ACIT, NEW DELHI vs. SHRI SANJEEV MALHOTRA, NEW DELHI

Brief facts of the case are that assessee is sole proprietor of two proprietorship firms namely M/s. K.S. Traders and M/s. Alpha Exports. The return of income for the year under appeal was filed on 31.03.2004 declaring total income of Rs.4,04,116/-. The case was taken up for scrutiny by issue of notice u/s 143(2) of the Act which was served upon the assessee on 12.01.2005. During the course of assessment proceedings, the AO issued notices u/s 142(1) of the Act, however, either they were remained uncompiled with or part details such as financial statements etc. were filed. Therefore, the AO vide final show cause letter dated 27th February, 2006 has asked the assessee to furnish additional information in respect of both the proprietorship firms which is reproduced at pages 3 to 10 of the assessment order. However, this notice was also remained un- complied with. In the meantime, while making verifications of the details in the case of assessment proceedings simultaneously caried out for other assessee namely M/s Vision Inc. in his juri iction, it was come to the knowledge of the AO that a search was carried by the Department of Revenue Intelligence (DRI) at the premises of the assessee i.e. Sh. Sanjeev Malhotra and therefore, he communicated with the DRI and called for the details collected by them during the course of search. In response, the DRI had supplied the copy of show cause notice No. DRI. F. No.50C/11/2003 dated 31.01.2004 issued to the assessee and five other persons. Based on such information ACIT vs. Sanjeev Malhotra and show cause supplied by the DRI, the AO again issued final show cause notice wherein based on the search carried out by DRI, further information was called for from the assessee. However, such notice was also remained unanswered. Thereafter, the AO passed the assessment order u/s 144 of the Act by making various additions which include addition of Rs.3,07,96,87,763/- made by holding the entire export sale proceeds as bogus, addition of Rs. 43,15,24,270/- by holding the duty draw back/export fraudulently obtained by making incorrect claim of export and no expenses were allowed u/s 37(1) of the Act against the sales so made. Besides this, addition of Rs.54,67,707/- was made u/s 68 of the Act of the advances received from customers holding the same as unexplained, addition of Rs.4.09 Cr. as unexplained expenditure u/s 69C of the Act and further addition of Rs.2,40,48,000/- was made u/s 68 on account of addition in capital has unexplained credits. Accordingly, the total income of assessee was assessed at Rs.3,58,14,85,480/-.

In first appeal, the Ld. CIT(A) has allowed substantial relief to the assessee vide impugned order dated 06.05.2009 wherein the assessee had filed additional evidences which were not admitted by the ld. CIT(A). During the course of appellate proceedings, ld. CIT(A) also sought remand report from the Assessing Officer after making verifications and allow the assessee an opportunity to cross examination the witnesses whose statements were relied upon by the DRI / Revenue for making additions. The Assessing Officer in its report stated that the address of the assessee has changed and ACIT vs. Sanjeev Malhotra department has not the information of the new address therefore, the neither the copies of those statements and other material nor the opportunity of cross examination of the witnesses could be provided to assessee. After considering the remand reports of the AO and submissions of the assessee, the ld. CIT(A) has deleted the additions made on account of export sales and export incentives which were treated as bogus by the AO and also deleted the additions on account of advance received from the customers and confirmed the balance additions made by the AO.

Against such order, both the Revenue and the assessee are in appeal before the Tribunal. Grounds of appeal taken by the assessee in its appeal are as under: “1) The order of the Learned Commissioner of Income Tax (Appeals), XXIII New Delhi is arbitrary, biased to the extent of addition sustained by him.

1) That the Learned CIT(Appeals) has grossly erred in disregarding the confirmation of Rs. 1.83 Crores (being the amount of loan of Rs. 1,32,00,000/- received from M/s Gullu Exports (P) Ltd and Rs. 51,00,000/- from M/s Sarthak International Ltd for payment of Customs duty) filed and facts on record while sustaining the addition of Rs. 4.09 Crores made on this count.

2) That the Learned CIT(Appeals) has grossly erred in not passing a speaking order with regard to the amount of Rs. 2,06,00,000/-(out of total addition of Rs. 4.09 crores as referred in Ground No. 2) being the amount paid by the appellant from his bank accounts towards Customs duty ignoring the bank statements of proprietorship concerns from where the amount had been sourced/withdrawn on record of the lower authorities. 2.3) That the Learned CIT(Appeals) has grossly erred in sustaining the addition of Rs. 4.09 Crores u/s 69C without the department discharging its onus that lay upon it to hold the payment as unexplained expenditure u/s 69C of the Act.

