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Facts
The assessee, a partnership firm engaged in manufacturing and export of readymade garments, faced reassessment proceedings initiated by the Directorate of Revenue Intelligence (DRI) based on allegations of bogus transactions, over-invoiced exports, and routing of hawala money. The Assessing Officer (AO) made significant additions to the income for various assessment years, disallowing deductions and estimating income based on these allegations. The assessee's appeals were heard against these additions.
Held
The Tribunal held that the basis of the impugned assessments relied heavily on show-cause notices issued by DRI, without independent investigation by the AO. The Tribunal noted that the findings of customs authorities were set aside by the appellate authority and that the AO did not conduct independent inquiries or provide corroborating evidence. Additionally, a recent order from the Principal Commissioner of Customs was admitted as additional evidence, which had material bearing on the case. Consequently, the appeals were restored to the CIT(A) for de-novo adjudication.
Key Issues
Whether additions made by the AO were based on valid evidence and independent investigation, or solely on DRI's show-cause notices without corroboration. The admissibility and impact of a subsequent quasi-judicial order from the customs department as additional evidence.
Sections Cited
143(3), 147, 68, 69C, 40(a)(ia), 36(1)(va), 80-IB, 194C
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Income Tax Appellate Tribunal, “A” BENCH, CHANDIGARH
Before: HON’BLE SHRI RAJPAL YADAV & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
Assessee By : Shri Tej Mohan Singh (Advocate) – Ld. AR Revenue By : Shri Manav Bansal(CIT) a/w Shri Vivek Vardhan (Addl. CIT) – Ld. DRs सुनवाईकीतारीख/Date of Hearing : 27-05-2025 घोषणाकीतारीख /Date of Pronouncement : 01-07-2025 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. The revenue is in further appeal for Assessment Years (AY) 2002-03 and 2005-06 to 2007-08. The assessee is in further appeal for AY 2005-06. The assessee has also preferred cross-objection for AY 2006-07. The facts as well as issues are substantially the same in all the years. First, we take up revenue’s appeal for AY 2002-03 which arises out of an order of Learned Commissioner of Income Tax (Appeals)-1, Ludhiana dated 12-05-2011 in the matter of an assessment framed by Ld. AO u/s 143(3) r.w.s.147 of the Act vide order dated 22-12-2009. The revenue is aggrieved by deletion of various additions as made by Ld. AO in the assessment order.
The Ld. CIT-DR advanced arguments supporting the assessment of Ld. AO and placed on record order of Pr. Commissioner of Customs (import) dated 06-02-2024 in the case of the assessee group. The Ld. AR opposed any interference in the impugned order. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident partnership firm is stated to be engaged in manufacturing / export of readymade garments.
Assessment Proceedings 3.1 The assessee filed regular return of income at Rs.0.34 Lacs. However, the case was reopened pursuant to search action by Directorate of Revenue Intelligence (DRI), Ludhiana in the case of assessee group in 18-03-2005. Shri Aman Kirpal and Smt. Leela Kirpal were partners in assessee-firm. On the basis of show-cause notices as issued by DRI, various allegations of bogus transactions were made against assessee-group. 3.2 The Ld. AO concluded that no manufacturing activity was being carried out by the assessee and his sister concerns. The assessee arranged for and obtained bogus purchases bills from various firms but purchased inferior quality of material from the market and exported the same at highly inflated prices to fraudulently avail DEPB and Duty drawback. These over invoiced goods were sold to non-existent entities in Russia. The assessee opened accounts in the name of various concerns for routing hawala money received as payments by the Kirpal family in their firms for over-invoiced exports. It was thus concluded by Ld. AO that all sales and purchases as reflected in the books of accounts were bogus. The goods purchased by the assessee were purchased in cash from unknown sources and received abroad by himself / through agent and sold to unknown buyers at unknown prices. To conclude, the assessee was sending unaccounted money abroad through unofficial channels which was brought back in India through realization of bogus exports. The assessee was utilizing his own money for this rotation purpose to claim export incentives viz.
