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Income Tax Appellate Tribunal, DELHI BENCH “E” NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI LAXMI PRASAD SAHU
ORDER
PER I.C. SUDHIR: JUDICIAL MEMBER These are two cross-appeals filed by the assessee as well as Revenue against the order passed by the learned CIT(A) dated 31.12.2007. The return of income was originally filed by the assessee on 30th 2. November, 2000 declaring a loss of Rs.66,05,500/-. The assessment of the same was completed under section 143(3) at a loss of Rs.52,74,450/- vide order dated 31.12.2002.
Later on the basis of the information received from the Director Revenue Intelligence (DRI), the assessment of the assessee was reopened by AO under section 148 on the allegation that the income chargeable to tax has escaped assessment to the extent of the fraudulent claim of drawback and DEPB credit by way of exporting mis-declared goods. The objection of the assessee to the reopening of the assessment was rejected and reassessment was completed at an income of Rs.16,43,78,772/- as against returned loss of Rs.52,74,450/-.
The AO held that purchases of Rs.16,34,83,676/- made by the assessee are not genuine and accordingly he made addition of the same. The AO further held that export sales declared by the assessee is also bogus and after allowing a deduction of 6.35% against export sale of Rs.65,87,872/- added back the balance amount of Rs.61,69,546/- as unexplained credit.
5. Aggrieved by the order of the Assessing Officer, the assessee came in appeal before the learned CIT(A), both on the issue of reopening of the assessment as well as addition made by the Assessing Officer. On the issue of the reopening of the assessment, the learned CIT(A) held that the Assessing Officer was having fresh material which prima facie shows that the income has escaped assessment and such information was sufficient for the Assessing Officer to arrive at a conclusion that income of the appellant has escaped assessment and accordingly he rejected the contention of the assessee on the issue of reopening of the assessment.
6. As regards the addition of Rs.16,34,83,676/-, the learned CIT(A) held that the Assessing Officer has not disputed the corresponding sales made to the third parties though he has held that the purchases from the four parties are not genuine. Considering this fact, he held that in such a situation the peak amount of the payment made in purchases along with gross profit rate of such trading activity need to be added as income instead of making addition of the entire purchase. The learned CIT(A) then worked out the peak amount of the purchase and computed Rs.56,50,600/- as the peak amount of the payment made against purchase. The learned CIT(A) further made a comparison of the gross profit in this line of business and taking gross profit rate of 3% on the total sales, he computed gross profit on the total turnover and after deducting the gross profit declared by the assessee at the rate of 1.42%, he held that addition of Rs.23,72,208/- need to be made on account of the understatement of the gross profit. Thus the learned CIT(A) restricted the addition to Rs.80,22,802/- as against Rs.16,34,83,676/- made by the Assessing Officer.
As regards the addition of Rs.61,69,546/- made by the Assessing Officer on account of the inflated export sale, the learned CIT(A) held that the assessee has failed to contradict the findings of the Assessing Officer that the overseas parties were not existing and accordingly confirmed the addition of the entire amount of Rs.61,69,546/- made by the Assessing Officer.
Aggrieved by the order of the learned CIT(A) both the assessee and the Revenue came in appeal before the ITAT. The appeal of the assessee was allowed by the ITAT vide order dated 31.03.2011, on the issue of the reopening of the assessment. The ITAT held that in the absence of any whisper in the reasons for reopening of the assessment that income has escaped assessment by assessee’s failure to make full and true disclosure of material facts for necessary assessment, the notice issued beyond a period of 4 years from the end of the relevant assessment year was bad in law and hence the assessment was quashed.
Since the reassessment order was annulled, the ITAT did not decide the other grounds of appeal on merit.
10. Aggrieved by the order of the ITAT, the Revenue filed appeal before the Delhi High Court. The Hon’ble Delhi High Court vide order dated 17.01.2012 reversed the finding of the ITAT on the issue of reopening of the assessment by holding that at the time of initiation of the reassessment proceedings only a prima facie and tentative view is required and ITAT was not correct in quashing the reopening of the assessment. Since ITAT has not decided other grounds raised by the assessee as well as Revenue the appeals were remitted back to the Tribunal for deciding the other aspects or grounds. The High Court, however, clarified that it has not expressed any opinion on any other aspect or grounds which is pending before the Tribunal or raised by the Respondent-assessee.
In view of the matter being remitted back to ITAT by the High Court both these appeals were heard together.
In the assessee’s appeal it has raised six grounds of appeal which read as under:-
“1. That on the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) erred in law in holding that the initiation and further completing reassessment proceedings under section 147 of the Income Tax Act, 1961 is valid, even though the Learned Assessing Officer disposed off objection without judicious application of mind and in mechanical manner, without dealing with the objections raised by the appellant.
That on the facts and in the circumstances of the case the Learned Commissioner of Income Tax (Appeals) erred in law holding that the Notice under section 148 of the Income Tax Act, 1961 issued on 28.03.2007 is not barred by limitation, even though it was issued after the expiry of four years from the end of the assessment year, while assessment was already made under section 143(3) by the Deputy Commissioner of Income Tax, Central Circle-3, New Delhi on 31.12.2002 and the reasons recorded has not stated about the failure on the part of appellant to disclose fully ad truly all material facts necessary for assessment, due to which there has been an escapement of income chargeable to tax.
3. That on the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) erred in upholding the addition to the extent of Rs.80,22,802/- made by the learned assessing officer on account of purchases made by the appellant as unexplained expenditure only on the basis of doubts, suspicion, conjectures and surmises.
4. That on the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) erred in upholding the addition made by the Learned Assessing Officer by treating Export Sales aggregating to Rs.61,69,546/- made by the appellant company as unexplained credits only on the basis of doubts, suspicion, conjectures and surmises and without confronting / made available to the appellant the materials used as evidence against the appellant.