1) That the Learned CIT (Appeals) has grossly erred in sustaining the addition of Rs. 2,40,48,000/- made by the Assessing Officer u/s 68 ignoring that no real income had accrued to the assessee and addition was sustained merely on the basis of an inadvertent error in making of a book entry.

1) That without prejudice to above, the Learned CIT(Appeals) has grossly erred in stating that the amount of Rs. 9,92,360/- & Rs. 33,23,54,185/- would be taken out from the ambit of Income from business to be assessed as Income from other sources whereas the interest income was only Rs. 1,47,841/- & Rs.1,43,462/- in M/s Alpha Exports and M/s K.S. Traders (proprietorship concerns of the assessee) respectively.

2) That the Learned CIT(Appeals) has grossly erred in applying the ratio of decision of Supreme Court in the case of IPCA Laboratories Ltd. 266 ITR 521 whereas a retrospective amendment was made in the Act nullifying the said judgment by inserting proviso to Section 80 HHC.

The grounds of appeal taken by the Revenue in its appeal are as under: “1. On the facts and in the circumstances of the case the Ld. CIT(A) has erred in law and on facts in deleting the addition made on account of sale proceeds Rs.3,07,96,87,763/-.

The Ld. CIT(A) has ignored the fact that all the sale proceeds were bogus as established by the DRI, hence proceeds deposited in the bank account of the assessee were treated as income.

On the facts and in the circumstances of the case the Ld. CIT(A) has erred in law and on facts in deleting the addition made on account of duty draw back/export incentive of Rs.43,15,24,270/-.

Since the sales were bogus, hence amount received by the assessee on account of duty draw back was treated as his, the fact which was ignored by the Ld. CIT(A).

On the facts and in the circumstances of the case the Id. CIT(A) has erred in law and on facts in deleting the addition made on account of advance received from customers of Rs.54,67,707/-.

The Ld. CIT(A) has ignored the fact that assessee has failed to establish the identity and creditworthiness of the creditors.

The appellant craves leave to add, alter or amend any of the ground of appeal before or during the course of hearing of the appeal.”

We first take up the appeal filed by the assessee in Appeal No. 2851/Del/2009. 7. Ground No.1 is general in nature. 8.3. After considering the arguments put forth by both the parties, we find that in the instant case assessee since inception of the proceedings had not cooperated with the Assessing Officer. Even during the course of remand proceedings carried out by the AO on the directions of the ld. CIT(A), no compliances were made by the assessee as he has not intimated the department about his present address. At the same time, the assessee pursued his appeal before the ld. CIT(A), therefore it cannot be said that he was not aware of the pending proceedings. At the same time, the AO was aware of the fact that the assessee was appearing before the ld. CIT(A) thus he could have requested CIT(A) to direct the assessee to appear before the AO. The additional evidences so filed before the ld. CIT(A) are shipping bills, bills of lading, bank certificates regarding realization of sale proceeds, confirmations of the parties, letter of credit issued by bank for foreign affairs of USSR of Moscow, copy of cross examination of Mr. P.S. Ahluwalia, Ex-Director of Conti Shipping 9. Ground No.2 to 2.3 are relation to the addition of Rs.4.09 Crores made by AO u/s 69C of the Act as unexplained expenditure which was paid by the assessee to the Customs Authorities.

1. Brief facts leading to this issue are that assessee has voluntary tendered cheques of Rs. 4.5 Crores before the Commissioner of Customs towards duty draw back, wrongly claimed/availed. Against these cheques of Rs.4.5 Crores, the assessee subsequently deposited total sum of Rs.4.09 Crores by demand draft before the Commissioner of Customs (export promotion sales), Mumbai. The AO observed that no payment of Rs.4.09 Crore is appearing in the bank statements of the assessee and assessee had not responded to the query raised in this regard during the course of assessment proceedings, therefore, the said amount could not be allowed as expenditure and therefore he made the disallowance u/s 69C by the Act. During the course of appellant proceedings, the assessee claimed that part of the amount out of Rs. 4.09 crores was deposited directly by the friends and relatives of the assessee from their bank accounts and remaining amount was deposited by the assessee from his proprietorship firms. In support of the claim, the assessee had filed confirmations etc. as additional evidences alongwith the application ACIT vs. Sanjeev Malhotra filed under Rule 46A of the Rule before the Ld. CIT(A). The ld. CIT(A) had not admitted the additional evidences filed by the assessee and confirmed the additions so made by observing in para 47 to 49 as under: “47. Turning to the facts of the case and explanation of the assessen, it is observed that the assessee had submitted confirmation from Gullu Exports Pvt. Ltd. and Sarthak International Ltd. In both these companies, the assessee was a Director (shareholding, if any, is not clear). The undated Certificates from M/s Gullu Exports (P) Ltd. and M/s. Sarthak International Ltd. are reproduced as under:

There is another angle to this addition. In the remand report, reproduced above, dt. 19.2.2009, it is a finding of fact by the Id. AO that the Balance Sheet of M/s. Gullu Exports indicates that only an amount of Rs. 23,87,020/- was advanced to the proprietorship concern of the assessee, M/s. Alpha Exports as "Loans' and another Rs. 13,32,400/- under the head Loans and Advances'. Similarly, the Balance Sheet of M/s. Sarthak International Ltd. does not mention about any loan given to the assessee or its proprietorship concerned. In the rejoinder filed on 23.2.2009, the assessee is silent on this issue. He has not rebutted the same. They have been insisting upon the bank book of M/s. Gullu Exports (P) Ltd. and M/s. Sarthak International Ltd. In fact, the AO has specifically recorded in the remand report that even though narration was required along with bank statement in the requisition made to the assessee, this was not done. Nor was the narration submitted to me during the appellate proceedings. In other words, the assessee has failed miserably to co-relate the statements of the bank with the ostensible loan given to the assessee, on which it is heavily relying. In fact, in the P. Mohanakala case (supra), the Hon'ble Apex Court that itself is of no consequence unless a satisfactory explanation is given by the assessee. In CIT v Anil Kumar [2007] 292 ITR 552 (Del), it was held that mere identification of donor/creditor and the movement of the money through banking channels was not sufficient to prove the genuineness of the transaction. As such, it is held that the explanation offered by the assessee under the provisions of sec. 69C is not satisfactory and therefore the addition made on this account deserves to be upheld. The assessee fails in ground of appeal No.8. 9.2. Before us, the Ld. AR of the assessee argued that assessee was taken to the custody on 28.12.2003 and earlier on 13.03.2003 where he was asked to make the payment of Rs.4.50 crores against the wrong claim of duty draw back incentives. Assessee gave cheques of this amount and later paid Rs. 4.09 Crores by way of demand draft under protest. A sum of Rs. 2.06 Crores were deposited by the assessee from his proprietary firm M/s K.S. Traders, a sum of Rs.1.32 Crores from M/s Gllu Exports Pvt. Ltd. where he was one of the Director and Rs. 51 lacs from M/s Sarthak International Ltd., a proprietorship firm of his relative and Rs. 20 lacs from M/s Mohinder Exports, proprietorship firm of his another relative. The necessary copies of the bank statement of the respective parties along with confirmations were filed in Paper Book pages 338 to 363 which were filed before ld. CIT(A) as additional evidences. Ld. AR further submit that while confirming the additions, the CIT(A) had relied upon the observations made by the AO in the remand report where the AO had accepted that the amounts were verifiable from the bank statements of the parties, however, observed that these could be treated as deemed dividend u/s 2(22)(e) of the Act. According to ld. AR, such ACIT vs. Sanjeev Malhotra observation of the AO clearly shows that in principle the AO was in agreement with the claim of the assessee that these payments were made by the assessee through the firms where he is a proprietor /director or his relatives are proprietor. The Ld. AR further submitted that the Assessing Officer in remand report has failed to appreciate the fact that assessee had filed confirmations of the respective parties. Once the source is established, the same could not be doubted more particularly when they were examined by the AO during the remand proceedings. Therefore, he prayed for the deletion of the addition.

3. On the other hand, Ld. CIT-DR vehemently supported the orders of the lower authorities and submitted that assessee has failed to justify the sources of payments made nor any evidences were filed before the Assessing Officer and, therefore, the AO had rightly made the additions which were sustained by the Ld. CIT(A) and thus he prayed for the confirmation of the additions so made.

4. We have heard the rival submissions and perused the material available on record. We find that the assessee has failed to produce the necessary details alongwith copies of the bank statements from where it could be established that these payments were made out of the bank accounts of the respective parties who had further confirmed the payment of the amounts on behalf of the assessee. The ld. CIT(A) has confirmed the additions as he had not admitted the ACIT vs. Sanjeev Malhotra additional evidences filed by the assessee during the course of appellate proceedings and further the AO in the remand report has also made adverse observations in this regard. Since we have allowed the ground of appeal No. 6 of the assessee with regard to the admission of additional evidences before ld. CIT(A), therefore, we remand back this issue to the file of AO to avoid the multiplicity of proceedings and direct the AO to decide this issue afresh based on the evidences and other material filed by the assessee. Needless to say assessee be provided sufficient opportunity of being heard before concluding the issue. As a result, this ground of the assessee is partly allowed for statistical purposes.