DEPB and duty drawback. These remittances were nothing but unaccounted money of the assessee. Therefore, the receipts were to be treated as cash credit u/s 68. 3.3 The value of FOB export was Rs.179.97 Lacs which was added u/s 68. The Ld. AO estimated expenditure of 6% against the same and made another addition u/s 69C for Rs.10.79 Lacs. The assessee received duty drawback of Rs.27.60 Lacs which was also considered as assessee’s income. Since no manufacturing activity was carried out, deduction u/s 80IB was denied to the assessee. 3.4 In AY 2005-06, similar assessment was framed u/s 143(3) on 31- 12-2007. The Ld. AO added peak credit of foreign remittances for Rs.360.39 Lacs u/s 68 along with estimated unaccounted expenditure of 6% of total foreign remittances of Rs.724.41 Lacs. The assessee reflected misc. Income of Rs.153.91 Lacs which primarily in the nature of DEPB, Duty drawback and CENVAT credit which was considered as other income. The trading results of indirect export, local sales and dyeing charges were rejected and profit of 5% was estimated on these receipts of Rs.122.73 Lacs which led to another addition of Rs.6.13 Lacs in the hands of the assessee. The total income was thus proposed at Rs.563.91 Lacs. This assessment was on the basis of show cause notices issued by DRI. The Ld. AO also proceeded to make alternative protective addition on returned income. The Ld. AO made disallowance u/s 40(a)(ia) for Rs.239.76 Lacs for non-deduction of TDS on labor job work charges. Even if TDS was not required to be deducted on these payments, the expenditure was to be disallowed since the assessee could not substantiate the same with documentary evidences. On the business receipts, business income was estimated at 5%. The misc. income of Rs.153.91 Lacs was actual receipt and was to be taxed as such. The Ld. AO proposed disallowance of Rs.0.20 Lacs u/s 36(1)(va). TDS on job work payment of Rs.2.24 Lacs was paid laid and accordingly, the amount of Rs.2.24 Lacs was also disallowed u/s 40(a)(ia). The total income was thus proposed to be computed at Rs.432.41 Lacs. Finally, the income was assessed at higher figure of Rs.563.91 Lacs which was subjected to first appeal by the assessee. 3.5 In AY 2006-07, similar assessment was framed u/s 143(3) on 30- 12-2008. The Ld. AO added peak credit of foreign remittances for Rs.32.96 Lacs u/s 68 along with estimated unaccounted expenditure of 6% of total foreign remittances of Rs.32.96 Lacs. The assessee reflected misc. Income of Rs.15.58 Lacs which primarily in the nature of DEPB, Duty drawback and CENVAT credit which was considered as other income. The trading results of indirect export, local sales and dyeing charges were rejected and profit of 5% was estimated on these receipts of Rs.184.08 Lacs which led to another addition of Rs.9.20 Lacs in the hands of the assessee. Another addition of Rs.238.24 Lacs was made for direct and indirect exports, the proceeds of which were received in unknown bank accounts. The total income was thus proposed at Rs.297.97 Lacs. This assessment was on the basis of show cause notices issued by DRI.
The Ld. AO also proceeded to make alternative protective addition on returned income. The Ld. AO estimated business income of 5% on trading receipts for Rs.244.70 Lacs. The misc. income of Rs.15.58 Lacs was actual receipt and was to be taxed as such. The Ld. AO proposed disallowance of Rs.0.17 Lacs u/s 36(1)(va). The total income was thus proposed to be computed at Rs.27.99 Lacs. Finally, the income was assessed at higher figure of Rs.297.97 Lacs which was subjected to first appeal by the assessee. 3.6 In AY 2007-08, similar assessment was framed u/s 143(3) on 29- 12-2009. The Ld. AO added foreign remittances of Rs.305.11 Lacs u/s 68 which was allegedly routed through three other group entities. The unaccounted expenditure was estimated at 6%. The misc. income of Rs.27.88 Lacs was taxed as such. The trading income was estimated at 5%. The total income was thus proposed at Rs.355.82 Lacs. This assessment was on the basis of show cause notices issued by DRI. The Ld. AO, in the alternative, on protective basis, disallowed bad debt claim for Rs.111.83 Lacs since sales were bogus. The Ld. AO proposed disallowance of Rs.0.44 Lacs u/s 36(1)(va). The assessee returned loss of Rs.70.98 Lacs. After proposed additions, the income was computed at Rs.15.28 Lacs. Finally, the income was assessed at higher figure of Rs.355.82 which was subjected to first appeal by the assessee. Appellate Proceedings 4. For AY 2002-03, the assessee assailed the validity of reassessment proceedings and quantum additions on merits. The Ld.