That on the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) erred in holding that extrapolating the findings of the DRI, Amritsar is valid in respect of goods to be exported out of India in the month of May 2000 to goods already exported during the financial year 1999- 00.
That the appellant craves leave to add, to alter or to amend grounds of appeal before the appeal is heard and disposed off.”
In the Revenue’s appeal, it has raised 3 grounds of appeal which read as under:-
“(1) On the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in deleting the addition of Rs.15,54,60,874/- (out of total addition of Rs.16,34,83,686/-) made by the AO on account of bogus purchases without proper appreciation of all the facts as brought out clearly from Para 6 onwards of the Assessment order dated 31.12.2000 including the facts established during enquiries by DRI and Sales Tax Department and the abnormally low yield declared by the assessee. (2) On the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in granting relief to the assessee on the basis of additional evidence in the shape of chart of peak value of investment admitted during appellate proceedings without calling for a report from the AO in violation of rule 46A of the Income tax Rules. (3) The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.”
14. In assessee’s appeal grounds no. 1 and 2 are relating to reopening of the assessment which as stated hereinabove stand disposed of by the Hon’ble Delhi High Court.
Ground no.3 in assessee’s appeal is regarding upholding the addition to the extent of Rs.80,22,802/- out of the total addition of Rs.16,34,83,676/- made by the AO. Grounds no.1 and 2 in Revenue’s appeal are regarding deletion of the balance amount of Rs.15,54,60,874/- out of the addition of Rs.16,34,83,676/- made by the AO. Since the issue in these grounds of appeal are common, the same are being taken together.
16. It was contended by the learned DR that the AO has received information from the DRI that the assessee was involved in fraudulent claim of drawback and DEPB credit by export of mis-declared goods. Detailed enquiries were conducted by the DRI in respect of the concerns from which the goods/raw material was shown as purchases and huge payments were made by the assessee. Four concerns were found non-existing and bogus concerns. Since the assessee could not substantiate these purchases, the AO was justified in disallowing the entire purchases. It was contended that it was a claim of the assessee and assessee having failed to substantiate the claim, the only course open to the AO in such a situation was to disallow the claim and make the addition.
The learned DR further submitted that the learned CIT(A) was not justified in working out the peak of the purchases and restricting the addition to such peak along with the gross profit on such purchases. It was further contended that the acceptance of the sales cannot be a ground for allowing deduction on account of the purchases. It was also contended by the learned DR that the learned CIT(A) while preparing the chart of the peak value of investment has admitted the additional evidence without complying with the provision of Rule 46A.
In reply the learned AR submitted that the addition per se is untenable. The appellant company is engaged in the business of steel casting and forging. During the course of the reassessment proceeding, the appellant company has filed complete details of the sales, purchases along with copies of the invoices and copy of accounts of each of the supplier including these four parties. The books of account along with bills and vouchers, central excise record and stock register were also produced for verification. In response to the AO’s show cause notice regarding the allegation levied by the DRI, the assessee has substantiated the genuineness of the purchases as well as sales by producing the Item-wise quantitative details of Direct / Indirect Exports Sales, Purchases, Production and Closing Stock, Copies of Purchases Invoices, Copies of Export Sales Invoices, Copies of Bank’s Certificates for Export and Realization and Details of Duty Drawback received / receivables on Export Sales.
The books of accounts along with bills and vouchers, Central Excise records and stock register were also produced for verification and AO has not pointed out any error or deficiency in such documents and books of accounts.
It was further contended by the learned AR that it is apparent from the assessment order that no independent enquiry has been carried out by the AO himself. The assessee has submitted all its documents and evidences and the AO has not brought any material to impeach or discredit the evidences submitted by the assessee in support of genuineness of the purchases. The AO has merely relied upon the information which it has received from the DRI for making the addition.
It was further contended that information from the DRI may be a starting point for carrying out the investigation but cannot be conclusive particularly in view of the material and evidences brought in support of its contention by the assessee. It was also submitted that the DRI inspection was not carried out during the year under consideration and adverse inference has been drawn for this year on the basis of allegation in the succeeding year. The learned AR submitted that the entire addition is based on the allegation levied by the DRI which has been subject matter of appeal before the High Court of Punjab & Haryana, where the High Court has held that the impugned show cause notice as well as the impugned order passed by the Custom authorities did not deal with the live consignment but pertain to earlier consignments. The High Court further held that the past export cannot be challenged as being improper on the basis of any irregularities noticed in the subsequent exports.
It was further stated that this issue was referred by the DRI to CBI. Thereafter CBI has conducted comprehensive investigation and it found that the allegation has no substance. The learned AR further contended that the books of accounts have been maintained in the normal course of business. The same have been audited and are supported by the excise records, stock records, etc. These books of accounts have not been rejected and hence the action of the Assessing Officer in making the addition of the purchases is unsustainable and the entire addition needs to be deleted. In support thereof the learned AR place reliance on the following judgments:-
(i) CIT vs. FairFinvest Limited 357 ITR 146 (Del) (ii) CIT vs. Gangeshwari Metal (P) Ltd. 361 ITR 10 (Del) (iii) Goel Sons Golden Estate (P) Ltd., dt. 11.4.2012
On the issue that the Assessing Officer was not justified in making addition of the entire purchases, it was contended by the learned AR that the Assessing Officer has not tinkered with the sales. This means that the trading results per se are accepted and if so the right course for the Assessing Officer was to estimate income on such sales. The Assessing Officer has not brought any material that the profit earned by the assessee on the sales cannot be more than the profit declared by the assessee. Further since the assessee has made purchases and the source of the purchases is duly reflected in the books of accounts, the addition on account of investment in purchases cannot be made. It was submitted that the addition made by the learned CIT(A) on the basis of the investment in purchases is unjustified. It was further contended that the learned CIT(A) was not justified in enhancing the gross profit rate. The assessee has carried on the business in the normal course and without there being any finding that assessee has received anything over and above the sale consideration stated in the books of accounts enhancement of the gross profit rate is untenable. It was further contended that there is no finding recorded by the Assessing Officer as well as learned CIT(A) that the value of the purchases for which sales have been effected was less than that recorded in the books of accounts. In the absence of any evidence or material that the value of the purchases have been overstated as compared to the market price as on that day, the enhancement of G.P. is not justified.