Ground of appeal No.3 is in relation to the addition of Rs.2,40,48,000/- made by the AO on account of addition in the capital account.

1 Before us, the Ld. AR of the assessee submitted that in the capital account of both the firms of the assessee there were credit entries. In the books of M/s Alpha Exports a sum of Rs.1,20,24,000/- was credited on 31st March, 2023 with the narration “OOO Fair. Similarly in the capital account of M/s K.S. Traders a credit entry of Rs.1,20,24,000/- is appearing on 21st August, 2022 with the narration “OO Fair Trade”. Both the accounts are available in the PB pages 364 and 267 respectively. The corresponding entries of the said amount were also available in the PB pages 309 and 381 which are the ledger accounts of “OO Fair Trades” in the books of M/s K.S. Traders and “OOO Fair” in the books of M/s Alpha Exports respectively. The Ld. AR submitted that from the perusal of these entry it is clear that they are book entries made with no fresh induction of the capital in the shape of money and, therefore the provisions of section 68 could not be applied. He, thus, requested for deletion of the additions made on this account.

2. On the other hand, ld. CIT-DR vehemently supported the order of the lower authorities and submitted that since, the assessee has failed to submit any details during the course of assessment proceedings, the genuineness of the transactions remained unverified, therefore, he prayed for confirmation of the orders of the lower authorities upholding the additions made.

3. We have heard the rival submissions and perused the materials available on record. From the perusal of the ledger accounts as submitted in the paper book, it is seen that though there were credit entries in the capital accounts of the assessee in both the proprietary firms where journal entries were made debiting the accounts of the respective parties and crediting the capital accounts of the assessee. 11. The last ground of appeal, assessee is challenged the action of the AO and CIT(A) in holding that interest earned on books debts used in margin money should be treated as ‘Income from Other Sources’ and not as income from ‘Business or Profession’.

1 Before us, the Ld. AR submitted that FDRs were made with the bankers against the margin money towards the credit facilities obtained which were utilized for business purposes, therefore, there was a direct nexus between interest received on such FDRs and the business income of the assessee. He thus submitted that the interest ACIT vs. Sanjeev Malhotra received on such FDRs should be treated as business income and would be eligible for deduction u/s 80HCC of the Act. He further submit that while confirming the interest income from FDRs as income from other sources, the Ld. CIT(A) has placed reliance on the judgment of Hon’ble Supreme Court in the case of IPCA Lab (supra) wherein it is held by the Hon’ble Supreme Court that since profit figure in both the proprietary firm of the assessee is negative, thus, assessee will not got the benefit u/s 80HCC of the Act. He further submitted that the Hon’ble Supreme Court vide order in the case of CIT vs. Avani Exports reported in 58 taxman.com 100(SC) held that condition stipulated in 3rd and 4th proviso of section 80HCC would not retrospective and in case having export turn over below 10 lacs and above 10 lacs or would be treated similarly during the period prior to amendment made in section 80HCC of second amendment act taxation laws (2nd amendment act, 2005 where these to proviso i.e. 3rd and 4th proviso inserted with retrospective effect from 01.04.1998. 11.2. On the other hand, the Ld. CIT-DR vehemently supported the order of the lower authorities and made request for the confirmation of the same.

3 After considering the facts, we find that this issue has been settled by the Hon’ble Supreme Court in the order passed in the case of Avani Export (supra), therefore, we hold that interest income 13. Now we take up the revenue appeal in ITA No. 3290/Del/2009. 14. In grounds of appeal No.1 to 4, the Revenue has challenged the deletion of addition of Rs.3,07,96,87,763/- made on account of export of sale proceeds treating the same as bogus and further deletion of addition of Rs.43,15,24,270/- made on account of duty draw back/export incentives alleged as fraudulently claimed and received. Since these grounds of appeal are interconnected, therefore, they are considered together and decided in terms of the following observations.