CIT(A), in para-8, noted that the entire assessment was based on alleged discrepancies as found by DRI as contained in the show- cause notice as issued by that authority. However, except for issuance of show-cause notice, no action was taken by that authority despite lapse of six years from the date of search. The show-cause notice was not taken to its logical end by completing the adjudicating proceedings to raise the demand against the assessee despite the directions of jurisdictional High Court to expedite the proceedings. The assessee also relied on copy of Panchnama drawn on 29-09-2004 when the customs department inspected the assessee’s factory evidencing manufacturing as done by the assessee. The independent evidence as collected by the customs department could not be brushed aside as irrelevant. The Ld. AO proceeded to complete the assessment without carryingout any independent investigation to bring on record any evidence to confirm the allegations as contained in the show-cause notice as issued by DRI. The addition was made u/s 68 without verifying the source of the remittance or without giving opportunity to the assessee to do so. The 90% of export proceeds were received through letter of credits which were opened before the goods were exported and backed by bankers of both the exporter as well as the purchaser. The allegations of DRI were yet to be established. The creditworthiness of the person making the payment, incase of L/C, was very clear from the banking transactions itself since only on the basis of parties’ credentials, the L/Cs would be opened by customer’s bankers. Except for allegation in the show-cause notice, there was no material before AO to hold that the exports were bogus and all the foreign remittances were unaccounted and towards bogus exports. The decision of Hon’ble High Court of Madras in the case of Vignesh Kumar Jewellers (180 Taxman 18) was referredto which was stated to be rendered on similar facts. Accordingly, the addition made by Ld. AO u/s 68 and consequential estimation of expenditure was deleted. The addition of Rs.27.60 Lacs was deleted since the same was duly disclosed by the assessee in the financial statements. The findings in Panchnama dated 29-09-2004 would establish that the assessee carried out manufacturing activities. The deduction u/s 80-IB was allowed in earlier years. In this year, no such deduction was claimed by the assessee. Accordingly, this addition was also deleted. Aggrieved as aforesaid, the revenue is in further appeal before us.
In AY 2005-06, it was similar noted by Ld. CIT(A) that the allegations in show-cause notice were not established through judicial or quasi-judicial proceedings. The copy of Panchnama dated 29-09- 2004 contained details of stock which prima-facie established that the assessee was engaged in production ofgoods at Ludhiana factory. The possession of machinery by the assessee was not doubted. The factum of exports was borne out of export documents including shipping bills and custom clearances. The majority of payment was received through L/C through banking channels. The Ld. AO completed the assessment without carrying out any independent investigation to establish the allegations as made in the show-cause notices. Therefore, the additions as made u/s 68 and consequential addition of estimated expenditure as made u/s 69C was deleted. On alternative assessment as proposed by Ld. AO, the disallowance as proposed u/s 40(a)(ia) on labor charges of Rs.239.76 Lacs, the same was deleted since the demand raised u/s 201(1) & 201(1A) was deleted in first appeal wherein it was held that there was no violation of provisions of Sec. 194C. The Ld. AO also proposed disallowance for want of documentary evidences. These expenses were not verifiable. The Ld. CIT(A) concluded that book results were not reliable and accordingly, upheld the estimation of net profit at 5%. In such a case, there was no scope for separate disallowance of Rs.239.76 Lacs. Further, no separate addition of export incentives would be required. However, the other income which as in the nature of rental income and interest income was not related tonormal trading income of the assessee and therefore, the addition to the extent of Rs.5.63 Lacswas upheld. The disallowance u/s 36(1)(va) was deleted since the payments were made before due date of filing of return of income. The addition of Rs.2.24 Lacs u/s 40(a)(ia) was sustained. The deduction claimed by the assessee u/s 80-IB would not be allowable on export incentives as per the decision in Liberty India (317 ITR 218). Since the estimated income was less than export incentives, there was no eligible profit on which deduction u/s 80-IB could be claimed. Therefore, no such deduction would be available to the assessee. Aggrieved as aforesaid, the assessee as well as revenue is in further appeal before us.
In AY 2006-07, the Ld. CIT(A) deleted the addition made u/s 68 as well as estimated expenditure u/s 69C on the ground that the search was carried out on assessee on 18-03-2005. In this year, no evidence was brought on record by Ld. AO to substantiate the allegation. The assessee duly reconciled the total receivable account (direct export or indirect export) as on 31-03-2005 and 31-03-2006. Accordingly, the addition of Rs.238.24 Lacs, the addition of misc. income for Rs.15.58 Lacs, estimated income of 5% for Rs.9.20 Lacs was also deleted on same logic / reasoning. The alternative assessment as proposed by Ld. AO was also rejected. Aggrieved, the revenue is in further appeal before us. The assessee has filed cross- objections stating that ground nos.2 and 9 have not been adjudicated. In Ground No.2, the assessee assailed addition of Rs.32.96 Lacs on the ground that no export sales were made. Ground No.9 is general in nature.