As regards issue of violation of Rule 46A raised by the Ld. DR, it was submitted by the learned AR that there is no violation of Rule 46A as assessee has not submitted any additional evidences before the learned CIT(A). In fact the learned CIT(A) himself has prepared the peak amount of the payment made against purchase as is evident from the order of the learned CIT(A) at Page 36.The same has been enclosed as Annexure A to his order by the learned CIT(A). This chart was prepared by the learned CIT(A) on the basis of copy of accounts of the suppliers filed before Assessing Officer as well as learned CIT(A) and no fresh evidences were filed by the assessee before the learned CIT(A).
It was further contended by the learned AR that addition made by the Assessing Officer and as confirmed by the learned CIT(A) are otherwise untenable in view of the fact that this assessment was reopened on the basis of the allegation that income chargeable to tax has escaped assessment to the extent of the fraudulent claim of the drawback and DEPB credit by way of export of mis-declared goods. Thus reopening was on the issue of drawback and on this issue of drawback no addition has been made as is evident from the assessment order. In this regard the learned AR invited our attention to the office note appended to the assessment order whereby it has been accepted by the Assessing Officer that no addition is being made on this account. In support of the above proposition, the learned AR relied upon the following judgments:-
(i) CIT vs. Ranbaxy Laboratories Ltd. vs. DCIT (2013) 351 ITR 23 (Del) (ii) CIT vs. Jet Airways (I) Ltd. 331 ITR 236 (Bom) (iii) Oriental Bank of Commerce Vs ACIT W. P. (C) 2594/2013, CM 4918/2013 & CM 15970/2013, Dated.- August 11, 2014 (Delhi High Court) (iv) CIT-II Vs Living Media India Ltd. [2013] 359 ITR 106 (Del) (v) CIT VsCheil Communications India Pvt. Ltd. [2013] 354 ITR 549 (Del) (vi) CIT vsAdhunikNiryatIspat Co. 63 DTR 212 (Del) (vii) CIT vs Software Consultants 341 ITR 240 (Del) (viii) CIT vs Narayan Securities P Ltd (Del) dt. 3-6- 2011 (ix) ACIT vsMaj Deepak Mehta 344 ITR 641 (Chatis) (x) CIT vsShri Ram Singh 306 ITR 343 (Raj) (xi) Double Dot Finance Ltd vs CIT (Bom) ITA no. 856/2011 (xii) CIT vs ICICI Bank Ltd 349 ITR 482 (Bom)
We have heard both the parties and perused the assessment order and the order passed by the learned CIT(A) and also gone through the paper book on record. The learned AR has raised a legal issue regarding no addition being made in the reassessment proceeding for which assessment was reopened. It will be appropriate first to deal with this issue raised by the learned AR. As per learned AR this assessment was reopened on the basis of an allegation that income chargeable to tax has escaped assessment to the extent of fraudulent claim of duty drawback and DEPB credit and since no addition has been made on this account, the Assessing Officer was not justified in making other additions. It will be relevant to refer to the facts so that this issue can be adjudicated properly. The Assessing Officer has recorded the reason on 28th March, 2007 which reads as under:-
“Reasons for reopening the case u/s 147 of the I. Tax Act in the case of M/s Nandan Auto Tech. Ltd. in A.Y. 2000-01.Erstwhile M/s Garg Forgings & Castings Ltd. In this case, return declaring a loss of Rs.66,05,500/- was filed on 30.11.2000. The assessment under section 143(2) of the I.T. Act was completed on 31.12.2002 at a loss of Rs.52,74,450/-. The Asst. Director of Income Tax (Inv)-III, Ludhiana vide letter dated 27.03.2007 has reported that as per DRI notice No. 1326 dated 03.10.2002, ShVinod Kumar Garg and Sh. N.D. Garg, directors of the company are indulged in fraudulent claim of drawback and DEPB credit by way of exporting mis-declared goods through M/s Garg Forgings & Casting Ltd., Kanganwal Road, VillJugiana, Ludhiana now known as M/s Nandan Auto Tech Ltd. and their allied concern. On perusal of the Profit and Loss A/c it has been observed that assessee has made export sales of Rs.65,87,812/- and indirect export of Rs.37,19,93,945/- and assessee has made huge payments to inter- related parties. In view of the above and the information detailed in the letter of Asstt. Director of Income Tax (Inv.)-III, Ludhiana, No. NIL dated 22-03-07,
I have reasons to believe that the income chargeable to tax has escaped assessment to the extent of fraudulent claim of drawback and DEPB credit by way of exporting mis-declared goods. Hence, kind approval of CIT-V, New Delhi is solicited for issue of notice u/s 148 r/w Sec. 147 of the I.T. Act, 1961.”
