TMI Blog2015 (10) TMI 2432X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. As going 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - Held that:- 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46/- 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 ₹ 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not expressed any opinion on any other aspect or grounds which is pending before the Tribunal or raised by the Respondent-assessee. 11. In view of the matter being remitted back to ITAT by the High Court both these appeals were heard together. 12. 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. 2. 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 Deput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment 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. 15. Ground no.3 in assessee s appeal is regarding upholding the addition to the extent of ₹ 80,22,802/- out of the total addition of ₹ 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 ₹ 15,54,60,874/- out of the addition of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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. 21. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial 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. 24. 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). 25. 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 DEP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 65,87,812/- and indirect export of ₹ 37,19,93,945/- and assessee has made huge payments to interrelated 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 on the basis of actual receipt. Duty Draw Back of ₹ 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. 29. 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. 30. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and circumstances of this case the addition of entire amount of ₹ 16,34,83,676/- made by AO is justified or is to be restricted to the amount computed by learned CIT(A). 32. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted 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 dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by alleging that purchases made by the assessee are not genuine cannot be sustained. 39. 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. 40. 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 circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration, the appellant company also undertook trading in machined and vehicle gears of various sizes, steel balls and B-SBlind. 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 crores) G.P.% 1 Shri Ram Steel Ludhiana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 44. 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. 45. Accordingly ground no.3 of the assessee s appeal is allowed and ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctures 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. 48. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el. 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. 52. 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 ₹ 65,87,872/- as export sale and against that has allowed a deduction of ₹ 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 ₹ 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 amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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