1. Brief facts leading to these grounds of appeal are that during the course of search carried out by DRI and based on the show cause notice issued by the DRI, it was observed by the AO that assessee claimed that he had executed exports to the Russian Federation which were illegally diverted to Dubai and further the assessee has earned duty draw back on such diverted exports which was illegal and were inconsistent with the Custom’s Act and the RBI circulars. During the course assessment proceedings, the assessee had failed ACIT vs. Sanjeev Malhotra to file any details with respect to the exports sale made and additional evidences were filed in this regard before the Ld. CIT(A) where the assessee submitted that he was prevented by sufficient cause, thus, was not able to file the evidences before the Ld. AO. These evidences includes the copies of the statement of key witnesses recorded during the course of examination before the Commissioner, Central Excise which is adjudicating authority, wherein the witnesses had confirmed the fact of exports made by the appellant. These additional evidences further include bills issued by the appellant, shipping bills, bill of lading, bank certificate regarding realization of sale proceeds, and letter of credit issued by bank for foreign affairs of USSR of Moscow. Copy of cross examination of Mr. P.S. Ahluwalia, Ex- Director of Conti Shipping Transport Pvt. Ltd. on 21.03.2006, Sh. Harshwardhan, chief Manager, PNB, copy of account of parties from whom advances were received along with photocopy of bank statement and details of payments of 4.09 crore to Customs Department etc. However, Ld. CIT(A) by observing in para 6 of the appellate order that assessee during the course of assessment proceedings had failed to disclose the fact of search carried out by DRI and also failed to state that show cause notice dated 31.01.2004 issued by DRI was already available with him and was non- cooperative during the course of assessment proceedings, had rejected the additional evidences so filed. Before the ld. CIT(A), it was the claim of the assessee that Assessing officer has solely relied upon the show cause notice issued by DRI and no independent enquiries ACIT vs. Sanjeev Malhotra were made nor any opportunity was given to cross examine the third parties whose statements recorded by the DRI relied upon to make the additions. The Ld. CIT(A) sought remand report from the Assessing Officer, however, besides of repeated opportunities given u/s 250(4), the AO has failed to make any further enquiry in the matter nor furnished the copy of the evidences collected nor any opportunity of cross examination was given to the assessee. After considering the facts, the Ld. CIT(A) in para 13 to 26 has dealt with this issue in detailed and deleted the additions so made. Relevant observations of Ld. CIT(A) as contained in paras 13 to 26 of the appellate order are reproduced as under: “13. I have carefully gone through the assessment order, the show cause notice issued by the DRI, the submissions made by the Id. AR of the assessee, remand reports filed by the Id. AO and also the rejoinders filed by the assessee. The assessment records have also been perused. The perusal of the impugned assessment order, very clearly brings out at pages 10 to 28 that the Id. AO has made the addition. on sales (Rs.3,07,96,87,763/-) and duty drawback (Rs.43,15,24,270/-) solely on the show cause notice issued by the DRI. It is clarified that the DRI had only issued a show cause, on which the impugned additions have been based. Independent enquiries, if any, such as confronting the assessee with the evidences collected by the DRI, examining the witnesses of the DRI, affording an opportunity of cross examination, to the assessee etc. was not made or even attempted. In fact, perusal of the assessment record does not even have the copies (leave alone the original) evidences collected by the DRI, on which addition has been based. There is no doubt, that the DRI is another Government Organization and the evidences collected by it cannot be ignored (as submitted by the Id. AO). However, for purposes of assessing the income of the assessee, corroborative evidences needed to be brought on record. The impugned assessment order does not even mention the details of seized documents, or the statements recorded. In the remand report, the Id. AO has taken the stand that the assessee was un-available 14. From the above, two conclusions can be drawn (i) The Id. AO has relied totally on the show cause notice of the DRI to make the impugned additions; and (ii) Principles of natural justice was not followed. One may take the first part, wherein the Id. AO from the perusal of the assessment order has evidently relied totally on the investigations of the DRI. No corroborative evidence has been brought on record. No independent enquiry with a view to ascertain the truth or the veracity of the contents of the show cause issued by DRI has even been made. There is not even a whisper to that end in the impugned order. Evidence as collected by the DRI has also not been examined. Recently the Madras High Court was confronted with similar facts in CIT v Vignesh Kumar Jewellers [2009] 222 CTR (Mad) 79, wherein the DRI had found and seized unaccounted stock of jewellery and gold idols of foreign origin during a search at the business premises of the assessee. The AO made additions merely by relying on the findings of the DRI and the Commissioner of Customs. The matter travelled to the CIT(A), who deleted the additions except for a small part of the same. The Tribunal upheld the order of the CIT(A). When the matter travelled to the Hon'ble High Court, it was concluded by the Hon'ble Court on the grounds that additions made by the AO merely by relying on the findings of the DRI and the Commissioner of Customs, without make any independent enquiry or bringing any corroborative evidence, were correctly deleted by the CIT (A) and the ITAT. In CIT v Ved Prakash Choudhary [2008] 305 ITR 245 (Del), the Hon'ble 16. The second issue was the issue of non-examination or the opportunity of affording an opportunity to the assessee for cross-examination, of the witnesses who appear in the show cause notice of the DRI. While it may be correct that the assessee did not present himself for hearing, one cannot agree with the Id. AO that this would result in not affording an opportunity to the assessee for cross-examination. Even if the AO has afforded this opportunity to the assessee, by affixing the communication on the last known address, it would have met the cause of natural justice. In fact, this opportunity has not been availed at the appellate stage, even while suitable directions were given u/s. 250(4), on a possible incorrect appreciation of the provisions of sec. 250(4).