The Assessing Officer thereafter has completed the assessment and made additions as under:-
(i) Bogus purchases : Rs.16,34,83,676/- (ii) Bogus export sales : Rs. 61,69,546
The Assessing Officer further appended an office note to the assessment order which reads as under:-
“Office Note:- As per information received from the DRI, assessee received the Duty Drawback and DEPB amounting to Rs.75,72,300/- on the export sale in Feb. to April 2000 and amount of Rs. 38,60,325/- receivable on export sale in the month of April 2000. In respect of claim of duty draw back, DEPB received the assessee had stated the company recognize the income from duty draw back/ DEPB on receipt basis as the income cannot be ascertained at time of eligible export and the amount is finalized by the Govt. authorities after confirming all facts related to export and realization. The assessee followed the same accounting method on earlier years also and there is no change in method of accounting during the current financial year. The assessee company has not received any Duty Draw Back/DEPB during the financial years 1999-2000, 2001- 02 and 2002-03. Details of the Duty Draw Back/ DEPB income received and income accounted for in the financial years 1998-99 and 2000-01 has been given as under:- During the F.Y. 1999-00 relevant to the A.Y. 2000-01 assessee had shown direct export sale of Rs. 65,87,872/- through bills no. E151 to E158 dated 24.03.2000. F.Y. Export Sale DDB/DEPB Due Rcd in F.Y. 1998-99 13,482,753 53,19,476 1998-99 1999-00 65,87,872 40,89,300 2000-01 2000-01 56,75,319 34,83,000 2000-01 2000-01 66,21,203 38,60,325 Not received
The assessee had declared the Duty Draw Back of Rs.53,19,476/- in A.Y. 1999-2000, amount of Rs.75,72,200/- in A.Y. 2001-02 on the basis of actual receipt. Duty Draw Back of Rs.38,60,325/- ha not been received by the assessee till now. In view of the above no addition on this account has been made. Asstt. Commissioner of Income Tax, Circle – 13(1), New Delhi.”
The contention of the learned AR is that in the reasons recorded the allegation is limited to the extent of fraudulent claim of drawback and DEPB credit by way of exporting mis-declared goods and since no addition has been made on account of drawback and DEPB credit and the Assessing Officer having accepted this fact in the office note, the Assessing Officer ought to have closed the reassessment proceedings.
Thus, the issue is whether the allegation in the reasons recorded is limited to the fraudulent claim of drawback and DEPB credit. On going through the reasons recorded, as stated hereinabove, we note that in Para 2 it has been stated that the directors of the company are involved in fraudulent claim of drawback and DEPB credit by way of exporting mis-declared goods. Thus this paragraph talks about fraudulent claim of drawback and DEPB credit. In the second paragraph is the statement of facts whereby figures of the profit and loss account has been stated. It has been stated that the export sales of Rs.65,85,812/- and indirect export of Rs.37,19,93,945/- has been made and also the fact that huge payments to inter-related parties have been made. In the last paragraph it has been stated that there is a reason to believe that income chargeable to tax has escaped assessment to the extent of the fraudulent claim of drawback and DEPB credit by way of exporting mis-declared goods. The contention of the AR is that assessment has been reopened on the allegation of fraudulent claim of drawback and DEPB credit. No addition on this account has been made. However the additions have been made in respect of the bogus purchases and bogus export sales and not on account of the fraudulent claim of drawback and DEPB credit and hence the same are legally unsustainable. We are of the view that though in the reasons, the issue of bogus purchases has not been specifically mentioned and the allegation is limited to the extent of fraudulent claim of drawback and DEPB, but in the facts and circumstances of the case, it cannot be said that Assessing Officer was not within its power to make addition in respect of unexplained credit and the bogus purchases.
The Assessing Officer having reopened the assessment under section 148 on the basis of the fraudulent claim of drawback and DEPB credit, in our opinion, he was well within his right to extend the enquiry to the unexplained credit and the bogus purchases during the course of the reassessment proceedings. The case laws relied upon by the learned AR are distinguishable on facts. In those cases the additions were made which were completely different than the issue on which reopening was done. In this case the reopening has been done on the allegation of fraudulent claim of drawback and DEPB credit and this will include purchases and sales on which such claim was made. As such this contention of the assessee is rejected.
Now coming to the issue of the addition of Rs.16,34,83,676/-, the Assessing Officer has made addition by holding purchases are not genuine.
Considering the arguments advanced by Ld. AR as well as Ld. DR, two issues arise for consideration. The first issue is whether the Assessing Officer is justified in holding that the purchases are not genuine and the second issue is that if the purchases are not genuine whether in the facts and circumstances of this case the addition of entire amount of Rs.16,34,83,676/- made by AO is justified or is to be restricted to the amount computed by learned CIT(A).
Now coming to the first issue, we note from the assessment order that the Assessing Officer has held that the purchases are not genuine on the basis of the report he received from the DRI. In para 7.1 of the assessment order the AO has made a reference to the enquiry conducted by the DRI and the Sales Tax Department to the effect that these firms do not exist at the given address on the invoice and in respect of some of the concerns the sales tax number was cancelled much before the issue of the invoices. On the basis of this report the AO issued a show cause notice to the assessee and in response thereto the assessee submitted detailed replies. The assessee vide letter dated 13.12.2007 submitted details of the sales and purchases made by it along with copy of account of each of the supplier. Further vide another letter, it was explained by the assessee that it is registered with the Central Excise Department and the production and the movement of the goods had taken place under the supervision and control of the Central Excise Department. It was further submitted that all these movements and the quantity is recorded in the excise record maintained by the assessee company and the excise returns filed with the department. The assessee also submitted quantitative details of the sales, purchases, production, opening and closing stock. The assessee also produced the books of accounts along with central excise record in the form of RG 1 register, Form 24, AR 4, Sales/Purchase invoices, RG 23A Part 1 ad Part 2, RG 23C Part 1 and Part 2.
It was further contended before the AO that the whole basis of the allegation is the show cause notice issued by the DRI which is not a final verdict and the assessee company has filed an appeal against the order of the excise authorities and the said appeal is pending before the Tribunal. The AO after getting the above reply along with evidences did not do anything as is evident from the assessment order.
The Assessing Officer has rejected the contention of the assessee without carrying out any verification. No enquiry was conducted by the Assessing Officer. The contention of the assessee that the CBI has also given final report has also been rejected without going into the facts of the closure report. It may also be relevant to refer to the facts of the assessee’s case.
