoned. All of them were examined. Only two parties, viz. Yash Gems and Pritam Exports have not appeared. But they appeared and filed confi....
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....ak 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 s. 80HHC, AO 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 (excluding exchange fluctuation which is allowed as it being beyond the control of the assessee) at Rs. 6,90,23,486 and the total trading and establishment expenses at Rs. 2,93,120. The difference of Rs. 6,87,30,366 after deducting the expenses was treated as such. The actual cost of purchase and expenses treated at 94 per cent of the sales, which comes to Rs. 6,48,82,076. He allowed indirect expenses to the tune of Rs. 2,93,120. AO, thus treated the actual purchase at Rs. 6,45,88,956, whereas the assessee has shown only Rs. 5,30,87,813. He also made an addition under s. 40A(3) being 20 per cent of the cas....
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....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 AO is pre-determined, pre-mediate and based only on presumptions and assumptions, ignoring the facts on record. It was further submitted, assessee was not required to prove the details of the sources/transactions of the assessee's suppliers. Even the details collected were not put to the assessee, which is violative of principles of natural justice. Assessee established the identity of its creditors. Relying upon the decision of the Hon'ble Gauhati High Court in the case of Nemi Chand Kothari vs. CIT (2003) 185 CTR (Gau) 635 : (2003) 136 Taxman 213 (Gau). It was contended, if the assessee proved the source, it was not necessary for the assessee to prove the source of sources. In the case of the assessee, the creditworthiness of the creditors is established. Only the sub-creditors had no capacity, ....
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....well. Assessee further objected the finding of the AO 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 regarding holding of stock for a very short period. It was irrelevant, it was submitted. It can vary from party to party and at best it can form part of business terms unrelated to hypothetical figures. 21. Considering that during assessment proceedings no opportunity was provided to the assessee to contradict the evidence gathered by the AO, the matter was remanded back to the file of AO for providing assessee an opportunity to cross-examine and to controvert the evidence gathered. Assessee was given copies of statements recorded during the course of assessment proceedings and was asked to appear for cross-examination of the parties on 7th Jan., 2005, to be conducted on 19th Jan., 2005 and 20th Jan., 2005. However, on 18th Jan., 2005, assessee's representative appeared and stated that cross-examinatio....
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....as a marriage in the family of the assessee on 20th/21st Jan., 2005. Assessee also objected the following: CIT(A) remanded the matter just to cross-examine the parties, whereas the AO has taken fresh statements without assessee's presence. Assessee further submitted "the fresh cross-examination of all the parties reveals that a set of standard questions have been put to each party and that the statement of replies recorded. All these have been reproduced in the remand report. In not a single case has any of the parties examined stated that accommodation bills have been provided to the assessee or that cash has passed from these parties back to the assessee. This is a mere presumption which the AO has made on the basis of an examination of a few parties who have no business connections with the assessee; they have only business connections with the purchasers or sellers of the assessee. The alleged statements of third parties cannot be relied upon to make fresh additions in the case of the assessee in the absence of some direct linkage of evidence which goes to show that the assessee has in fact adopted dubious means to obtain any unfair advantage. In this connection we have already....
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....ent of purchase consideration in order to increase the profit ratio, giving rise to earning of unrealistically high profits which are eligible for deduction under s. 80HHC of IT Act, 1961. Your actual profit from export of cut and polished diamonds is, therefore, proposed to be restricted to 5.4 per cent as against the same declared by you at 23.4 per cent of the total purchase consideration. This means that you have inflated your profits by about 18 per cent. In other words, I am inclined to agree with the AO regarding his observation that you had suppressed the purchase price for inflating the profits. The inevitable conclusion which emerges from these facts is that you are making higher payment in cash for the purchase of diamonds but issuing cheques of lesser amounts, as per the purchase invoices, meaning thereby that you were having lesser funds available to meet the subsequent purchases. Hence, the adjusted peak investment after taking into account the inflated profit rate, is proposed to be worked out as per the abovementioned table computing the unaccounted peak investment at Rs. 4,67,01,433. This amount of Rs. 4,67,01,433 as computed above, is proposed to be taxed as your ....
