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Facts
The assessee, Lunawat Gems Corporation, challenged an assessment order that computed undisclosed income for a block period from 1989-90 to 1999-2000. The CIT(A) upheld the Assessing Officer's order which had assessed undisclosed income at Rs. 54,40,344/- against 'Nil' declared by the assessee.
Held
The Tribunal held that the assessee failed to prove the genuineness of impugned purchases and also failed to produce documents for manufacturing expenses. The circular No. 37 of 2016 was held not applicable to the facts of the case. The assessee's contention that the addition was related to export income was also rejected.
Key Issues
Whether the addition of Rs. 43,48,522/- on account of excess stock and Rs. 11,01,822/- on account of bogus purchases made by the AO and upheld by CIT(A) were justified. Whether the assessee is entitled to deduction under section 80HHC of the Act.
Sections Cited
158BC, 143(3), 158BFA(1), 158BFA(2), 158BF, 40A(3), 145(2), 6DD(j), 153A, 131, 80HHC, 32, 40(a)(ia), 43B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JAIPUR BENCHES,”B-Bench” JAIPUR
Before: DR. M.L. MEENA, AM, & SHRI NARINDER KUMAR, JM vk;dj vihy la-@ITA No. 123/JPR/2024
vkns'k@ORDER PER: NARINDER KUMAR, J.M.
This is second round of litigation between the assessee and the department. Present appeal came to be presented on 01.08.2024. Challenge is to the order dated 26.12.2023 passed by the Learned CIT(A)- 4, Jaipur. Assessee is feeling aggrieved as thereby the impugned assessment order dated 22.12.2017 passed by the Learned Assessing Officer, for block period 1989-90 to 1999-2000 has been upheld.
2 Lunawat Gems Corporation vs. DCIT 2. Vide assessment order dated 22.12.2017 undisclosed income of the assessee for the above said block period was computed and assessed at Rs. 54,40,344/- as against Rs. Nil- shown by the assessee in the block return. As a result, net amount of tax and interest payable by the assessee has been computed by the Learned Assessing Officer as under:- “Total undisclosed income for the block period Rs. 54,40,344/- Tax on undisclosed income @ 60% Rs. 32,64,206/- Add: Surcharge @ 10% Rs. 3,26,421/- Total Rs. 35,90,627/- Less: Taxes paid Rs. ------------- Balance tax payable Rs. 35,90,627/- Interest u/s 158BFA(1) Rs.------------ Net amount payable Rs. 35,90,627/- Assessed u/s set aside/158BC read with section 143(3) at income of Rs. 54,40,344/-.”
At the same time, Learned Assessing Officer initiated penalty proceedings u/s 158BFA(2) separately, in view of the finding that the undisclosed income determined as above, was far in excess of the undisclosed income declared by the assessee in the block return.
4. It may be mentioned here that earlier vide order dated 27.05.2002 the Learned Assessing Officer had completed assessment u/s 158BF read with 3 Lunawat Gems Corporation vs. DCIT section 143(3) of the Income Tax Act (hereinafter referred to as “Act”), at Rs. 87,45,810/- on the basis of the following two additions as under:- “* Addition of Rs. 44,07,287/- on account of bogus purchases from various concerns. * Addition of Rs. 43,38,522/- on account of unaccounted investment in stock found in excess at the time of search proceedings.”
Feeling dissatisfied with the above assessment previously framed on 27.05.2002, the assessee had filed appeal. That came to be disposed off by Learned CIT(A) vide order dated 10.01.2003, while deleting both the above said additions.