One of the reason for making the addition stated by the Assessing Officer is that the yield in assessee’s case is 79.73% as against normal yield of 92 to 95%. In this regard the Assessing Officer has not taken into consideration the fact that out of the total alleged purchases only purchases amounting to Rs.28,55,531/- were for manufacturing process and the balance purchases were towards trading activities. The trading purchases are for the trading sales about which no doubt has been raised by the Assessing Officer. The Assessing Officer has also not pointed out any difference in the quantity detail submitted before him. The Assessing Officer has also not pointed out any error or defect in the excise record. Though the Assessing Officer has referred to excessive consumption in the course of manufacturing process but has not given the basis how the same has been treated excessive. In our view it was not correct on the part of the Assessing Officer to hold that purchases are not genuine without discrediting evidences brought on record by the assessee in support of its contention. As we note from the facts above, the assessee has produced all the documents and evidences in support of the purchases made by it along with books of accounts, stock record, excise record, etc. No inconsistencies or infirmity has been pointed out by the Assessing Officer in such documents. All the payments have been made through banking channel as is evident from the copy of account of each of the suppliers. There is no whisper in the assessment order about these evidences. The allegation quoted by the Assessing Officer in the assessment order with reference to the DRI enquiry to the effect that firms don’t exist at the given address and the allegation that sales tax number stand cancelled before the issue of invoices per se can’t be sufficient enough to discard the evidences and to reach a conclusion the purchases are bogus. The fact that sales tax number has been cancelled later on mean that these firms were in existence at one point of time and having sales tax number also. Further nonexistence at the given address at the time of enquiry conducted after a gap of many years per se also can’t be conclusive so as to hold that these firms are bogus. The assessee having filed copy of accounts of these firms showing purchases and payments through banking channel, the least the Assessing Officer could have done is to conduct enquiry by issuing summon under section 131 or notice under section 133(6) to these firms in case he was having doubts about these firms. The Assessing Officer has neither made any enquiry from the suppliers nor from the banks. It is a case where Assessing Officer has simply quoted DRI report in the assessment order and without making any further examination has made the addition.
With the assistance of learned DR as well as learned AR we have gone through the documents filed by the assessee in support of the purchases made by it. The learned DR could not point out any error or defect in these documents so as to ignore these evidences. We are of the view that in such circumstances, it cannot be said that purchases are not genuine. The report received from the DRI by the Assessing Officer being a trigger point for carrying out further investigation, the report per se cannot be a conclusive evidence to hold and make addition on that basis. The assessee having led the evidences in support of its contention, it was incumbent upon the Assessing Officer to discredit such evidences and material so as to substantiate its allegation that the purchases are not genuine. We are of the view that in the facts and circumstance, the finding of the Assessing Officer cannot be sustained.
The above view get supported by the judgment of the Hon’ble jurisdictional Delhi High Court in the case of CIT vs. Fair Finvest Ltd. [2013] 357 ITR 146 (Del) in dated 22nd November, 2012. In this case there was an allegation against the assessee company that it has received share capital by way of accommodation entry. This allegation was based on the basis of the enquiry carried out by the Investigation Wing of the Income Tax Department itself where the statement of the person who has provided accommodation entry viz., Mr. Mahesh Garg was also recorded.
The assessment of the assessee company was reopened on that basis. During the course of reassessment proceedings assessee company filed necessary evidences in support of the share capital it has received. These evidences were rejected by the AO and addition was made on the basis of the report of the Investigation Wing. The ITAT had deleted the addition on the ground that the AO has failed to carry out investigation and discredit the documents filed by the assessee in support of its contention. The Hon’ble High Court upheld the order of the ITAT and held as under:-
“6. This Court has considered the submissions of the parties. In this case the discussion by the CIT(Appeals) would reveal that the assessee has filed documents including certified copies issued by the Registrar of Companies in relation to the share application, affidavits of the Directors, Form 2 filed with the ROC by such applicants confirmations by the applicant for company’s shares, certificates by auditors etc. Unfortunately, the assessing officer chose to base himself merely on the general inference to be drawn from the reading of the investigation report and the statement of Mr. Mahesh Garg. To elevate the inference which can be drawn on the basis of reading of such material into judicial conclusions would be improper, more so when the assessee produced material. The least that the assessing officer ought to have done was to enquire into the matter by, if necessary, invoking his powers under Section 131 summoning the share applicants or directors. No effort was made in that regard. In the absence of any such finding that the material disclosed was untrustworthy or lacked credibility the assessing officer merely concluded on the basis of enquiry report, which collected certain facts and the statements of Mr. Mahesh Garg that the income sought to be added fell within the description of Section 68.”
A similar view has been taken by the Hon’ble jurisdictional High Court in the case of CIT vs Gangeshwari Metal Pvt Ltd [2014] 361 ITR 10 (Del), whereby the Court held as under:-
“As can be seen from the above extract, two types of cases have been indicated. One in which the assessing officer carries out the exercise which is required in law and the other in which the assessing officer “sits back with folded hands” till the assessee exhausts all the evidence or material in his possession and then comes forward to merely reject the same on the presumptions. The present case falls in the latter category. Here the assessing officer, after noting the facts, merely rejected the same.”
In the case of CIT Vs Goel Sons Golden Estate Pvt. Ltd. [ITA No. 212 of 2012 Dated 11-04-2012 Honourable Delhi High Court has upheld the deletion of addition by holding:- “3. We have examined the said contention and find that the assessee during the course of assessment proceedings has filed confirmation letters from the companies, their PAN number, copy of bank statements, affidavits and balance sheet. Thereafter the Assessing Officer had asked the assessee to produce the said Directors/ parties. Assessee expressed its inability to produce them. The Assessing Officer did not consequent thereto conduct any inquiry and closed the proceedings. This is a case where the Assessing Officer has failed to conduct necessary inquiry, verification and deal with the matter in depth specially after the affidavit/confirmation along with the bank statements etc. were filed. In case the Assessing Officer had conducted the said enquiries and investigation probably the challenge made by the Revenue would be justified. In the absence of these inquiries and non-verification of the details at the time of assessment proceedings, the factual findings recorded by the Assessing Officer were incomplete and sparse.”
