TMI Blog2007 (9) TMI 292X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee has opted not to press ground No. 1. Accordingly ground No. 1 is dismissed being not pressed. 3. With regard to ground No. 2, brief facts borne out from the record are that during the course of reassessment proceedings in order to verify the claim of deduction under s. 80HHC raised by the assessee, AO has issued a letter to the assessee requiring him to furnish details such as purchase register, bank statement and also to produce the supplier of the assessee, namely Divya Enterprises and in response thereto assessee filed a letter dt. 14th Sept., 2004 but the proprietor of M/s Divya Enterprise was not produced. Thereafter the AO issued the show-cause notice on 20th Sept., 2004 to the assessee for explanation why the rate of 70 paise per piece should not be adopted for the quantity of 13,19,195 ball pens and why Rs. 9,23,437 should not be considered as income from undisclosed sources, moreso, in the absence of necessary verification from M/s Divya Enterprises. Assessee filed a letter stating that purchases were made through Shri Rajesh Shah, who had approached and persuaded the assessee to start export business as he was in the said business for more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. 6. The CIT(A) re-examined the issue in the light of assessee's contention but was not convinced with it and has confirmed the disallowance of deduction under s. 80HHC after having observed that the goods had not reached the desired destination and were destroyed thereafter. It was also noted by the CIT(A) that the alleged modus operandi in this case was that black money was sent to Dubai through hawala channel and in turn US dollars were routed to Russia from Dubai from where the remittance was shown against the export invoices and exports as such were only paper transactions. Relevant observation of CIT(A) is extracted hereunder: "7. I have carefully examined the appellant's submissions. It has been held in McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148, 171 (SC) that: 'Tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.' Therefore, the issue aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be any estoppel against legal principles and the assessee can always retract if the amount offered cannot be taxed under law. However, the factual matrix is that the voluntary deposit of drawback of Rs. 10,68,280 is not shown to have been subsequently retracted before the Customs Department of the DRI. Therefore, the appellant's contention that the duty drawback was returned to the Customs Department under pressure cannot be accepted. 11. The appellant's contention is that the conditions prescribed for deduction under s. 80HHC are satisfied since there is export out of India, the sale proceeds are received in convertible foreign exchange and the report in Form No. 10CCAC was submitted to the AO. However, the goods did not reach the destination and as noted in the order of the Settlement Commission dt. 16th Feb., 2004 supra, the export goods were destroyed at Limassol on 10th June, 1997, under instruction from the applicant. The duty drawback claim received was refunded to the Customs Department by the appellant. These facts support the citation in order of the Settlement Commission dt. 16th Feb., 2004 supra that the alleged modus operandi that the black money was sent to Dubai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apex Court in the case of CIT vs. Silver Arts Palace (2003) 180 CTR (SC) 309 : (2003) 259 ITR 684 (SC) in which it has been held that where the transactions of counter sales effected by the respondent involved customs clearance within the meaning of Expln. (aa) to s. 80HHC and further sales were in convertible foreign exchange the respondent was entitled to such deduction under s. 80HHC in respect of profits from those transactions. The learned counsel for the assessee further pointed out that the assessee has placed all relevant evidences to prove, that the goods were exported after customs clearance and compliance of other formalities and within the period of six months sale proceeds were also realized in foreign convertible exchange, as such the assessee is eligible for deduction under s. 80HHC. 8. The learned counsel for the assessee further contended that merely stating that the assessee has agreed that goods have not reached the desired station is not enough for disallowing the claim of deduction under s. 80HHC because, although the goods had not reached the desired station and were destroyed thereafter it does not mean that no export had taken place. Once the goods leav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anker under LC were duly verified before they were dispatched to the LC opening bank at foreign country. It was further contended that only after verification of such documents and their acceptability under the law, the export remittance was released by the bank under the LC in the account of the beneficiary of the LC. Moreover, the RBI closely monitors the LCs' relating to the export. Thus there is a complete check of the export document and the existence of the party. In support of his contention he has relied upon the order of the Tribunal in the case of Smt. Sujata Grover vs. Asstt. CIT (2006) 99 TTJ (Del) 837. He further contended that judgment of the apex Court in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) has been substantially watered down by the subsequent decision of the Hon'ble Supreme Court in the case of CWT vs. Arvind Narottam (Individual) (1988) 72 CTR (SC) 94: (1988) 173 ITR 479 (SC) wherein the Hon'ble Supreme Court relying upon the case of Gartside vs. IRC (1968) AC 533 (HL) has held that "where the language of the deed of settlement is plain and admits of no ambiguity, there is no scope for considerations