However, Revenue felt aggrieved by the order dt.10.1.2003, and challenged the same. The matter came up before this Tribunal by way of ITSSA No. 13 & 14/JP/2003. The assessee filed cross-objections i.e. CO No. 20/JP/2003 and CO No. 21/JP/2003. Hon’ble ITAT Tribunal upheld the decision given by Learned CIT(A) regarding deletion of above said two additions. That is how, the Department felt dis-satisfied, and as such preferred D.B. Income Tax Appeal No. 195/2004 before the Hon’ble High Court. 7. Hon’ble High Court, vide order dated 02.11.2016, disposed of the appeals and the Cross-objections by observing in the manner as under:-
4 Lunawat Gems Corporation vs. DCIT “3. Considering the law declared by the Supreme Court in the case of Vijay Proteins Ltd. Vs. Commissioner of Income Tax, special leave to Appeal © No. 8956/2015 decided on 06.04.2015 whereby the Supreme Court has dismissed the SLP and confirmed the order dated 09.12.2014 passed by the Gujarat High Court and other decisions of the High Court of Gujarat in the case of Sanjay Oilcake Industries Vs. commissioner of Income Tax (2009) 316 ITR 274 (Guj) and decided on 20.06.2016, the parties are bound by the principle of law pronounced in the aforesaid three judgments.
We remit back the case to the Assessing Officer for deciding afresh on the factual matrix. The authority will accept the law but the transaction whether it is genuine or not will be verified by the Assessing Officer on the basis of the aforesaid three judgments. The issue are answered accordingly. The appeal is accordingly disposed of.”
However, the Department presented D.B. Civil Misc. Review Application No. 69/20196. seeking review of the order dated 01.02.2006. Hon’ble High Court disposed of the review application by observing in the manner as under:- “ 4. In that view of the matter since we have already remanded back the matter to the AO for considering bogus purchase, the deletion of excess stock will also be considered by the AO while considering the overall matter. Hence, this issue will stands confirmed by observations of the Tribunal.”
5 Lunawat Gems Corporation vs. DCIT The point of deletion as regards the excess stock was also directed to be considered by the Learned Assessing Officer having regard to observations made by the Hon’ble ITAT Tribunal in para 11 of the order dated 29.06.2004, including that search having been conducted on 10.03.2000 i.e. end of the account period that the Learned Assessing Officer should have taken the gross profit of the current year as basis for arriving at the difference as per stock found during the physical verification and as per books of the assessee.
That is how, the matter, once again, came up before the Learned Assessing Officer, and on completion of the assessment vide assessment order dated 22.12.2017, total income of the assessee at Rs. 54,40,334/- was assessed. As noticed above, the assessee felt aggrieved by the fresh assessment order dated 22.12.2017. He then filed appeal before Learned CIT(A). Vide impugned order dated 26.12.2023, Learned CIT(A) has dismissed the appeal filed by the assessee. That is how, the assessee is before this Tribunal.
By way of appeal, the Assessee has raised following two grounds:- “Ground No.1: Ld. AO was not justified in making addition of Rs. 43,48,522/-, treating the same as excess stock than calculated on physical
6 Lunawat Gems Corporation vs. DCIT verification by applying G.P. rate of 20 percent achieved in immediately preceding year as G.P. rate of current year as also per order dated 30.01.2017 of the Honorable Rajasthan High Court in own case of appellant. Ground No.2: Ld. AO has erred in law and on facts in enhancing taxable profit by Rs. 11,01,822/-, equal to 25 percent of purchases of Rs. 44,07,287/- by treating few purchases as bogus, avoiding Circular No. 37 dated 2nd November 2016 issued by CBDT to allow higher deduction under chapter VIA (u/s 80HHC in this case) on such enhanced profit.”
Arguments heard. File perused.