In Kishinchand Chellaram v CIT [1980] 125 ITR 713 (SC) at page 720, the Hon'ble Supreme Court held as following:

In State of Kerala v K. P. Shaduli Yusuff [1977] 39 STC 478 (SC), the Apex Court has emphasised on the need of providing the assessee with evidence and giving an opportunity to cross examine witnesses. The Hon'ble Apex Court observed that cross examination was one of most efficacious methods of establishing truth.

In view of the aforesaid judgments of the Hon'ble Supreme Court, It is settled law that where the AO seeks to rely upon evidence obtained from other parties, the same has to be provided to the assessee and the third parties should be made available to the assessee for cross examination by summoning them. 1 am already on record that the Id. AO has not afforded any opportunity to the assessee to cross examine the witnesses, before 20. There is another angle to the issue. The Id. AO has relied heavily on the show cause notice dt. 31.1.2004, issued by the DRI. I have closely gone through the said show cause notice. The issue involved was that the assessee was ostensibly exporting readymade garments (RMG) to Moscow under the Rupee-Rouble Trade under the repayment of States Credit Scheme. On investigations, it is mentioned in the said show cause issued by the DRI that the goods were diverted to Dubai for sale and actually not delivered in Russia. In other words, the sales had been affected in Dubai and not in Russia, from where sale proceeds had ostensibly been received by the alleged buyers. As such, the assessee had incorrectly avalled off the duty drawback. As such, the claim for duty drawback was incorrect as this was in blatant violation of the RBI circulars governing exports under the Rupee-Rouble Scheme which was available only for goods exported to the Russian Federation (and not to Dubai). It was also mentioned that there was considerable over valuation of the exported items. In the show cause notice, several enquiries conducted by the DRI has been mentioned.

The main focus of the show cause notice of the DRI relates to incorrect claim of duty drawback, under the Customs Act. It does not say that the goods were not exported. In fact, it states that the goods were diverted for exports and sold in Dubai and not in the Russian Federation. It further states that on the said exports, duty drawback had been claimed. In other words, the charge as made. out in the show cause notice by the DRI is to be appreciated within the ambit of the Customs Act, 1962. It does not relate to the provisions of the Income-tax Act, whereby the information can be useful for assessing the income of the assessee, but cannot be considered conclusive.

The show cause notice which has been relied by the AO for making the impugned additions, as the name suggest is only a show cause. The issue has not attained finality till date (6 years), as evident from the affidavit filed by the assessee during the appellate proceedings, when specifically requisitioned. In my correspondence (placed on record) with the Adjudicating Assuming for a moment that the contents of the show cause notice are correct, it would naturally mean that the assessee was carrying out an unlawful activity. However, the Income-tax Act does not a make a distinction between income or profit derived from a legal or an illegal business. In CIT v S. C. Kothari [1971] 82 ITR 794 (SC), the Apex Court observed as under:

In other words, the Income-tax Act is not concerned with the carrying on of a legal or an illegal business. The assessee would be charged to tax even on the illegal business as per the provisions of the Income-tax Act in general and sec. 4 in particular. The DRI show cause, assuming that the contents are true, points out that the export was made to Dubai. The goods were also sold in Dubai. Duty drawback had been claimed and availed. It is a different matter that whether the duty drawback was claimed correctly or not as per the Customs Act and the RBI circulars under the Rupee-Rouble Trade Agreement. As such, the Id. AO has incorrectly concluded that there has been fraudulent sale or fraudulent claim of duty drawback. A conclusion drawn in the realm of Customs Act would not affect the taxability of income ACIT vs. Sanjeev Malhotra under the Income Tax Act. Even if the same were to be fraudulent, but as long as the export had been affected and duty drawback claimed, the same would be brought to tax as per the provisions of the Income-tax Act, 1961. Thus, on this ground also the assessee deserves to succeed.