In view of the above, we are of the view that the allegation of the Assessing Officer and the addition made by alleging that purchases made by the assessee are not genuine cannot be sustained.
Now coming to the second issue, though in view of our above
findings, the same not necessarily need to be adjudicated but since the same was argued at length by both the parties and also concerns the addition on merit we feel it appropriate to address the second issue also.
As stated hereinabove the AO has made addition of the entire purchases holding the same to be not genuine. Now the issue which arises for consideration is if the purchases are not genuine then can the sales be said to be genuine and if the sales are genuine, can entire purchases be held to be non-genuine and addition of entire purchase amount be made.
On the issue whether sales are not genuine, from the assessment
order we note that the Assessing Officer has not tinkered with the trading account. He has also not rejected the books of accounts. The assessee during the course of the assessment had produced complete books of account which included sales invoices, stock records, excise record and quantitative details. No observation has been made by the Assessing
Officer regarding any of these evidences. In these circumstances and facts it cannot be said sales are not genuine. In fact this is not the case of the Assessing Officer also.
Now the issue is if sales are genuine then can entire purchases be added back. The objective of making an assessment is to assess and determine the correct income of the assessee. The learned CIT(A) has held that taxing of entire purchases will be unjustified as it will give
absurd result and accordingly he has worked out the peak amount of the payments made against the purchases. In this regard we note from the order of the learned CIT(A) that he has made a detailed chart on the basis of the copy of account of suppliers filed by the assessee before the Assessing Officer and also before the learned CIT(A). On this basis he has worked out that the peak amount utilized for making these purchases at Rs.56,50,600/-. The contention of the learned DR that this is an additional evidence submitted by the assessee during the course of the hearing before the learned CIT(A) is not correct as is evident from the order of the learned CIT(A) which reads as under:-
“In the circumstances, the only remedy available in such cases is to tax the amount that has been utilized for making unaccounted purchases from parties which have not issued bills and such amount can be worked out by taking the peak amounts of payments made against the purchases. Accordingly, a chart has been prepared wherein details of the purchases made and payments issued by way of cheques are shown. The same is enclosed as Annexure ‘A’ to this order. As per this chart, the peak amount utilized for making unaccounted purchases comes to Rs.56,50,600/-. It is presumed that this amount was utilized for making purchases from unknown parties. While working out this peak, it is presumed that cheques were credited in the account of the respective parties, which were withdrawn by way of cash. Therefore, I hold that the maximum amount which supposed to have been utilized for making purchases from third parties was Rs.56,50,600/- which is unexplained income of the appellant, for the year under consideration.”
As rightly contended by the learned AR that this chart has been prepared by the learned CIT(A) himself on the basis of the copy of account of the suppliers placed in the paper book which were before the Assessing Officer as well as learned CIT(A). This chart was not filed by the assessee and that is why the learned CIT(A) has enclosed this chart as part of its order. On enquiry from the Bench whether there is any factual
inaccuracy in this chart prepared by the learned CIT(A), the learned DR was fair enough to admit that there does not appear to be any factual inaccuracy so far as the peak amount of the payments made against purchases as stated in the Annexure A. The learned CIT(A) has given detailed reasoning for not sustaining the entire addition and restricting the addition to the peak amount of the payments made against purchases and enhancing the gross profit rate to 3% as against 1.42% declared by the assessee. In this regarding the findings of the learned CIT(A) reads as under:-
“On the basis of these facts discussed above, the following facts emerges out:-
1. 1. The appellant has shown purchases but those parties were not found in existence.
2. The appellant has shown consequential sales to various parties of such material and which in turn have shown export of such trading goods.
3. The sales of the appellant have not been disputed by the A.O. in the assessment order.
4. It is also the matter of fact that unit of the appellant is under direct supervision by the Excise Department and all inwards as well as outwards movements of goods were under the supervision of the Excise Department.
5. All the payments have been made and received through banking channel and same are duly recorded in the books of accounts.
6. The AO has not rejected the books of accounts of the appellant nor any discrepancy in the same have been observed. In such circumstances, there can be two possibilities –
The A.O. has mentioned in the assessment order that the appellant has siphoned off the money by issuing cheques to fictitious parties and has subsequently withdrawn cash from the bank accounts of the said parties, which came back to the appellant. The A.O. has given the findings that purchases from four parties mentioned supra, are not genuine, but he has not disputed the corresponding sales made to the third parties. When genuine sales have been made, purchase must have also been made by the appellant from some other suppliers, if not made from said alleged bogus suppliers. In such a scenario taxing of entire purchases made from alleged suppliers is an absurd and impractical approach, as no sales can be made without corresponding purchases. In the circumstances, the only remedy available in such cases is to tax the amount that has been utilized for making unaccounted purchases from parties which have not issued bills and such amount can be worked out by taking the peak amounts of payments made against the purchases. Accordingly, a chart has been prepared wherein details of the purchases made and payments issued by way of cheques are shown. The same is enclosed as Annexure ‘A’ to this order. As per this chart, the peak amount utilized for making unaccounted purchases comes to Rs.56,50,600/-. It is presumed that this amount was utilized for making purchases from unknown parties. While working out this peak, it is presumed that cheques were credited in the account of the respective parties, which were withdrawn by way of cash. Therefore, I hold that the maximum amount which supposed to have been utilized for making purchases from third parties was Rs.56,50,600/- which is unexplained income of the appellant, for the year under consideration. It is seen that the appellant was engaged in manufacturing and sale of Steel Casting and Forging. During the year under consideration, the appellant company also undertook trading in machined and vehicle gears of various sizes, steel balls and B-S- Blind. The appellant company also claimed to have exported its own manufactured goods, i.e. Gear Cutting Tool of Cobalt Bearing High Speed Steel, to U.K. In the manufacturing activities the appellant has declared gross profit @ 7.69% whereas in the trading activities, which has been started during the year under consideration, Gross Profit has been declared @ 1.42%. The gross profit declared in the manufacturing activities is in line with the earlier years and as such no adverse inference is taken by the A.O. However, the gross profit shown in the trading activities of machined and vehicle gears of various size, steel balls and B-S-Blind is quite low as compared to the gross profit declared in this line of trading activities. During the course of appellant proceedings, I have come across to certain cases wherein gross profit in trading activities is around 2% to 2.96%.