It may be mentioned here that when the appeal was listed for hearing of arguments, even though on 17.05.2024, Learned DR for the department initially presented written request seeking adjournment, but, when arguments came to be advanced by Learned AR for the assessee, Ld. DR for the Department also opted to advance arguments. That is how, arguments stand concluded. In the course of arguments, Learned AR for the assessee has raised only the abovesaid 2 grounds. We proceed to deal with the same, one by one. Ground No.1 13. While challenging the reasons and findings recorded by the Learned CIT(A), as regards ground No.1 above, Ld. AR for the assessee has 7 Lunawat Gems Corporation vs. DCIT submitted that this is a case were during search of the business premises of the assessee, no incriminating material was found and further that even no difference in the quantitative tally of the stock was found, as per stock register maintained by the assessee. The contention is that when difference of Rs. 1,81,046/- was on account of calculated value of the stock available on the day of search of the premises, Learned CIT(A) was not justified in upholding the said addition by treating the said stock as excess, only on calculation of figures. Further, it has been submitted that a sum of Rs. 5,00,000/- by way of manufacturing expenses was added to the cost of manufactured goods only by estimation, but Learned CIT(A) did not consider this aspect, and as such said addition deserves to be deleted.
On the other hand, Learned DR for the department has referred to the observations made by Learned CIT(A) in para 4.2 of the impugned order and submitted that when representative of the assessee, in his statement recorded on 16.03.2000 i.e. during search, clearly stated that he agreed with working of the stock positions, wherein manufacturing expenses were also reflected to the tune of Rs. 5,00,000/-, and also offered to surrender as regards the excess stock, the assessment order on this 8 Lunawat Gems Corporation vs. DCIT aspect i.e. excess stock, deserves to be upheld, while rejecting the contention raised on behalf of the assessee.
Vide impugned assessment, Learned Assessing Officer observed that the reply dated 13.11.2017 presented by the assessee, through its Ld. AR was considered but found not tenable. Learned Assessing Officer observed that the assessee had failed to prove the genuineness of the impugned purchases even during proceeding conducted after the previous orders were set aside by the Hon’ble High Court. Accordingly, Learned Assessing Officer disallowed 25% of the unverifiable purchases of Rs. 44,07,287/- , and made addition of Rs. 11,01,822/-.
It may be mentioned here that when the matter came up before the Learned CIT(A), on the aforesaid ground, he observed as under:- “From the above discussion it is clear that during the course of search itself the manufacturing expenses were taken at Rs. 5,00,000 and the same was as per the detailed working in statement by Shri Neeraj Lunavat and as such the statement itself is an evidence and no retraction is seen to have been filed in this regard and no stronger evidence has been produced by the appellant to have it rejected. Further even during the assessment proceedings the appellant gave a letter wherein working of manufacturing expenses is shown at Rs. 5
9 Lunawat Gems Corporation vs. DCIT lakhs. Also, in the assessment order dated 27.05.2002 manufacturing expenses were taken at Rs. 5 lakhs. Not only that, the appellant vide letter dated 03.04.2002 itself stated that there was worth Rs. 1,81,046/- value of the excess stock was found on the day of search as discussed above. Appellant has not given any documents and bills and invoices and comparable basis etc. to show and prove the actual amount of manufacturing expenses incurred. It cannot be the case of the appellant that the manufacturing can be done without incurring any manufacturing expenses. It is not shown that this manufacturing expenses quantification was ever challenged in the appeal proceedings against the initial assessment order and as such this issue is raised by the appellant for the first time in the set aside proceedings whereas this was already earlier accepted and stands accepted due to the application of limitation law.”
So far as the submission that no incriminating material was found during search, Learned CIT(A) has rightly observed that the matter came to be restored to the files of the Assessing Officer in view of the order passed by Hon’ble High Court while disposing of the appeals filed by the department, in the manner indicated above. In the course of arguments, Learned AR for the assessee only referred to title of case Pr.CIT v. King Buildcon(P) Ltd., (2023) 333 CTR(SC) 449, and Pr.CIT v. Panchmukhi 10 Lunawat Gems Corporation vs. DCIT Management Services Pvt. Ltd., (2023) 456 ITR 358 (SC), on the point of non recovery of any incriminating material and non making of addition in the assessment under section 153A, but no such decision came to be furnished despite wait, and as such, same does not come to the aid of the assessee.