A crucial aspect that needs to be mentioned is that on interrogation by the DRI, the assessee had conceded that he had indeed diverted the exports to Dubai and had actually not exported the same to Moscow (Russian Federation) as it appears from the report of DRI. Heavy premium has been placed on this confession in the impugned order. During the course of hearing, the assessee stated that within 24 hours of making such an incriminating confession, which was allegedly taken under duress, he had retracted the statement on 29.12.2003 itself before the ACMM/Duty Magistrate, Patiala House Court, New Delhi. A copy of the same was also placed on file, on requisition. The assessee in his written submission filed on 16.12.2008 has relied on various decisions such as Sri Krishna V. Krukshetra University, AIR 1976 SC 376 as applied in Kisanlal Shivhandrai v CIT 88 ITR 293 (P&H), Pulangode Rubber Produced Co. Ltd. v State of Kerala 91 ITR (AT) (SC), CIT v Doris S. Luiz 96 ITR 646 (Ker), Roshan Beevi v Joint Secretary to Govt. of Tamilnadu AIR 1984 NOC 103 etc.

There is no doubt that confession made before a Custom official meets the principles of natural justice as held in Surjit Singh Chhabra v Union of India AIR 1997 SC 2560. However, it is also settled law that while a confession is a valid piece of evidence, it has to be backed by corroborative evidence particularly when the assessee has retracted from the said statement. It is also settled law that while considering a retracted statement, it has to be seen that after how much delay the said retraction has been made. In the case in hand, no corroborative evidence has been brought on record with regard to the impugned additions. Secondly, the statement which was made on 28.12.2003, was retracted before a Civil Magistrate on 29.12.2003 i.e. within 24 hours. Thus, not much credence can be given to the alleged confession statement especially in the Income-tax Act, 1961. Even assuming for a moment that the statement recorded on 28.12.2003, represent the true state of affairs, it cannot be stated that the assessee has admitted that he has not exported the goods, nor has he admitted that he has not received the duty drawback. On similar lines, are statements of Shri Harshwardhan (re-examined subsequently by AO), which have been elaborately mentioned and discussed in the show cause issued by DRI. None of them have stated that the goods were not exported or duty drawback not received. Nor have they stated that the goods have not been sold as it appears from the show cause of DRI. Taking in totality the show cause notice and the statements recorded, all that has come forth is that certain documents such as bill of lading had been forged and the assessee has actually sold the goods in Dubai and illegally claimed the duty drawback. I have already stated, above that even if this activity was unlawful and fraudulent, the sale proceeds received and duty drawback clamed would have to be brought within the ambit of taxation as per Income- tax Act, 1961, in general and section 4 in particular.

Thus, the Id. AO has incorrectly made additions on the total sale proceeds and export incentives amounting to Rs.3,07,96,87,763/- and Rs. 43,15,24,270/-relying totally on the show cause notice issued by the DRI, which also does not helps the cause of the Revenue. As such, the assessee succeeds in grounds of appeal No. 2 & 5.”

2. During the course of hearing, the Ld. CIT DR vehemently supported the order of Assessing Officer and argued that assessee since inception of the assessment proceedings was non cooperative which is evident from the assessment order itslef. It is also a matter of concern that in the case of the assessee, a search was carried by the DRI and show cause notice dated 31.03.2004 was already issued, however, when the Assessing Officer commenced scrutiny proceedings by issue of notice u/s 143(2) and subsequent occasions issued various show cause notice, assesse has not brought the fact of search by DRI and issue of show cause notice by Ld. DRI to the notice of Assessing Officer which further established that assessee was not cooperating with the Department and hiding the very ACIT vs. Sanjeev Malhotra important and crucial facts relating to the assessment. Ld. CIT DR further submitted that assessee claimed export was made to the Russian Federation, however, neither the goods were exported to the Russian Federation and nor the payments were received from the parties situated at Russian Federation and the goods were diverted to Dubai and, therefore, AO has rightly treated the entire sale turnover of Rs.3,07,96,87,763/- as unexplained receipts in the hands of the assessee. Ld. DR further submitted that assessee has also failed to produce the books of accounts to verify the expenses claimed against such exports which include the cost of goods sold and further expenses claimed in the profit and loss account, and, therefore, in absence of such verification, the AO had rightly disallowed the expenses. Ld. CIT DR further submitted that assessee had received exports incentives in violation to the Customs Act and RBI Circulars which incentives were meant for export to Russian Federation only and, therefore, AO has rightly made the addition of Rs.43,15,24,270/- on account of exports incentives as unexplained receipts. Ld. CIT DR submitted that Ld. CIT(A) had made undue pressure on the Assessing Officer for examinations of the evidences/investigations report and to carry out the cross examination of the witnesses by ignoring the fact that all such investigations were carried by the DRI during its examination and based on such verification and examination final show cause notice was issued. Ld. CIT DR further submitted that the assessee had never asked for cross examination of the witnesses nor had been able ACIT vs. Sanjeev Malhotra of cross examination. The Ld. CIT(A) also asked the Assessing Officer to provide all the evidences and documents and statements which were used against the assessee, however, no such opportunities / Officer were reproduced in the assessment order. A perusal of the said reports, we find that the AO observed that the notices issued u/s 136(6) to the persons were returned unserved with the remarks “no such person exists at the given address”. It was also observed by the Assessing Officer that the DRI is an Indian Investigation Agency and its finding cannot be ignored. The Ld. AO further observed in the remand report that assesse shifted his address and new address was never intimated to the Department, therefore, it is not possible for the Assessing Officer to provide the statements and other documents to the assessee. Even the assessment order was served through affixture. It is also surprising fact that though the Assessing Officer was not able to find the assessee at the given address, however, at the same time the assessee was appearing before Ld. CIT(A) and submitting details in his case. Merely for the reason that Assessing 15. Ground No.5 & 6 of the Revenue are in relation to the deletion of addition of Rs.54,67,707/- made by Assessing Officer on account of advances received from parties holding the same as unexplained.