of tax avoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf, meaning thereby deduction under s. 80HHC can only be allowed if the goods or merchandise are exported from India to some other country and the sale proceeds were received by the assessee in foreign convertible exchange. If the chain is not complete and is broken somewhere assessee would not be eligible for deduction under s. 80HHC of the Act. In the instant case, though assuming for the sake of argument but not admitted that the goods were exported out of India but were not sold to the buyer and once it is not sold there is no question of receipt of sale proceeds in foreign convertible exchange. The learned Departmental Representative further contended that according to the assessee itself the goods were destroyed at the high sea at assessee's instruction meaning thereby the goods were in constructive possession of the assessee till it was destroyed. Assessee has received certain amount in foreign convertible exchange from the so-called buyer without making any sale to him. It is also interesting to note that the so-calle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceeds to have been received by the assessee. Since the assessee has not received any sale proceeds he is not entitled for deduction under s. 80HHC of the IT Act. The learned Departmental Representative further contended that though the judgment of the apex Court in the case of McDowell was watered down by subsequent judgments of the apex Court but it does not confer any discretion to the assessee that he can adopt dubious means for avoidance of tax liability. 12. The learned Departmental Representative further contended that the amount introduced in the books of account of the assessee as sale proceeds convertible into foreign exchange on which deduction under s. 80HHC is claimed is in fact is not sale proceeds of the exported goods as the sale was never completed. It is also strange to note that the so-called buyer has not raised any claim either for the goods or for the money paid to the assessee on account of sale of exported goods till date. If all these events are closely examined only one inference would be drawn that it is all made up affairs and assessee has made its efforts to convert its black money through hawala transaction and also in the shape of receipt of forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order to understand the essential ingredients for claiming deduction under s. 80HHC of the Act we reproduce the provision of s. 80HHC as under: "80HHC. Deduction in respect of profits retained for export business.-(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction to the extent of profits, referred to in sub-s. (1B), derived by the assessee from the export of such goods or merchandise: Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an export house or a trading house, as the case may be,) issues a certificate referred to in cl. (b) of sub-s. (4A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores (other than processed minerals and ores specified in the Twelfth Schedule). Explanation 1.-The sale proceeds referred to in cl. (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the RBI. Explanation 2.-For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then, such transfer shall be deemed to be export out of India of such goods and merchandise and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in sub-s. (1) of s. 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be deemed to be the sale s thereof. (3) For the purposes of sub-s. (1),- (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ninety per cent of any sum referred to in cl. (iiid) of s. 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,- (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under cl. (a) or cl. (b) or cl. (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in cl. (iiie) of s. 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,- (a) he had an option to choose either the duty d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouses, the profits of the business; (b) in a case where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more export houses or trading houses, the amount which bears to the profits of the business the same proportion as the turnover in respect of sale to the respective export house or trading house bears to the total turnover of the business carried on by the assessee. (4) The deduction under sub-s. (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-s. (2) of s. 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section: Provided that in the case of an undertaking referred to in sub-s. (4C), the assessee shall also furnish along with the return of income, a certificate from the undertaking in the special economic zone containing such particulars as may be prescribed, duly certified by the auditor auditing the accounts of the undertaking in the special economic zone under the provisions of this Act or under any othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th cl. (a) of sub-s. (2)] of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962); (ba) 'total turnover' shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962): Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression 'total turnover' shall have effect as if it also excluded any sum referred to in cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 28; (baa) 'profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by- (1) ninety per cent of any sum referred to in cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be eligible for deduction under s. 80HHC of the Act. 15. In the instant case the assessee might have exported goods as per the definition of the Customs Act but the goods never reached the destination or in the hands of the buyer meaning thereby the sale of the exported