S. No. Name of concern Sales (in G.P.% crores) 1 Shri Ram Steel Ludhiana 2.25 2.09% 2 M/s Pahwa Steels, Ludhiana
The items traded by these companies are some what identical. Hence the gross profit of the appellant in the trading activities is taken at 3% as against gross profit of 1.42% declared by the appellant in the books of accounts. I, therefore, take gross profit @ 3% on the total sales of Rs.15,01,39,789/- made by the appellant which comes to Rs.45,04,193/-. As discussed above, the appellant has declared Gross Profit @ 1.42% as already declared in the books of accounts. The differential amount (3% - 1.42% x 15,01,39,789/-) is taken as undisclosed income of the appellant which comes to Rs.213,72,208/- which has not been disclosed by the appellant in the books of account. As discussed above, for making unaccounted purchases from third parties, I have taken the peak of the amount which was utilized for making the unaccounted purchase from third parties and the said amount has been treated as undisclosed income of the appellant. Similarly, the appellant has declared low gross profit as compare to the gross profit declared in this line of trade. On this account, addition of Rs.23,72,208/- has been made as discussed in above para. Both the amounts are treated as undisclosed income of the appellant which comes to Rs.80,22,802/- as against the addition of Rs.16,34,83,686/- added by the A.O. as unexplained expenditure.”
In our view, the learned CIT(A) was justified in drawing the above
conclusion. When sales are not in dispute and it is held that purchases are not verifiable then in such circumstances, in order to determine the correct income of the assessee, the right course will be to reject the trading results and to estimate the gross profit on the sales. This exercise will give the correct picture of the income of the assessee and will avoid absurdity by making addition of the entire purchases. It is not the case of a single transaction, there are multiple transactions of purchases and sales. If the same amount is being rotated either it has to be held that both purchases and sales are bogus and assessee is engaged in accommodation business.
In the alternative if it is held that the sales are genuine then the money which the assessee is receiving on account of the sale is being utilized towards purchases and assessee’s profit will be the gross profit which it will be earning on sales plus investment in purchases.
Accordingly, in such circumstances, we are of the view that the learned CIT(A) having held that purchases are not genuine, thereafter has done the right exercise by rejecting the trading results of the assessee and estimating the profit on sales. For this purpose the learned CIT(A) has worked out the comparative gross profit rate and on that basis he has estimated the income on the sales made by the assessee. The learned
CIT(A) has gone a step further. He has also worked out the investments, the assessee would have made on account of the payments made for so called alleged purchases. Thus the methodology applied by the learned
CIT (A) is correct approach once he has held that purchases are not genuine. However since we have held that the findings of the AO that the purchases are not genuine, on the facts and circumstances of the case as discussed hereinabove is untenable, the entire addition made on account of purchases is directed to be deleted.
Accordingly ground no.3 of the assessee’s appeal is allowed and ground no.1 and 2 of the Revenue appeal are dismissed.
Ground no.4 and 5 in assessee appeal is regarding addition of Rs.61,69,546/- sustained by the learned CIT(A). The assessee during the course of the year has made export sale of Rs.65,87,872/-. The AO on the basis of the DRI report held that the export sale declared by the assessee
is bogus and mis-declared. The Assessing Officer accordingly held that the direct cost of such sale is about 6.35% and allowing cost of Rs.4,18,326/-, made addition of the balance amount of Rs.61,69,546/- as unexplained credit. The learned CIT(A) has confirmed this action of the Assessing Officer by holding that the appellant company has failed to produce any evidence to negate the findings recorded by the Assessing Officer.
It was contended by the learned AR that the findings recorded by Assessing Officer as well as the learned CIT(A) are factually incorrect.
The appellant company has made export sale of Rs.65,87,872/- of the goods manufactured by it in its own factory. The goods so manufactured are part of the excise records which were produced before the AO during the course of the assessment hearing. The appellant company has also filed details of the export sales, purchases, production along with copies of the invoices of sales and purchases, details of the Duty Drawback and DEPB income. The books of account along with bills and vouchers, excise record and stock register were also produced for verification. As regards the allegation of the bogus export it was submitted that the fact that goods exported were duly examined by the Custom authorities cannot be ignored. At the time of inspection by Custom authorities samples were taken and only after receiving the report from the Central Revenue controlled laboratory and realization of the sale proceeds of the export, incentives were realized. It was further submitted that on the basis of the allegation, the DRI has formally made a complaint to the CBI and the CBI after thorough verification has held that the allegation as levied by the DRI are not sustainable. The appellant company has submitted item-wise quantitative details of the sales, purchases, production and closing stock, copy of export invoices, copy of bank certificate for export realization.
The additions have been made by the Assessing Officer based on the doubts, suspicion and conjectures and without carrying out any verification at his end as is evident from the assessment order. The Assessing Officer has solely relied upon the information received from the DRI without carrying out any independent verification at his level. It was argued that the observation made by the learned CIT(A), that during the course of the assessment proceedings, the appellant was specifically asked to produce the parties who claimed to have supplied the material but the appellant failed to ensure attendance of any such party is factually incorrect. It was submitted by the learned AR that at no stage of reassessment proceedings the appellant was ever asked to produce the parties. The observation of the learned CIT(A) in this regard are factually incorrect. It is a case where the AO has not carried out any verification or investigation and has solely relied upon the DRI report. The assessee having lead the evidences in support of its sales the AO was not justified in ignoring the same and making the addition.