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....esorted to this measure." 27. It was further submitted that part of the current assessment year is covered in the block assessment and in the block assessment the suppliers like Neha Gems and Rough Stones appeared before the AO with their books of account, bills/vouchers and confirmed the transactions with the assessee. Assessee also furnished confirmations for the remaining suppliers to establish the genuineness of the purchases. Even the Dy. Commr. of Customs, Mumbai, handling diamond exports has confirmed that all the export of diamond transactions of the assessee are genuine and he further found that the statement of Shri R.A. Pawaskar was contradictory and hence he held "it is not worthy of credence". Assessee submitted, while framing the block assessment, the Revenue has given a clean chit but for part of the assessment year taken steps just contrary to the one taken in the block period. Hence, assessee requested, the enhancement proceedings are to be dropped. 28. However, the learned first appellate authority rejected the claim. He held that AO had fixed the opportunity of cross-examination on 19th and 20th Jan., 2005 not with an intention. The marriage was to take place o....
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....g the purchases of diamonds than what is disclosed in the regular books of account. He held, assessee recorded only 82 per cent of the actual expenditure on effective purchases of diamonds. In other words, the balance 18 per cent of the expenditure was unexplained. Hence he held, the provision of ss. 69B and 69C are clearly applicable in the instant case of the assessee. 30. CIT(A) further held, the export of diamonds and receiving the sale consideration in foreign exchange has not been disputed. There cannot be any sale without purchase. The only conclusion is that the assessee purchased the exported diamonds against cash payment in open market and merely obtained accommodation bills from the above seller parties. This is a reasonable conclusion. He further held, assessee has shown unreasonably high profit ratio, i.e. 23.4 per cent in respect of the same diamonds, whereas the other parties earned profit of only 1 per cent from the assessee. He held, the high profit earned by the assessee against the very meagre commission earned by the sellers also indicates that the assessee was showing unreasonably high rate of profit to claim the benefit under s. 80HHC. He held, hence the find....
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.... of Rs. 6,45,88,956. CIT(A) held, the decision relied upon by the assessee in the case of CIT vs. Banwarila1 Banshidhar (1998) 148 CTR (All) 533 : (1998) 229 ITR 229 (All) is distinguishable on facts. On the other hand, he confirmed the disallowance relying upon the decision of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC) and the decision of the Hon'ble Punjab & Haryana High Court in the case of Chanana Associates vs. CIT (1997) 137 CTR (P&H) 216 : (1997) 225 ITR 72 (P&H). Aggrieved by the above order, assessee is in appeal before the Tribunal. 32. Learned counsel for the assessee submitted, there was search and seizure action in the instant case of the assessee during the middle of the year, i.e. on 26th Sept., 2000; though this appeal does not emanate from the block assessment and that block assessment order is at pp. 126 to 140 of the paper book. AO cannot ignore the facts entirely. In that case the purchase and sales are accepted and the books of account were found correct. Assessee was asked to file confirmations. Confirmations were filed. All the purchase parties are assessed to tax. They are esta....
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....ansactions of the assessee were stage managed. It is pointed out by AO in para 7.5 of his order. It is stage managed, AO held, because the assessee's turnover is Rs. 6,90,23,486 and the purchases comes to Rs. 5,30,87,313, taking the net profit on sale of 23.4 per cent as compared to 28.11 per cent in the previous year. AO found fault with this profit vide para 6 of his order because according to the AO "the income of the assessee was non-taxable in the last assessment year as deduction under s. 80HHC was 100 per cent and during the relevant assessment year it is at 80 per cent. The fall in GP from 28.11 per cent to 23.4 per cent is therefore, quite abnormal and does not seem to have any bona fide reason but for the limitation of deduction during the relevant year from 100 per cent to 80 per cent being done as per IT Act". AO further held, the expenses claimed, average comes to only 0.003 per cent and 0.004 per cent for the asst. yrs. 2000-01 and 2001-02, which is quite abnormal. The time gap between the purchases and sales are too short, i.e. about less than 10 days. Another reason given by the AO for suspicion is that the assessee does not even pay the purchase parties when it buy....
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....er comes to more than Rs. 500 crores. The profit earned is about Rs. 10 lakhs or less; whereas the assessee from 11 transactions made Rs. 1.66 crores GP. It is just to avail the benefit under s. 80HHC. 36. Learned counsel also objected the peak credit working by the Revenue authorities. Even on the peak credit working, 18 per cent was further taken as unaccounted cash because assessee's profit was taken at24 per cent, whereas actual profit was about 6 per cent. The case of the assessee before the CIT(A) was that the assessee's family members are in the business for more than 20 to 25 years and are assessed to tax regularly and the assessee has declared Rs. 73,44,023 under the head "Business", etc. which did not satisfy the AO. The findings of the AO are based on some statements recorded from third parties with whom assessee had no dealings or transactions. In fact the books of account. of the assessee have not been rejected. The only comment was that the profit declared by the assessee is unreasonably high. The above conclusion was arrived at on the basis of some statement recorded from Shri Rajan A. Pawaskar, which in fact (was) rejected by the Customs Department as untrustworthy....