1. Brief facts leading to the facts are that assessee has shown advances of Rs.54,67,707/- received from four parties of Moscow, Russia. The AO during the course of assessment proceedings vide ACIT vs. Sanjeev Malhotra notice u/s 142(1) asked the assessee to file the copies of the accounts and, further asked to file the necessary details to show how these advances were dealt with in subsequent financial years. The Ld. AO further observed that as per DRI show cause notice parties at Moscow are non-existent, hence, advances claimed to have been received from the parties from Russia are doubtful. However, as the assessee had failed to submit any details in this regard, therefore, the AO had made the addition. During the course of appellate proceeding before Ld. CIT(A), assessee claimed that payments were received through banking channels and were duly credited in the bank account of M/s K.S. Traders, proprietary firm of the assessee. The Ld. CIT(A) in terms of section 250(4) asked the AO to verify said advances, however, the AO in its report dated 19.02.2009 observed that the parties were foreign parties and stayed outside India, therefore, the genuineness could not be verified. After considering the assessee’s submissions and the remand report, the Ld. CIT(A) deleted the additions by observing in para 36 as under: “36. I have carefully gone through the order of the Id. AO, the remand report as well as the submission made by the assessee. I am already on record stating that the fresh evidence as being filed during the appellate proceedings has been rejected. No credence could be given to the said documents. However, I am inclined to agree with the Id. AR of the assessee when he states that the failure to verify by the Department cannot go against the assessee. In any case, directions were given for enquiry u/s. 250(4) and could have probably been done through the diplomatic channels, even though the parties concerned were outside India. This would have sufficed the conditions (either way) as laid down for any addition u/s. 68 viz. identity of the creditor, financial capacity of the creditor and genuineness of the transaction. If the assessee could not establish the three ingredients in the proceedings u/s. 250(4), the case of the Revenue would have been strong. As such, the assessee deserves to succeed in grounds of appeal No.7. Addition of Rs.54,67,707/- is deleted. But the lack of enquiry does not help the cause of Revenue.

2. Before us, the Ld. CIT-DR argued that assessee had failed to prove the genuineness of the transactions as no details whatsoever were filed as asked by the Assessing Officer from time to time and, therefore, he requested for confirmation of the addition made by the AO.

3. On the other hand, the Ld. AR vehemently supported the orders of the Ld. CIT(A) and submitted that in the remand report, the Assessing Officer himself has admitted that all the parties are stayed outside India and were foreign parties. He further argued that when the amounts were received through banking channel from such parties, the same cannot be doubted. He thus prayed for the confirmation of the order of Ld. CIT(A) deleting the addition.

4. We have heard the rival submissions and perused the materials available on record. During the course of assessment proceedings despite of the opportunity provided by the assessing officer assessee had not filed any details. In appellate proceedings certain details were filed as additional evidences. Admittedly the parties were stayed outside India. We also observed that the Revenue can verify the existence and genuineness the transaction through diplomatic channels where the parties situated outside India. When the assessee had submitted the relevant details about these parties Order pronounced on 16/04/2025. d\\ \- /- (ANUBHAV SHARMA) (MANISH AGARWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:16/04/2025