It was further submitted that this export sale was made in the preceding year and not in the year in which the verification has been carried out by the Custom authorities. In this regard reference was made to the judgment of the Hon’ble Punjab & Haryana High Court dated 6th April, 2010 in the petition filed by the assessee company against the order passed by Custom authorities whereby the High Court has observed that the charges of mis-declaration and fraudulent availing of incentives against the appellant are based on suspicion. In this judgment the High Court has further held that in the present case the show cause notice as well as impugned order did not deal with the live consignments but pertain to earlier consignments i.e. past exports where export had already been completed and goods had already reached in the hands of the foreign buyers. The High Court has further observed that it is a settled proposition of law that the past exports cannot be challenged as being improper on the basis of any irregularities noticed in subsequent exports. The High Court has also referred to the test report and observed that it is evident that there is no anomaly pertaining to quality and description of the goods. It was also submitted by the learned AR that export sales having been included in the income the Assessing Officer was not justified in adding back the same as unexplained credit. The entire export
sale having been included in the income, the only issue if at all could be regarding purchases against such export sale and Assessing Officer could not have made addition of the export sale as unexplained credit.
In reply the learned DRrelied upon the order of the Assessing Officer
as well as learned CIT(A). It was submitted that the report of the DRI is a valid piece of evidence which has established that the export made by the assessee was bogus and accordingly Assessing Officer was justified in adding the export sales as unexplained credit.
We have considered the arguments advanced by the parties and have perused the orders of the authorities below as well as material available
on record. On going through the assessment order we note that the AO is of the view that the export sale made by the assessee is not genuine. This allegation has been made by the AO on the basis of the DRI report where the allegation apparently is that the assessee has mis-declared the goods and the value of such goods was not of that level at which the same have been declared and accordingly Assessing Officer, after allowing deduction of cost of purchases at the rate of 6.35%, he has disallowed the balance amount brought in by way of export sale as an unexplained credit.
The learned CIT(A) has confirmed the action on the ground that the assessee has failed to controvert the findings. The learned CIT(A) has further observed that the assessee has failed to produce the parties despite specifically being asked to produce. On this issue the learned AR has pointed out that at no point of time during the course of the reassessment the assessee was asked to produce the parties. We have gone through the assessment order and we do not find any such observation made by the Assessing Officer. The assessment order nowhere mentions that the assessee was asked to produce the parties. The learned DR also could not controvert this fact. We also note from the assessment order that the Assessing Officer in Para 11 has simply made a reference to the report of the DRI and in Para 11.1 on the basis of such report he has made the addition. Thus the observation of the learned CIT(A) that assessee was to produce the parties is not borne out by the record. As held while deciding the ground no.3 in assessee’s appeal and ground no.1 in Revenue’s appeal the Assessing Officer after the assessee has filed all documents and evidences in support of its contention has done nothing except relying on the report of the DRI. In this case the assessee has filed all the documentary evidences in respect of the exports made by it. It has filed the following documents to substantiate export sale made by it:- a) Item wise quantitative details of Direct / Indirect Exports Sales, Purchases, Production and Closing Stock b) Copies of Export Sales Invoices c) Copies of Bank’s Certificates for Export and Realization d) Details of Duty Drawback received / receivables on Export Sales e) The books of accounts along with bills and vouchers, Central Excise records and stock register were also produced for verification.
The Assessing Officer thereafter did nothing. In the absence of any further verification and without discrediting the documents filed by the assessee company, we are of the view that the Assessing Officer was not justified in drawing adverse inference and making the addition. As held hereinabove the information received by it from the DRI may be a starting point for making investigation but that per se cannot be the conclusive evidence to sustain addition. The assessee having filed the evidences, the Assessing Officer ought to have carried out further investigation. No effort has been made to find out the purchases in respect of which the exports have been made. There is no whisper in the order about the purchases of such goods. As per the documents filed before the Assessing Officer and placed in the Paper Book before us, the payments of these purchases have been made from banking channel. There is no material to hold that these purchases were not genuine. Further the fact that the export was made in the preceding year cannot be ignored. The allegation in the DRI report pertains to subsequent year when one of the shipments was examined. The subsequent shipment cannot be a basis for holding that the shipments made earlier were sub-standard. Each of the shipment is physically verified by the Custom people and as pointed out by the learned AR, the samples have been drawn in respect of each shipment and nothing adverse has been reported from the sample report issued by the Central Revenue Controlled Laboratory. The payment has also been realized in respect of such goods through banking channel. Bank has also issued the realization certificate of such export. There is no discussion or adverse comment by the Assessing Officer on this aspect also. In view of these facts we are of the view that the learned CIT(A) was not justified in sustaining this addition.
We are also of the view that the alternative contention of the learned AR is also correct. The assessee has made export sales and such sale proceeds have been included in the income. Having included the entire proceeds of the sale in the income, the same amount cannot be added as unexplained credit. The Assessing Officer, as we note from the assessment order, has taken into consideration the figure of Rs.65,87,872/- as export sale and against that has allowed a deduction of Rs.4,18,326/- towards cost of such export. The balance amount has been added as unexplained credit.
The methodology adopted by the Assessing Officer is prima facie incorrect.
The amount of Rs.65,87,872/- has been included in the income by way of sales and the assessee would have claimed deduction of the expenses in respect of the purchases made against such export. There is no discussion in the assessment order about the amount of the purchases which has been claimed as deduction against such export. The Assessing Officer, in case was having any doubt about the export sale, the right course of action would have been to disallow the purchases against such export as difference of amount of export sale and purchases against such export stand already included in the income. In the absence of any adverse finding in respect of purchases for such export the AO’s action of making the addition as unexplained credit is unsustainable. In view of the above, we allow the ground no.4 and 5 in assessee’s appeal.
Ground no.6 in assessee’s appeal is general in nature and need no adjudication.
In the result assessee’s appeal is partly allowed and appeal of the Revenue is dismissed.