The appellate order for AY 2007-08 is on similar lines as appellate order for AY 2002-03. The Ld. CIT(A) deleted addition as made u/s 68 and also deleted addition of estimated expenditure as made u/s 69C. The misc. income of Rs.27.88 Lacs was already offered to tax. The estimation of 5% on local sales was deleted since no defect was ever pointed out in the books of accounts. The addition of bad debts was deleted by following the decision of Hon’ble Apex Court in the case of TRF Ltd. (323 ITR 397). Aggrieved as aforesaid, the revenue is in further appeal before us.
Our findings and Adjudication 8. It is quite clear that the whole basis of impugned assessments is the show-cause notices issued by DRI pursuant to search action on the assessee by that authority on 18-03-2005. The Ld. AO has primarily relied upon the show-cause notices issued by DRI and framed the assessments based on the allegations as contained therein. The appellate orders have decided majority of the issues in assessee’s favor primarily on the ground that no independent investigation was ever carried out by Ld. AO while framing the assessments. It is trite law that no addition could be made on the basis of presumptions, conjectures and surmises. The Hon’ble High Court of Madras in the case of Vignesh Kumar Jewellers (180 Taxman 18), observed that the additions were made only by relying on the findings of the custom authorities and the said findings, which were the basis for making additions, were set aside by the appellate authority. The Assessing Officer had not made any independent enquiry and also there was no corroborating evidence to support the case of the revenue. It was also found that even the assessee, whose statement was recorded by the Department of Central Excise, had not been examined by the Assessing Officer. Further, the assessee was not given an opportunity to cross-examine them. Therefore, both the authorities were correct in deleting the additions made by the Assessing Officer. The findings given by the authorities were based on valid materials and evidence and it was a question of facts and not perverse. Further, the revenue had not produced any material evidence to take a view contrary to that of the Tribunal. Hence, there was no error or illegality in the order of the Tribunal warranting interference. The order of the Tribunal was in accordance with law and the same was to be confirmed.
During the course of hearing, the revenue, at the outset, has placed on record the copy of order dated 06-02-2024 as passed by Ld. Principal Commissioner of Customs (Import) in respect of 51 noticees including the assessee. A detailed findings have been rendered in this order and the order in respect of assessee entity is contained in para 17.1 of the order which inter-alia include disallowance of DEPB amounts / DEPB scripts purchased and utilized by the importer, imposition of penalty, disallowance of duty drawback etc. It is quite clear that the said adjudication would have material bearing on the impugned assessments of the assessee. It could further be seen that this additional evidence could not have been made available, at all, at any stage of proceedings before lower authorities. The Ld. AR has vehemently opposed admission of additional evidences at this stage of proceedings. However, we are of the considered opinion that the whole basis of impugned addition was show-cause notices issued by DRI which have ultimately been culminated into a quasi-judicial order. The first appellate authority, in their respective orders, have granted relief to the assessee primarily on the ground that no independent investigation was carried out by Ld. AO whole making the additions in the hands of the assessee and the conclusion were based on show- cause notices. The said notices have now been culminated into a quasi-judicial order which necessarily has to be taken into account to culminate assessment proceedings to their logical end.
In terms of Rule 29 of Income Tax (Appellate Tribunal) Rules, 1963, Tribunal can admit additional evidence for valid reasons. Tribunal may allow admission thereof for "substantial cause" and it must record reasons for admitting such evidences. This rule is quite similar to Order 41 Rule 27(b) of the Civil Procedure Code, which allows additional evidence when the appellate court requires it to pronounce judgment. Therefore, for a substantial cause, additional evidences could be admitted by Tribunal. On the facts of present case, we find that the order of adjudicating authority could not have been produced by revenue in any way before lower authorities since the order has been passed on 06-02-2024. The revenue was clearly prevented by sufficient cause from producing the evidence earlier. Further, this evidence would have material bearing on respective assessments before us.Under these circumstances, we admit the same and restored all the appeals back to the file of Ld. CIT(A) for de-novo adjudication in the light of aforesaid order passed by appropriate authority. All the issues are kept open. The assessee is directed to plead and prove its case forthwith.
In the result, all the appeals of the revenue as well as the appeal and cross-objection of the assessee stand allowed for statistical purposes. Order pronounced on 01-07-2025