Both the authorities below have rightly relied on the statement of Shri Neeraj Lunawat recorded on 16.3.2000 wherein he agreed with the stock positions, which also reflected manufacturing expenses to the tune of Rs. 5 lacs on estimation basis. Both the authorities also rightly relied on the statement of Shri Neeraj Lunawat whereby he offered to surrender the excess stock. Furthermore, vide letter dt.3.4.2002, the assessee submitted that excess stock worth Rs.1,81,046/-was found on the day of search. It is significant to note that neither before the authorities below nor before this Appellate Tribunal, retraction has been made from the above statement of the representative of the assessee. In the course of arguments, no contention has been raised not to take into consideration said statement of the representative of the assessee made during search proceedings.
11 Lunawat Gems Corporation vs. DCIT It is significant to note that the assessee has not produced any document or invoice as regards actual amount of the manufacturing expenses. No such document was filed even before CIT(A). Conclusion 19. In view of the above discussion, we do not find any merit in the contentions raised on behalf of the assessee as regards ground No.1, noticed above. Ground No. 2 20. As regards this ground, Ld. AR for the assessee has referred to Circular No. 37 of 2016 issued by CBDT, and contended that in view of the said circular, the assessee was entitled to deduction under Chapter-VI A on the profit, which gets enhanced because of the disallowance, in the eligible business, but Learned CIT(A) has erred in disallowing deduction u/s 80HHC of the Act simply because few sellers did not appear before Learned Assessing Officer, on being called on summons issued u/s 131 of the Act. In the alternative, it has been contended on behalf of the assessee that the assessee being 100% exporter, no such addition could be made, and as such impugned order deserves to be set aside.
12 Lunawat Gems Corporation vs. DCIT In support of his contention, learned AR has relied on decision in Principal Commissioner of Income–tax v. Chawla Interbild Construction Co. Pvt. Ltd., (2019) 412 ITR 152 (Bom.) 21. On the other hand, Learned DR for the department has referred to observations made by Learned CIT(A) in para 5.2 of the impugned order and the reasons recorded therein so as not to treat said addition to the income of the assessee as income derived from the export, and as such contended that the appeal challenging the impugned order even on this ground deserves to be dismissed.
As is available from the assessment order dated 22.12.2017, Learned Assessing Officer, considered the reply filed by Learned AR for the assessee, and found that the same was not tenable. In this regard, Learned Assessing Officer observed that on search, stock inventory was prepared after carrying out of physical verification and same revealed excess stock of Rs. 43,38,522/-. It was further observed that the working of the stock positions was accepted by Shri Nuraj Lunawat, representative of the assessee and he even offered surrender of the said excess stock. As regards GP rate, Learned Assessing Officer was of the view that the same could be allowed @ 20% for deduction. Accordingly, Learned 13 ITA No. 123/JPR/2024 Lunawat Gems Corporation vs. DCIT Assessing Officer made addition of Rs. 43,38,522/- on account of unaccounted investment in the stock, that was found in excess, at the time of search, as regards the assessment year 2000-2001.
When the matter came up before the Learned CIT(A), on behalf of the assessee, reference was made to Circular No. 37 of 2016 i.e. of 02.11.2016 . While dealing with the contention raised on behalf of the assessee, as regards ground No. 2, Learned CIT(A) observed that the above said circular provides relief to the taxpayer in case disallowance is made in terms of technical non compliances like TDS and late deposit of tax etc. in terms of provisions of Sections 32, 40(a)(ia) and 43B etc., which are not on the aspect of any grave substantive tax evasion practices like out of the books stock etc., In this regard, he also relied on the decision in case of Shah Originals v. Commissioner of Income Tax-24, (2023) 156 taxmann.com 695 (SC). Accordingly, Learned CIT(A) disallowed the claim of the assessee. As a result, Learned CIT(A) held that the addition to the income of the assessee on account of bogus purchases and excess stock could not be treated as income derived from export and rather said incomes were on 14 Lunawat Gems Corporation vs. DCIT account of manipulation of bogus accounts, and as such, same could not be eligible for deductions u/s 80HHC of the Act.