goods never effected. To understand as to how the sale is complete, we refer the relevant provisions of the Sale of Goods Act and according to s. 4 of the Sale of Goods Act, 1930 where in a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called sale but where the transfer of the property in the goods is to take place at a future time or subject to some conditions thereafter to be fulfilled, the contract is called an agreement to sell, meaning thereby unless and until the goods are transferred from the seller to the buyer the sale is not complete. We further refer to s. 31 of the Sale of Goods Act which talks about the duties of the sellers and buyers and according to it, it is the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale. In the instant case it is an admitted p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible why has not he enforced refund of the so-called payment even till date, i.e. even after the lapse of 10 years? This mystery remained unsolved despite repeated queries from the learned counsel for the assessee. Since there was no sale of exported goods, there cannot be sale proceed to determine the profit derived from export for its deduction under s. 80HHC of the Act. We, therefore. are of the view that assessee is not entitled for deduction under s. 80HHC as he has not fulfilled the basic three essential ingredients to make him eligible for deduction. We have also carefully examined various judgments referred to by the assessee but we do not find anywhere in any of the judgment that assessee can claim deduction only on the basis of export of goods without proving its sale and receipt of sale proceeds in convertible foreign exchange. 17. With regard to taxability of the receipt is concerned we are of the view that this amount was offered as income of the assessee so it is to be taxed. We however get support from the judgment of the apex Court in the case of CIT vs. P. Mohanakala (2007) 210 CTR (SC) 20 : (2007) 291 ITR 278 (SC) in which it has been held that where the explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see unacceptable. The authorities upheld the opinion formed by the AO that the explanation offered was not satisfactory. The assessee did not take the plea that even if the explanation is not acceptable the material and attending circumstances available on record do not justify the sum found credited in the books to be treated as a receipt of an income nature. The burden in this regard was on the assessees." 18. Keeping in view the totality of the facts and circumstances of the case we are of the considered opinion that the assessee is not entitled for deduction under s. 80HHC and the Revenue has rightly taxed the receipt. 19. Next ground relates to the addition on account of difference in the cost price of the ball pens purchased by the assessee. Assessee has claimed to have made purchases from M/s Divya Enterprises but during the course of assessment proceedings assessee could not produce Divya Enterprises despite adequate opportunities. He, however, filed letters explaining the mode of purchase but the AO was not convinced with it and he noted that the purchases of pens was shown at Rs. 3.40 per piece but in actual reality the same was accepted by Shri V.C. Kamdar to be fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee against the invoices should not be doubted on the basis of the enquiries made by other Departmental officials who were finally convinced with the claim of the assessee: (i) Dy. CIT vs. Kay Poly Plast Ltd. (2004) 91 TTJ (Jd) 374; (ii) ITO vs. Murli Dhar Narain Das (1976) 1 TTJ (Del) 15; (iii) Ellenbarrie Industrial Gases Ltd. vs. Jt. CIT (2002) 76 TTJ (Cal)(TM) 841 : (2002) 83 ITD 111 (Cal)(TM); (iv) CIT vs. Orissa Corporation (P) Ltd. (1986) 52 CTR (SC) 138 : (1986) 159 ITR 78 (SC); (v) Sumati Dayal vs. CIT (l995) 125 CTR (SC) 124 : (l995) 214 ITR 801 (SC): (vi) CIT vs. Durga Prasad More 1973 CTR (SC) 500 : (1971) 82 ITR 540 (SC). 20. The learned Departmental Representative, on the other hand, has placed heavy reliance on the order of the CIT(A). 21. Having gone through the orders of the lower authorities we find that undisputedly the assessment was reopened on receipt of the information from the DRI and the AO has formed a view that the assessee has over invoiced the purchases of the ball pens on the basis of the investigation conducted by the customs authorities. The AO has summoned M/s Divya Enterprises under s. 131 but it did not appear nor was it pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kamdar recorded by the customs authorities was not confronted to the assessee during the course of the impugned assessment proceedings. This is the only evidence on the basis of which AO has formed the belief with regard to over invoicing of the purchase bills. This statement of Shri V.C. Kamdar was not relied on by the Addl. Commr. of Customs and he has dropped the proceedings. But this statement was relied upon by the AO in the IT proceedings and made the disallowance without making any further enquiry only for the reason that M/s Divya Enterprises did not appear before him. These materials are not sufficient to hold that the assessee had over invoiced the purchases. We accordingly do not find ourselves in agreement with the findings of the lower authorities in this regard as except the statement no other enquiry was conducted by the Revenue authorities and moreso no material was brought by them to establish that assessee has over invoiced the purchase bills. Moreover, there are different varieties of pens available in the market whose costs differ upon their quality and different factors are also there to determine the cost of pens. Without bringing any material on record the di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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