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....d, none of the parties denied the sales to the assessee. This is also part of the record. Merely huge cash withdrawals are made from the accounts of the purchase parties does not justify the theory of bill accommodation, learned counsel contended. Not a single party was questioned about such cash withdrawal or the withdrawal ever directly or indirectly connected to the assessee. These crucial questions were never put to any of the purchase parties. Cash withdrawal, claimed to have reflected in the bank statement of the third parties, is not within the knowledge of the assessee. It was never put to the assessee. Even if that happened, how the assessee could be fastened with such liability that the money carne back to the assessee, learned counsel contended. Assessee was subjected to search and seizure action under s. 132 on 20th Sept., 1990. No incriminating material or anything else was found in the course of such search proceedings even remotely hinting that the assessee is engaged in bill accommodation. In the absence of any concrete evidence, the AO as well the CIT(A) was not justified in rejecting the purchases reflected in the books of account, holding that these were cash pur....
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....ey sold the goods to the assessee is being ignored. This pick and choose method is not acceptable, learned counsel submitted. 39. Learned counsel further submitted, legally also the case fails because the rules of natural justice have not been observed. While framing the assessment order, the assessee was not given opportunity to cross-examine the parties and subsequently deliberately fixing cross-examination on dates inconvenient to the assessee due to marriage in the family. Learned counsel, relying upon the judgment of the Hon'ble Supreme Court in the case of Tin Box Co. vs. CIT (2001) 166 CTR (SC) 509 : (2001) 249 ITR 216 (SC), submitted that "an assessment made without giving the assessee an opportunity of setting out his case was liable to be set aside". So also, the Hon'ble Supreme Court observed in the case of Dhakeswari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC). Learned counsel submitted, if the AO proposes to use any material against the assessee, which is obtained by private enquiry, it should have been communicated to the assessee so as to know full particulars of the case and the failure to do so vitiates the case of the Revenue. For the above proposition, lear....
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....ned counsel submitted, the orders of the Revenue authorities are liable to be set aside. 42. Objecting the above, the learned Departmental Representative briefly made the following submissions: The contention of the assessee that the purchases were accepted in earlier years is of no relevance. Assessee-group trades in VCD rights. Assessee was not in diamond trade, which was formed on 7th Jan., 2000. In fact, this is the only completed first assessment year. There is no long past history of acceptance or rejection. Further, each year is a separate year and acceptance or rejection in preceding year has no much relevance except on the basis of facts for every year. 43. The learned Departmental Representative further submitted, the fact that no adverse evidence was found in block assessment completed on 27th March, 2003, where purchases were examined, parties were summoned and purchases and sales were held genuine as assessed at nil also has no much relevance. The learned Departmental Representative submitted, it is well-settled position that block assessments have to be completed on the basis of material found during the course of search and not on the basis of post-search inquirie....
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....he diamonds and supply of goods. In the light of such glaring evidence it is for the assessee to prove that the assessee had in fact purchased the goods from the alleged sellers and also rebut the evidence gathered by the Department. When confronted, the assessee shied away. Assessee cannot take shelter of s. 106 of Evidence Act or the decisions of the Courts, which have been rendered in different context, like S. Hastimal vs. CIT (1963) 49 ITR 273 (Mad). The learned Departmental Representative submitted, the decision relied by the assessee of the Hon'ble Gauhati High Court in the case reported in (2003) 185 CTR (Gau) 635 : (2003) 136 Taxman 213 (Gau) has no relevance. In the present case, the AO has discharged the onus but the assessee has not made any efforts to controvert the evidence collected by the Department to prove that the purchases shown are genuine. 45. Learned Departmental Representative also objected assessee's plea that the assessee was not given proper opportunity to cross-examine the parties, even though they were witnesses of the Department. The assessee relied upon the bills given by these parties, though assessee claims that they are the witnesses of the Depart....