As noticed above, Hon’ble High Court while restoring the matter to the files of Assessing Officer relied on decision of Hon’ble Apex Court in Vijay Proteins Ltd. V. Commissioner of Income Tax, Special Leave to Appeal © No.8956/2015, decided on 6.4.2015, whereby decision of Hon’ble Gujarat High Court and in the cases referred to in DB Income Tax Appeal No.195/2004 decided on 2.11.2016 by our own Hon’ble High Court were appreciated.
In Vijay Proteins Ltd vs Commissioner Of Income Tax, decided by Hon’ble Gujarat High Court, on 9 December, 2014, the question which arose for consideration was as to whether the entire amount of the said bogus purchases and freight payments made in relation thereto should have been disallowed or the assessee should have been held to be eligible for grant of deduction of a reasonable amount of purchase price of the oil cakes in question in view of the fact that receipts of the materials in question by the assessee were supported by various registers and books of accounts maintained by the assessee, which the Revenue had not disputed.
Hon’ble High Court observed that on the basis of the entries recorded in the books of accounts of the assessee, the provisions of Section 40A(3) of the Act were not applicable as said payments were shown to have been made by "crossed cheques". If these entries were ignored, the books of accounts stood rejected u/s.145(2) and then the income was to be estimated on the basis of best judgment.
Hon’ble High Court went on to observe that by then it was well settled that in order to decide as to whether a particular payment for expenditure would be covered under the exceptions provided in Rule 6DD(j) or not will depend on the peculiar facts and circumstances of each case.
In that case, for reasons recorded therein, the provisions of Section 40A(3) were not applicable. Hon’ble High Court was of the view that even if said provisions were held to be applicable, the expenditure would be covered by the exceptions provided in Rule 6DD(j) of the Rules.
Therein, as a matter of fact the goods were not received from the parties from whom same were shown to have been purchased but, such 16 Lunawat Gems Corporation vs. DCIT material was received from a different source which was exclusively within the knowledge of the assessee and none else. Therefore, it was evident that the assessee had inflated the expenditure in question by showing higher amount of purchase price through the fictitious invoices in the names of 33 bogus suppliers.
Considering the overall factual scenario, Hon’ble Gujarat High Court held that the Tribunal was justified in disallowing 25% of the purchase price.
Having regard to all the facts and circumstances of case at hand and applying the decision in Vijay Proteins case (supra), we do not find any illegality or irregularity in the impugned order passed by Learned CIT(A), as regards ground No.2 raised on behalf of the assessee. In Shah Originals v. Commissioner of Income-tax-24 (supra), Hon’ble Apex 26. Court, while analyzing provisions of Section 80 HHC of the Act, emphasized that the deduction allowed pertains exclusively to profits derived from the export of goods or merchandise. Hon’ble Court rejected the interpretation proposed by the assessee, asserting that gains from price fluctuations are not inherently linked to the export income of the assessee.
17 Lunawat Gems Corporation vs. DCIT Hon’ble Court also referred to precedents and held that the term "derived from" in Section 80 HHC signifies a direct nexus between the profits and gains and the industrial undertaking. Further, it was observed that the deduction is intended and restricted solely to profits from the business of exporting goods and merchandise outside India.
So far as applicability of Circular No.37 of 2016 issued by CBDT is concerned, admittedly, the Board observed that the disallowances made under sections 32,40(a)(ia), 40A(3), 43B etc., of the Act and other specific disallowances, related to the business activity against which Chapter VI-A deduction was claimed, resulted in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance. After going through the said circular, we agree with the view expressed by Learned CIT(A) that same does not apply to the given facts and circumstances of this case, in which it cannot be said that the addition to the income of the assessee due to bogus purchases and excess stock, is covered by the income derived from export, or that the same entitles the assessee to deduction under section 80 HHC of the Act.