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....tive submitted, two parties were not at all found. Assessee reported to have filed their confirmations during the block assessment, but as rightly noted hereinabove, this does not absolve the assessee from furnishing their new address. In the case of remaining parties, on examination, the following anomalies were noticed: All the purchase parties of suppliers are based at Surat. All of them have address at Sardar Diamond Complex, Surat, except for Rough Stones purchase parties. None of these parties were found at the given address. Veni Gems, Saroj Diamonds and Mahavir Exports having same Mumbai address and have similar purchase parties. Neha Gems and Shree Nakoda Exports have also same Mumbai address and have similar purchase parties. Since the Surat parties' genuineness was in doubt, the matter was referred to Investigation Wing, Surat. Enquiry revealed that none of the above parties (was) in existence. There was no local information available regarding any of these parties. Hence bank accounts of these parties were traced and it was seen that there were huge cash withdrawals from these accounts, RBI guidelines states of reporting of Rs. 10 lakhs and above cash transaction. To e....
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....ax records of the parties shows very high creditors and debtors ratio, meaning that most of the trade is carried out on credit basis. It is not a mere coincidence that all the third parties discontinued the business within a year or so. None of the parties found to be maintaining Jangad to prove the movement of goods. The proprietors and partners appear to be men of no means. All of them are staying in small rented accommodation in Mumbai suburbs. None of them owns any residential or commercial property, which are curious circumstances. The argument of the assessee that the assessee exported diamonds and it is certified by the Customs Department goes against the assessee. It means the assessee purchased the material from undisclosed sources and exported, exactly the case of the Revenue. Hence the learned Departmental Representative submitted, the peak worked out was the correct method to find out the investment and the disallowance made under s. 40A(3) being cash purchases to the tune of 20 per cent is also correct. Hence he submitted, recomputation of deduction under s. 80HHC and the profit is on the right steps. Learned Departmental Representative submitted, the orders of the Rev....
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....t purchased the goods/diamonds from these parties. AO mentioned that two parties have not filed confirmations, viz. Yash Gems and Pritam Exports. But the case of the assessee is that for the very same year in the block assessment these parties have confirmed the purchases. We are of the view that on the basis of the above facts the reasoning of the AO that these parties have not confirmed their dealings with the assessee cannot be a factor that goes against the assessee. The facts demand that the parties confirm the transaction and also in response to notice, they appear. One of the objections of the AO is that though the parties appeared and confirmed the transactions, they are not existing at the given address. This alone cannot be the reason for rejection of their confirmation. 52. One of the contentions of the assessee is that the assessee did not get proper opportunity to rebut the statements taken from the third parties/Surat parties. When the matter was carried before the CIT(A), he called for the remand report from the AO and also directed the AO to give the assessee an opportunity to cross-examine the parties. AO recorded statements from all these parties and the date was....
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....Rs. 78.2 crores. That means they have withdrawn about Rs. 20 lakhs per day. Again, there is nothing on record to show that where the money went ultimately. It is almost the same case with every party. This most vital point was never even suggested to the parties. Therefore, the basic theory of the AO that the amount paid by the assessee by cheque ultimately reached back to the assessee is not a finding based on any facts. Unless there is some evidence in support of the claim that the money reached back to the assessee, we are unable to hold that the finding arrived at by the Revenue authorities is the right one. Suspicion alone however strong is not sufficient. It is true, the AO clearly established the modus operandi in this line of business. But unless there is some evidence against the assessee, however weak, the decision has to go in assessee's favour. 56. The CIT(A) found that the assessee made purchases to the tune of Rs. 5,30,87,813 and resorting to s. 40A(3), he disallowed 20 per cent being the cash purchases. Again we have to say that there is not an iota of evidence, except the reasoning of the AO, to show that the assessee made purchases by making cash payments. 57. He....
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.... not be that relevant strictly, search was conducted during the period under consideration. Nothing incriminating was found during the search action. There is no evidence to show that the money has come back to the assessee or claim of the payment as bogus. In such circumstances, for the subsequent period to hold that the entire purchase is bogus is a conclusion that is very difficult to arrive at. Another reasoning of the AO to come to the conclusion that the assessee had not actually purchased the diamonds from the immediate suppliers is that their suppliers from Surat had no capacity and even if they had the capacity, there is no evidence that they transported it to Mumbai. According to the AO, the diamonds worth crores of Rupees, if they claimed to have transported, these diamonds should have been insured and the mode of transportation or at least the details of tickets, etc. of the persons who brought diamonds should have been mentioned. Be that as it may, we are not making any proposal. No question has been put to immediate suppliers to the assessee whether they purchased the material from the open market other than the parties who said to have supplied them from Surat. There....